Cost Accounting refers to that branch of accounting which deals with costs incurred in the production of units of an organization. On the other hand, financial accounting refers to the accounting concerned with recording financial data of an organization, in order to exhibit exact position of the business.
Cost accounting generates information so as to keep a check on operations, with an aim of maximizing 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.
Content: Cost Accounting Vs 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 at 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 is used only by the internal management of the organization like employees, directors, managers, supervisors etc.||Users of 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 complete record of the financial transactions.|
|Forecasting||Forecasting is possible through budgeting techniques.||Forecasting is not at all possible.|
Definition of Cost Accounting
Cost Accounting is the field of accounting that is used 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 labour, 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 organisation. It traces the cost incurred at each level of production, i.e. right from the input of the material till the output produced, each and every cost is recorded. There are two types of Cost Accounting systems, they are:
- Non – Integrated Accounting System: The accounting system in which separate set of books is maintained for cost information.
- Integrated Accounting System: The accounting system in which cost and financial data are maintained 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 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 organisation during a period.
The information provided by the financial accounting is useful in making comparisons between different organisations and analysing the results thereof, on various parameters. In addition to this, performance and profitability of various financial periods can also be compared easily.
Key Differences Between Cost Accounting and Financial Accounting
The following are the major differences between cost accounting and financial accounting:
- Cost Accounting aims at maintaining cost records of an organisation. Financial Accounting aims at maintaining all the financial data of an organisation.
- Cost Accounting Records both historical and per-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 is valued at cost while in financial accounting, the stock is valued at the lower of the two i.e. cost or net realisable value.
- Cost Accounting is mandatory only for the organisation which is engaged in manufacturing and production activities. On the other hand, Financial Accounting is mandatory for all the organisations, as well as compliance with the provisions of Companies Act and Income Tax Act is also a must.
- Cost Accounting information is reported periodically at frequent intervals, but financial accounting information is reported 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 organisation 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, on the basis of which reporting can be done at the end of the accounting period.
So, above are the most important differences between the Cost Accounting and Financial Accounting. The information provided by the Cost Accounting is helpful in the decision making of the managers to control costs, but it lacks comparability. The information provided by the financial accounting is capable of making comparisons, but future forecasting cannot be done through this information. That is why they both go side by side, in fact, cost accounting data is helpful for financial accounting.