What Is the Difference Between Cost And Financial Accounting?

Generally, accounting is about recording and summarizing numbers to be used by the business. It helps business owners and other stakeholders understand operational and strategic matters by presenting information highly usefully.

Accounting is mainly divided into financial accounting and management. Let’s understand the main differences between financial accounting and management accounting.

Financial accountingCost accounting
Financial accounting is about identifying and recording monetary events in the system.

It helps build a comprehensive accounting record that can be used to generate financial statements.

The financial statement is provided in a manner that is easily understood by its users, including internal management to external parties.

The financial statement components include income Statement, Balance Sheet, Cash Flow Statement, statement of changes in equity, and notes to the financial statement.  
Cost accounting specializes in detailed cost records, regularly summarising reports for cost information. It’s focused on determining and controlling costs.

Further, cost data helps users determine selling prices, control costs, project plans, costing savings actions, and measure the efficiency of the labor force.  
The main objective is to prepare financial statements to be used by different stakeholders, including management, employees, shareholders, Government, customers, suppliers, etc.    Cost accounting aims to stay on top of operations to maximize profits and enhance efficiency.

Management accounting generates different reports at management’s discretion to enhance business and process understanding to make decisions.
Financial accounting helps compare financial results between organizations and analyze performance based on various criteria using detailed financial information.

Further, it enables to compare of financial performance and profitability over the period.
It helps control cost, monitor operations, optimize processes, control production loss, and increase departmental coordination.
Financial accounting is mainly about historical financial data, transactions, and events.

For instance, a quarterly financial statement helps understand the last three months’ performance.
Management accounting is about recent operational efficiency and business operations. For instance, a report on production loss is relevant in controlling current and future production.

Explanatory discussion for financial and cost accounting

Accounting is always interconnected with business operations. So, both accounting types coexist, Although cost accounting is a small component of overall financial and business cycles.

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Yet, its importance can not be neglected. The reason is that the cost accounting approach provides insights into operational inefficiencies.

As a result of cost accounting, operational efficiency and inefficiency can be identified and reflected in an accounting cycle.

As a result, cost accounting contributes to the efficiency of financial accounting. It’s done by providing comprehensive and structured cost-related information to the business management that helps them make wise and feasible decisions for the betterment of the organization.

This process traces each cost incurred throughout the production process, from material input to the completed output. Further, cost accounting can be divided into two groups: (1) Cost Analysis and (2) Cost Forecast.

So, a cost accountant deals with the costs incurred by an organization in the production of its product. On the other hand, financial accounting covers the recording of financial data of an enterprise to present the exact position of the business.

Overall, details like product cost/cost of sales are obtained from management accounting and used to prepare financial accounting reports. Hence, output data of the cost accounting is used as input for the financial accounting.

So, concepts of financial and cost accounting can not be analyzed separately. Further, a firm can reduce costs and increase profitability by using both cost accounting and financial accounting.

Likewise, a connected analysis of cost and financial accounting information can lead to analyses such as ratios, growth & margin trends, industry comparisons, etc.

Under financial accounting, revenue and costs are recorded in the financial statement. On the other hand, cost accounting is mostly about the cost incurred on the internal processes and operations. Let’s make a quick comparison between financial and cost accounting.

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Difference Between Cost And Financial Accounting

Cost accounting and financial accounting differ in major ways.

  1. Keeping cost records for an organization is the main objective of Cost Accounting. On the other hand, the purpose of financial accounting is to keep track of an organization’s finances.
  2. Cost accounting records historical and predetermined costs, while transactions recorded by financial accounting are historical.
  3. Accounting for cost is primarily used by management within an organization, and other internal and external stakeholders use financial accounting.
  4. Cost accounting values inventory at the cost incurred, and financial accounting values stock at the lower of two values, i.e., their market value or net realizable value.
  5. The Cost Accounting requirement only applies to organizations that manufacture and produce goods. On the contrary, all companies are required to perform financial accounting and follow the provisions of the Companies Act, as well as the Income Tax Act.
  6. The Cost Accounting report is prepared more frequently or as and when required by management. On the other hand, a financial accounting report is generally prepared after specific periods like months, quarters, and years.
  7. Using cost accounting information, one can determine how much profit a product, project, or business will make. On the other hand, Essentially, the profit made by an organization during a specific period is determined through financial accounting.
  8. Cost accounting is used for the sole purpose of controlling and reducing overall costs. On the contrary, financial accounting keeps complete records of the financial information to prepare a financial statement.
  9. Cost accounting does not prescribe a particular format for reporting. On the other hand, reporting under financial accounting is based on formats issued by GAAP, IAS, and IFRS.
  10. Cost accounting analyzes marginal cost, breakeven analysis, and variance analysis. In contrast, financial accounting maintains accurate records of financial information on a particular date about a business to reflect its current financial position.
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A fast additional fact about cost accounting

  1. Cost accounting is about tracking various costs associated with production activities in an organization.
  2. Contains information on materials, labor, and overhead usage during production.
  3. The management is frequently informed of details provided by the cost accounting department.
  4. Budgeting techniques in cost accounting allow for forecasting.
  5. Helps to analyze the operations of a segment, operational, and geographical or division-wise.

A fast additional fact about financial accounting

  1. Records information that is monetary.
  2. Costs from the past only.
  3. In addition to internal users, external parties such as creditors, shareholders, customers, etc, also utilize financial accounting information.
  4. The company’s income, expenditures, and profits are analyzed for a period specified by the company.
  5. It isn’t possible to forecast anything; things are recorded when the event is completed.
  6. Analyzes the overall operations of the company.

Conclusion

Accounting helps business owners and other stakeholders to understand business needs, performance, and corrective actions to be taken. Generally, accounting can be divided into two types that include financial accounting and management accounting.

Financial accounting is mainly about identifying, recording, summarizing, and reporting financial information. The main objective of financial accounting is the preparation of financial statements based on historical information.

On the other hand, cost accounting is mainly about the cost perspective of the business. Its main objective is to control production and business processes to increase business profitability. Hence, cost accounting is more about controlling aspects of the operations and increasing business-related information.

Frequently asked questions

Which type of accounting is more important financial or cost accounting?

Both types of accounting are important for the business. However, their uses are different. For instance, financial accounting is more about summarized reporting for the business’s financial performance. It’s intended to satisfy internal and external business stakeholders.

On the other hand, cost accounting is more about business processes, controlling production, analyzing product mix, getting breakeven, and sorting ways to increase profits.

Which accounting areas are considered to be tough?

Accounting is systematic and interested subject. The accounting treatment and guidelines are defined and easy to follow. However, there are some subjective areas where an accountant needs to be professionally judgmental.

Enlist important concepts for cost accounting.

Following are some of the important concepts of cost accounting.

  1. Absorption costing
  2. Marginal costing
  3. Break-even analysis
  4. Variable cost
  5. Fixed cost