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CMA Foundation · Fundamentals of Financial and Cost Accounting · Meaning and Significance of Cost Accounting and its Relationship with Financial Accounting

Gupta Industries' financial accounts show profit of ₹3,50,000. The cost records show profit of ₹3,80,000. Reconciliation items: office rent paid for a cost-excluded item, ₹0; interest on loan ₹15,000 charged in financial books only; income tax provision ₹40,000 charged in financial books only; and notional rent of own premises ₹25,000 charged in cost books only. Other items nil. What is the profit as per cost accounts that reconciles with the financial profit?

Interest of ₹15,000 and tax of ₹40,000 appear only in financial books, so they are added back to the financial profit. Notional rent of ₹25,000 appears only in cost books, so it is deducted. The result is ₹3,80,000, matching the cost profit.

  1. A₹3,50,000 + ₹15,000 + ₹40,000 − ₹25,000 = ₹3,80,000Correct
  2. B₹3,50,000 + ₹15,000 + ₹40,000 + ₹25,000 = ₹4,30,000
  3. C₹3,50,000 − ₹15,000 − ₹40,000 + ₹25,000 = ₹3,20,000
  4. D₹3,50,000 + ₹25,000 = ₹3,75,000

Explanation

Items charged only in financial books (interest 15,000 and tax 40,000) are added back to reach cost profit. Notional rent is charged only in cost books, so it is deducted. 3,50,000 + 55,000 − 25,000 = ₹3,80,000, agreeing with cost profit. Adding notional rent, as option 2 does, is the sign error.

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