Part 3: Reasons For The Differences/Discrepancies/Disagreement Of Profits As Per Cost Accounts and Financial Accounts?

When a company uses the interlocking or non-integrated system,

there is a necessity to reconcile the profits between Cost Accounts

and Financial Accounts

Below discuss the reasons:

1.0 There are certain items which appear in financial books only and are not included in cost accounting books. The items are:

  • INCOME: Profit on sale of assets, Interest received, Dividend received, Rent received, Rent receivable, Transfer fees, etc
  • EXPENDITURE: Loss on sale of assets, Uninsured destruction of assets, preliminary expenses written off, goodwill written off, interest on mortgage and loans, fines
  • APPROPRIATION: Dividend, Reserves,etc

2.0 There are certain items which appear in cost accounting books only and are not included in financial books. The items are:

  • Notional rent on premises owned, notional interest on capital

3.0 Different methods of valuation of closing stock adopted in cost and financial accounts will also cause a difference in the results shown by the two set of books. In financial accounts, the method generally followed is cost or market price, whichever is less whereas in cost accounts different methods of pricing of material issues such as LIFO, FIFO, average,etc are used

4.0 Use of different methods of depreciation is another reason for the difference in profits shown by the two sets of books. In financial accounts, depreciation may be charged according to written down value method whereas in cost accounts, it may be charged on the basis of the life of the machine.

5.0 Abnormal items not included in cost accounts also causes a difference in profit. Inclusion of such items will distort the cost ascertained.

6.0 Under or over-absorption of overhead: in cost accounts overheads are charged to production at pre-determined rates whereas in financial accounts amount of overhead is charged on actual basis, the difference give rise to under or over-absorption; causing a difference in profits.

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