Preparation of Cost settlement Statement

10.3.1 Methods

In case of settlement, the profit or loss as disclosed by the financial accounting with that can be shown by the cost accounting. For this a settlement Statement or Memorandum of Reconciliation Account is prepared. The following steps have to be taken for preparation of Reconciliation Statement:

To find the extent of difference between the profit or loss disclosed by two set of book of accounts.

To calculate the base profit or loss as per any set of books of accounts as the starting point.

To get ready a statement by making suitable adjustment of items either added or subtracted included in one set of accounts but not in the other set.

To balances as per cost account has been taken as the starting point, then balance as per financial account is to be adjusted according to the transaction recorded in the financial accounts and vice versa.

10.3.2 Statement

A settlement statement is a type of document that start with a company's own record of an account balance, adds and subtracts integration items in a set of additional columns, and then uses these adjustments to arrive at the record of the same account held by a third party. The purpose of the settlement statement is to know an independent verification of the veracity of the balance in the company account, as well as to clarify the differences between the two versions of the account.

It was observed that the differences between the two accounts are detailed in the

settlement statement, which makes it easier to determine which of the reconciling items may be invalid and in need of adjustment. Settlement statements are an extremely useful tool for both internal and external auditors. Settlement statements are commonly

constructed in the following situations: Bank accounts.

It was found that the bank settlement compares the balances between a company's version of its cash balance and the bank's version, typically with many reconciling items.

Debt accounts.

Further the debt settlement compares the debt amounts outstanding according to the company and its lender.

Accounts receivable.

The receivables settlement is usually constructed on an informal basis for individual customers, and compares their version of outstanding receivable balances to the company's version.

Accounts payable.

The payables settlement is also usually constructed on an informal basis by individual supplier, and compares their version of outstanding payable balances to the

company's version.

It was observed that if there is a difference in the results shown by the cost accounts and financial accounts, then we have to see for the cost settlement statement. This is prepared to reconcile the results by removing their differences. A cost settlement statement is prepared on the basis of same footing on which a bank reconciliation statement is prepared. In such cases the preparation of cost settlement statement involves the steps mentioned as:

Step 1: First start with profit or loss as shown by any one set of accounts as the base Step 2: Secondly find the reason of difference of profit between cost and financial account.

Step 3: Find the addition or subtraction items

Step 4: Finally prepare the cost settlement statement

Taking the profit as per cost account or loss of financial account

Particulars...Amount Profit as depend on cost account or loss as per financial account...XXX Add:

i. Overcharge of expenses ...XXX ii. Items of expenses ...XXX iii. Items of income recorded ...XXX iv. Amount of understated income . ...XXX

v. Over-valuation of opening stock ...XXX Vi. Under valuation of closing stock ... XXX Less:

i. Under charge of expenses ... .(XXX) ii. Items of expenses recorded ... .(XXX) iii. Income shown in cost account ... .(XXX) iv. Amount of income over state ... (XXX) v. Under valuation of opening stock ... .(XXX) vi. Over valuation of closing stock ... .(XXX) Profit as per financial account or loss as per cost account. ...XXX 10.4 Reasons for the Difference

The are certain reasons which can create difference between cost and financial profit or loss shown by the two set of books may be listed under the following heads :

(1) shown only in Financial Accounts (2) shown only in Cost Accounts (3) Absorption of expenses (4) Methods of Stock Valuation (5) Abnormal Loss and Gains

10.4.1 Shown only in Financial Accounts:

Some items of income and expenses which are included only in financial accounts but are not shown in cost accounts and vice versa. The following items are shown in financial accounts but not in cost accounts:

(A) Income:

Profit on sale of permanent assets Interest received on asset

Dividend received on savings

Rent, brokerage and commission received Premium on issue of shares

Transfer fees received. (B). Expenditure:

Loss on sale of fixed assets, e.g., Factory, Machinery, Building etc. Interest paid

Discount paid Dividend paid

Losses due to scrapping of plant and machinery Penalties and fines

Expenses of shares' transfer fees Preliminary expenses written off Damages payable at law.

10.4.2 Items shown only in Cost Accounts:

It is seen that there are certain items which are recorded only in Cost Accounts but are not included in financial accounts, national interest on capital, notional rent of premises owned, salary to proprietor etc. are not recorded in financial account as the amount is not actually spent or paid. These expenses reduced the profit in cost account while in

financial account it may be the reverse effect. 10.4.3 Absorption of Overheads :

In real fiscal accounts, amount of expenses paid are recorded whereas in cost accounts expenditure are charged at predetermined rates. If overhead charged are not equal to the amount of overhead received the under or over absorption of overhead leads to difference in profits of two accounts.

10.4.4 Methods of Stock

Valuation: Stock can be calculated if it is: In shape of raw materials

In shape of work in progress In shape of finished goods.

In financial accounts stocks are appreciated at cost price or market price whichever is lower. In case of Cost Account; stock of raw equipment can be valued on the basis of FIFO, LIFO and Simple Average Method etc., and work in progress may be valued at Prime Cost or Work Cost. Finished stocks are generally valued on the basis of cost of production. So, the adaptation of different method of valuation of stock leads to difference in profits of two sets of accounts.

10.4.5 Abnormal Losses and Gains:

There are certain diverse items of abnormal wastages, losses or gains which are included in financial accounts but they are not recorded in cost accounts. It was observed that the

figures of unusual losses and gains may affect the results in financial accounts unaccompanied.