Cost Accounting · Reconciliation of Costing and Financial Profit

Memorandum Reconciliation Account: Format and How to Prepare

Updated 10 October 2026 · Fact-checked

A memorandum reconciliation account is a ledger-form account that bridges profit as per cost accounts and profit as per financial accounts. Start with costing profit on the credit side, add items that raise financial profit there, put items that lower it on the debit side, and the balancing figure is financial profit.

Understand Memorandum Reconciliation Account

Cost accounts and financial accounts often show different profits for the same period. The reason is that each set follows its own rules. Some items appear in only one set. Overheads, stock and depreciation may be treated differently. The reconciliation explains the gap.

The memorandum reconciliation account does this in ledger form, with a debit side and a credit side. It is called a memorandum account because it is not part of the double-entry books. It is a working account that only records the differences. No journal entry is passed for it.

The logic is simple. Start from the profit you know, usually the costing profit. Ask of every difference: does it make financial profit higher or lower than costing profit? If financial profit is higher because of it, put it on the credit side. If financial profit is lower, put it on the debit side. The balancing figure is the other profit.

A reconciliation statement shows the same thing as a list, with additions and deductions under a starting profit. The memorandum account shows it as a two-sided ledger. The answer is the same. Questions will usually tell you which layout to use.

The exam can also work backwards. If financial profit is given and costing profit is asked, the same account is used and the balancing figure sits on the other side.

Key rules to remember

Balancing rule (costing profit given): Financial profit = Costing profit + Credit-side items − Debit-side items (other than financial profit); Costing profit goes on the credit side. Financial profit is the balancing figure on the debit side.
Balancing rule (financial profit given): Costing profit = Financial profit + Debit-side items − Credit-side items (other than costing profit); Put financial profit on the debit side and find costing profit as the balancing figure on the credit side.
Debit side items: Expenses and losses only in financial accounts; under-absorbed overheads; higher closing stock or lower opening stock in costing; excess charge in financial accounts; Each of these makes financial profit lower than costing profit.
Credit side items: Incomes and gains only in financial accounts; over-absorbed overheads; notional charges only in costing; higher closing stock or lower opening stock in financial accounts; Each of these makes financial profit higher than costing profit.
Items left out: Purely financial appropriations are not reconciled; Items such as dividends paid, transfer to reserves and income tax paid out of profit are appropriations, not charges. Include income tax or similar items only if the question treats them as charges in arriving at the financial profit.

How to solve Memorandum Reconciliation Account questions

Use the same method for every question. It works whichever profit is given.

1Read which profit is given and which is asked. Open the account with the given profit on its natural side: costing profit on the credit side, or financial profit on the debit side.
2List every difference from the question. Tick each one so that none is missed.
3Classify each item by its effect on financial profit relative to costing profit: does it make financial profit higher or lower?
4Place it accordingly: items that make financial profit higher go on the credit side, and items that make it lower go on the debit side.
5For stock differences, compare the two closing values and the two opening values separately. Higher closing stock in a set means higher profit in that set.
6Ignore appropriations such as dividends and transfers to reserves, and ignore items that appear equally in both sets.
7Total the side with the given profit, then insert the balancing figure on the other side so both totals agree.
8Label the balancing figure clearly, for example 'To Net profit as per financial accounts (balancing figure)'.

Quickest way: Direction test in one line

When to use it: Use it when the question has many small adjustments and time is short.

Write the starting profit and put the other profit as X.
For each item, ask only: does it raise or lower financial profit compared with costing profit?
Credit side if financial profit rises, debit side if it falls.
Total each side. The gap between the two totals gives X.
Check by rebuilding: costing profit + items that raise financial profit − items that lower it should equal financial profit.

Common mistakes in Memorandum Reconciliation Account

Putting under-absorbed overhead on the credit side
Students think under-absorption is a gain because costing charged less.
Fix: Costing charged less, so costing profit is higher. Financial profit is lower. So under-absorption goes on the debit side. Over-absorption goes on the credit side.
Ignoring notional items such as notional rent or interest on own capital
These do not appear in the financial books, so students skip them.
Fix: They reduce costing profit but not financial profit. Put them on the credit side when starting from costing profit.
Getting stock differences the wrong way round
Students remember a rule for opening and closing stock but not why it works.
Fix: Higher closing stock in a set raises profit in that set. Higher opening stock lowers profit in that set. Compare each set with the other and decide the direction.
Including dividends paid or transfers to reserves
These appear in the financial accounts, so students treat them as expenses.
Fix: They are appropriations of profit, not charges against it. Leave them out unless the question treats them as charges.
Not showing the balancing figure as a labelled line
Students write only the final number.
Fix: Show the balancing profit as a line in the ledger with a label, and total both sides equally. This earns the step marks.

Worked examples

Example 1

Profit as per cost accounts of Kaveri Industries Ltd is ₹3,60,000. The following differences exist: interest on debentures paid ₹20,000 and loss on sale of machinery ₹15,000 (both only in financial accounts); preliminary expenses written off ₹10,000 (only in financial accounts); factory overheads under-absorbed in costing ₹25,000; dividend received ₹12,000 and profit on sale of investments ₹18,000 (only in financial accounts); notional rent charged in costing only ₹30,000; closing stock in cost accounts is ₹8,000 higher than in financial accounts. Prepare the memorandum reconciliation account and find profit as per financial accounts.

