Cost Accounting refers to that branch of accounting which deals with costs incurred in the production of units of an organization. A common question asked around, What is the Difference between Cost Accounting and Financial Accounting? On the other hand, financial accounting refers to the accounting concerned with recording financial data of an organization, to exhibit the exact position of the business. Also learned, Cost and Management Accounting.
Learn, Explain the Difference between Cost and Financial Accounting!
Cost accounting generates information to keep a check on operations, to maximize profit and efficiency of the concern. Conversely, Financial accounting ascertains the financial results, for the accounting period and the position of the assets and liabilities on the last day of the period. There is no comparison between these two because they are equally important for the users. This article presents you the difference between cost accounting and financial accounting in tabular form.
#Definition of Cost Accounting:
Cost Accounting is the field of accounting that uses to record, summarise and report the cost information on a periodical basis. Its primary function is to ascertain and control costs. It helps the users of cost data to make decisions regarding the determination of selling price, controlling costs, projecting plans and actions, efficiency measurement of the labor, etc. Cost Accounting adds to the effectiveness of the financial accounting by providing relevant information which ultimately results in the good decision-making process of the organization. It traces the cost incurred at each level of production, i.e. right from the input of the material till the output produced, every cost records.
There are two types of Cost Accounting systems, they are:
- Non – Integrated Accounting System: The accounting system in which a separate set of books is maintaining for cost information.
- Integrated Accounting System: The accounting system in which cost and financial data are maintaining in a single set of books.
#Definition of Financial Accounting:
Financial Accounting is the branch of accounting, which keeps the complete record of all monetary transactions of the entity and reports them at the end of the financial period in proper formats that increases the readability of the financial statements among its users. The users of financial information are many i.e. from internal management to outside parties. Preparation of financial statement is the major objective of financial accounting in a specified manner for a particular accounting period of an entity.
It includes Income Statement, Balance Sheet, and Cash Flow Statement which helps in, tracing out the performance, profitability and financial status of an organization during a period. The information provided by financial accounting is useful in making comparisons between different organizations and analyzing the results thereof, on various parameters. In addition to this, the performance and profitability of various financial periods can also be compared easily.
#Comparison of Cost and Financial Accounting:
|Basis For Comparison||Cost Accounting||Financial Accounting|
|Meaning:||Cost Accounting is an accounting system, through which an organization keeps the track of various costs incurred in the business in production activities.||Financial Accounting is an accounting system that captures the records of financial information about the business to show the correct financial position of the company on a particular date.|
|Information type:||Records the information related to material, labor, and overhead, which are used in the production process.||Records the information which are in monetary terms.|
|Which type of cost is used for recording?||Both historical and pre-determined cost||Only historical cost.|
|Users:||Information provided by the cost accounting uses only by the internal management of the organization like employees, directors, managers, supervisors, etc.||Users of the information provided by the financial accounting are internal and external parties like creditors, shareholders, customers, etc.|
|Valuation of Stock:||At cost||Cost or Net Realizable Value, whichever is less.|
|Mandatory:||No, except for manufacturing firms it is mandatory.||Yes for all firms.|
|Time of Reporting:||Details provided by cost accounting are frequently prepared and reported to the management.||Financial statements are reported at the end of the accounting period, which is normally 1 year.|
|Profit Analysis:||Generally, the profit is analyzed for a particular product, job, batch or process.||Income, expenditure, and profit are analyzed together for a particular period of the whole entity.|
|Purpose:||Reducing and controlling costs.||Keeping the complete record of the financial transactions.|
|Forecasting:||The forecasting is possible through budgeting techniques.||The forecasting is not at all possible.|
The upcoming discussion will update you on the difference between cost and financial accounting.
The Difference in Cost Accounting:
The following difference below are;
- Cost Accounting explains the principles, techniques, and methods for ascertaining the cost and to find out the variance in comparison with the standard and enquire reasons for such variation.
- The objective of cost accounting is to ascertain the cost and allocates the same in respective places.
- It applies to manufacture and service industries.
- Cost accounting supplies necessary information’s to the management for decision-making purposes.
- Stocks are valued as per cost price in cost accounting.
- Cost accounting determines the profit or loss of each item of product, process, etc.
- There is no particular period for ascertaining the cost of a product.
- Cost accounting is based on the concept of costing principles.
- They include data based on facts and figures and also on some estimates.
- Cost accounting considers the requirements of Sec. 209(1) of Companies Act.
- Cost accounting control, material labor and overhead costs with the help of Standard costing, Budgetary control, etc.
- Usually, cost accounting provides services to internal management.
The Difference in Financial Accounting:
The following difference below are;
- Financial accounting maintains records for keeping accounts relating to all monetary transaction.
- The objective of financial accounting is to maintain records and to prepare final accounts.
- It is applicable in all cases.
- Financial accounting supplies information’s to the management relating to profit or loss and financial positions.
- In financial accounting, stocks are valued as per cost price or market price whichever is lower.
- Financial accounting shows the profit or loss of a firm as a whole at a particular date.
- In Financial Accounting, accounts are prepared periodically, usually at the end of the period.
- Financial accounting bases on the concept of GAAP.
- Financial accounting takes data based on facts and figures only.
- They meet the requirements of Companies Act 1956, Sales Tax, Income-Tax, etc.
- Financial accounting does not have any tool to control financial transaction of the business.
- Financial accounting provides information to the internal as well as external users of accounting information.
The Main point of Differences Between Cost and Financial Accounting:
The following are the major differences between cost accounting and financial accounting:
- Cost Accounting aims at maintaining cost records of an organization. Financial Accounting aims at maintaining all the financial data of an organization.
- Cost Accounting Records both historical and pre-determined costs. Conversely, Financial Accounting records only historical costs.
- Users of Cost Accounting is limited to internal management of the entity, whereas users of Financial Accounting are internal as well as external parties.
- In cost, accounting stock values at cost while in financial accounting, the stock values at the lower of the two i.e. cost or net realizable value.
- Cost Accounting is mandatory only for the organization which engages in manufacturing and production activities. On the other hand, Financial Accounting is mandatory for all the organizations, as well as compliance with the provisions of Companies Act and Income Tax Act, is also a must.
- The cost Accounting information reports periodically at frequent intervals, but financial accounting information reports after the completion of the financial year i.e. generally one year.
- Cost Accounting information determines profit related to a particular product, job or process. As opposed to Financial Accounting, which determines the profit for the whole organization made during a particular period.
- The purpose of Cost Accounting is to control costs, but the purpose of financial accounting is to keep complete records of the financial information, based on which reporting can be done at the end of the accounting period.