Question

Prepare a Reconciliation Statement and find profit as per financial records for the year ended March 31, 2025.

Hint:

To remember which adjustments to make in your reconciliations, think of this rule of thumb:
• Add back to Costing Profit: Any item that made the Costing Profit lower than the Financial Profit (such as over-recovered overheads in costing, or non-operating income recorded only in financial accounts).
• Subtract from Costing Profit: Any item that made the Costing Profit higher than the Financial Profit (such as under-recovered overheads in costing, or purely financial expenses recorded only in financial accounts).

Answer 1

Step 1: Analyzing the Impact of Each Variance on Profit:
We reconcile the Costing Profit (Rs. 2,75,000) with the Financial Profit by identifying how each expense or income variance affects both systems:
• Selling Overheads (Financial: Rs. 70,000 Cost: Rs. 60,000): Cost accounts charged Rs. 10,000 less than financial accounts. This under-recovery in cost accounts means costing profit is artificially high. To reconcile, we must deduct Rs. 10,000 from costing profit.
• Provision for Doubtful Debts (Financial: Rs. 4,000 Cost: Nil): This is a purely financial charge. Because it is ignored in cost accounts, costing profit is higher. To reconcile, we must deduct Rs. 4,000.
• Factory Overheads (Financial: Rs. 70,000 Cost: Rs. 80,000): Cost accounts charged Rs. 10,000 more than financial accounts (over-recovery of factory overheads). This extra charge means costing profit is lower. To reconcile, we must add Rs. 10,000.
• Director's Remuneration (Financial: Rs. 4,000 Cost: Nil): A purely financial charge ignored in cost records, making costing profit higher. To reconcile, we must deduct Rs. 4,000.
• Income Tax Paid (Financial: Rs. 20,000 Cost: Nil): A purely financial appropriation of profit ignored in costing, making costing profit higher. To reconcile, we must deduct Rs. 20,000.
• Rent Received (Financial: Rs. 5,500 Cost: Nil): Purely financial income recorded only in financial accounts, making financial profit higher. To reconcile, we must add Rs. 5,500.
• Depreciation (Financial: Rs. 12,000 Cost: Rs. 9,000): Cost accounts recorded Rs. 3,000 less depreciation than financial accounts. This under-recovery in costing means costing profit is higher. To reconcile, we must deduct Rs. 3,000.
• Dividend Received (Financial: Rs. 11,000 Cost: Nil): Purely financial income recorded only in financial accounts, making financial profit higher. To reconcile, we must add Rs. 11,000.
• Administrative Overheads (Financial: Rs. 70,000 Cost: Rs. 49,000): Cost accounts charged Rs. 21,000 less than financial accounts. This under-recovery in cost records means costing profit is higher. To reconcile, we must deduct Rs. 21,000.

Step 2: Preparing the Reconciliation Statement Table:
Using the additions and deductions identified above, we prepare the Reconciliation Statement:

Step 3: Calculating and Confirming the Final Profit:
By adjusting our costing profit baseline with the additions and deductions, we calculate the financial profit: Financial Net Profit &= Costing Net Profit + Total Additions - Total Deductions
Financial Net Profit &= 2,75,000 + 26,500 - 62,000
Financial Net Profit &= 3,01,500 - 62,000
Financial Net Profit &= Rs. 2,39,500 The net profit reported in the financial records for the year ended March 31, 2025, is Rs. 2,39,500.