Show the solution

Start with costing profit ₹3,60,000 on the credit side.
Items that raise financial profit (credit): dividend received ₹12,000, profit on sale of investments ₹18,000, notional rent charged in costing only ₹30,000.
Items that lower financial profit (debit): interest on debentures ₹20,000, loss on sale of machinery ₹15,000, preliminary expenses ₹10,000, under-absorbed overheads ₹25,000, higher closing stock in costing ₹8,000.
Credit total before the balancing figure = 3,60,000 + 12,000 + 18,000 + 30,000 = ₹4,20,000.
Debit items = 20,000 + 15,000 + 10,000 + 25,000 + 8,000 = ₹78,000.
Financial profit = 4,20,000 − 78,000 = ₹3,42,000.
Account layout: Dr side: To Interest on debentures 20,000; To Loss on sale of machinery 15,000; To Preliminary expenses 10,000; To Under-absorbed overheads 25,000; To Excess closing stock in costing 8,000; To Net profit as per financial accounts (balancing) 3,42,000; Total 4,20,000. Cr side: By Net profit as per cost accounts 3,60,000; By Dividend received 12,000; By Profit on sale of investments 18,000; By Notional rent 30,000; Total 4,20,000.

Answer: Profit as per financial accounts = ₹3,42,000. Both sides of the account total ₹4,20,000.

Example 2

Profit as per financial accounts of Narmada Traders Ltd is ₹2,10,000. Differences: goodwill written off ₹20,000 (only in financial accounts); interest received on investments ₹9,000 (only in financial accounts); overheads over-absorbed in costing ₹14,000; depreciation charged in cost accounts ₹50,000 and in financial accounts ₹62,000; closing stock in financial accounts ₹1,40,000 and in cost accounts ₹1,46,000; notional interest on capital charged in costing only ₹16,000. Find profit as per cost accounts using a memorandum reconciliation account.

Show the solution

This example is the mirror image of the first one. Financial profit ₹2,10,000 is given, so it goes on the debit side, and costing profit is the balancing figure on the credit side. The test is the same: items that make financial profit lower than costing profit go on the debit side, and items that make it higher go on the credit side.
Debit side items (each makes financial profit lower than costing profit): goodwill written off ₹20,000 (a charge only in financial accounts); excess depreciation in financial accounts 62,000 − 50,000 = ₹12,000; higher closing stock in costing, 1,46,000 − 1,40,000 = ₹6,000 (costing profit is higher, so financial profit is lower). Total = ₹38,000.
Credit side items (each makes financial profit higher than costing profit): interest received ₹9,000 (income only in financial accounts); over-absorbed overheads ₹14,000 (costing charged more than the actual, so costing profit is lower); notional interest on capital ₹16,000 (a charge only in costing, so costing profit is lower). Total = ₹39,000.
Debit total = 2,10,000 + 20,000 + 12,000 + 6,000 = ₹2,48,000.
Credit side without the balancing figure = 9,000 + 14,000 + 16,000 = ₹39,000.
Costing profit (balancing figure) = 2,48,000 − 39,000 = ₹2,09,000.
Account layout: Dr side: To Net profit as per financial accounts 2,10,000; To Goodwill written off 20,000; To Excess depreciation in financial accounts 12,000; To Excess closing stock in costing 6,000; Total 2,48,000. Cr side: By Interest received 9,000; By Over-absorbed overheads 14,000; By Notional interest on capital 16,000; By Net profit as per cost accounts (balancing) 2,09,000; Total 2,48,000.
Check from first principles: costing profit = financial profit + items that lower financial profit − items that raise it = 2,10,000 + 38,000 − 39,000 = ₹2,09,000, which agrees with the balancing figure.

Answer: Profit as per cost accounts = ₹2,09,000. Both sides of the account total ₹2,48,000.

Exam tips

Read the question for the given profit first. Start the account with that profit on its correct side, and keep the other profit as the balancing figure.
Make a quick three-column rough list: item, effect on financial profit (higher or lower), side. This stops direction errors.
Compute stock and depreciation differences on a rough sheet first, then post only the net difference in the account.
Show every item as a separate line with a clear description such as 'To Loss on sale of machinery'. Step marks are given for each correct line.
In the MCQ section, expect short questions on which side an item goes. Use the direction test: does it raise or lower financial profit?

Practice questions from Reconciliation of Costing and Financial Profit

Memorandum Reconciliation Account in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CA IntermediateReconciliation of Cost and Financial Accounts

Memorandum Reconciliation Account: frequently asked questions

What is the format of a memorandum reconciliation account?

It is a two-sided ledger account. The costing profit (or the given profit) sits on one side, items that raise financial profit go on the credit side, and items that lower it go on the debit side. The balancing figure is the other profit, and both sides must total the same.

Why is it called a memorandum account?

It is not part of the double-entry system. No journal entries are passed for it. It is a working account that only records the differences between the two sets of books, so it is called a memorandum account.

What is the difference between a reconciliation statement and a memorandum reconciliation account?

Both reconcile costing profit and financial profit and give the same answer. The statement shows additions and deductions in a list under a starting profit. The memorandum account shows the same items in ledger form with debit and credit sides.

Which side does under-absorbed overhead go on?

When you start from costing profit, under-absorbed overhead goes on the debit side. Costing charged less than the actual amount, so costing profit is higher and financial profit is lower. Over-absorbed overhead goes on the credit side.