Everything you need to know about the difference between financial accounting and cost accounting.
Financial accounting is primarily concerned with the preparation of financial statements, which summarise the results of operations for selected period of time and show the financial position of the company at particular dates.
Cost accounting is primarily concerned with determination of cost of something, which may be a product, service, a process or an operation according to costing objective of management.
A cost accountant is primarily charged with the responsibility of providing cost data for whatever purposes they may be required. A cost accountant, unlike a financial accountant, acts in a dual capacity. He has an obligation to both external reporting and internal reporting.
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Learn about the main points of difference between financial accounting and cost accounting. They are:
1. Objective 2. Form of Accounts 3. Nature of Transactions Recorded 4. Terms of Recording 5. Nature of Information Used 6. Valuation of Stock 7. Periodicity of Reporting 8. Provision for Control 9. Efficiency Analysis
10. Content of Reporting 11. Compulsion 12. Nature of Costs Recorded 13. Statements Prepared 14. Information for Pricing 16. Responsibility Fixation 15. Decision Making 16. Extent of Transactions 17. Access to Information.
Financial Accounting vs. Cost Accounting: 8 Main Key Differences
Difference Between Financial Accounting and Cost Accounting – 8 Major Points of Difference
The major differences between financial accounting and cost accounting are listed as follows:
Differences # Financial Accounting:
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(1) Purpose – The main purpose of financial accounting is recording business transactions and ascertainment of profitability and financial position.
(2) Nature – Subjective, since the recording is based on policies.
(3) Users of information – It mainly caters to the requirements of external stakeholders of the business enterprise.
(4) Time period – Financial statements (the outcome of financial accounting) are prepared in periodic intervals, generally, once in a year. Hence, the information is not contemporary.
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(5) Analysis and decision making – The analysis based on financial statements is post-mortem and might not be useful for all managerial decisions.
(6) Performance of individual products, divisions, etc. – Financial accounting does not provide performance of each product, process, division, function, etc. It only provides the overall results of the organisation.
(7) Inventory Valuation – Inventory is valued on the convention of conservatism, i.e., at cost price or net realisable value, whichever is less.
(8) Statutory Requirements – Financial accounting is mandatory for most business enterprises.
Differences # Cost Accounting:
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(1) Purpose – The main purpose of cost accounting is accounting for cost for enabling cost control and cost reduction.
(2) Nature – Objective, since the recording is based on facts.
(3) Users of information – It is mainly for the use of management for decision making purposes.
(4) Time period – Cost reports are prepared on continuous basis. Hence, the information is contemporary in nature.
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(5) Analysis and decision making – The analysis based on cost information are concurrent and facilities most decisions of the management.
(6) Performance of individual products, divisions, etc. – Cost accounting provides the performance of each and every product, process, division, function, etc., and thereby facilitates better decision making.
(7) Inventory Valuation – Inventory is valued at cost price, projecting more realistic data.
(8) Statutory Requirements – Cost accounting is voluntary in most cases, other than cases where cost accounting record rules are applicable.
Difference Between Cost Accounting Versus Financial Accounting – 11 Points
Both Cost Accounting and Financial Accounting are the branches of accounting related to each other. The main objective of both is to provide informations.
Difference # Financial Accounting:
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1. Objective – Its objective is to show the profit or loss and financial position of the business.
2. Usefulness – It is useful for external parties of business e.g., shareholders, creditors and Government for analyzing the Financial position.
3. Requirement – Preparation of Financial statements e.g., P/L A/c and Balance Sheet is compulsory under Companies Act and Income Tax.
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4. Reporting – Under Financial accounting operating results and financial position is reported at the end of the year.
5. Analysis of Profit – Financial accounting discloses the net Profit or loss at the business as a whole.
6. Nature of transactions – Financial accounting relates to commercial transactions of the business.
7. Fixation of selling price – Financial records do not help in fixing selling price.
8. Figures – It is concerned with historical figures.
9. Stock Valuation – Closing Stock is valued at cost or market price, whichever is less.
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10. Control techniques – Financial Accounting does not make use of any control technique.
11. Control on labour – There is no provision in financial account for control on labour.
Difference # Cost Accounting:
1. Objective – Its objective is to provide detailed information of cost for its control and decision making.
2. Usefulness – It is useful internally to management in decision making.
3. Requirement – Its maintenance is voluntary with exception of some industries.
4. Reporting – Reporting related to cost may be required at any time.
5. Analysis of Profit – Cost accounting discloses the Profit or loss of a job or process.
6. Nature of transactions – Cost accounts relates to manufacturing of goods and services.
7. Fixation of selling price – Cost records, helps in fixing the selling price after ascertaining cost per unit.
8. Figures – Cost Accounting also deals with estimated figures.
9. Stock Valuation – Stock is valued at cost.
10. Control techniques – Cost Accounting uses control techniques like standard costing, budgetary control, marginal costing etc.
11. Control on labour – In Cost Accounts, control on labour is exercised by computation of idle time, overtime, labour turnover.
Difference between Cost Accounting and Financial Accounting – 6 Key Points: Objectives, Presentation, Recording, Analysing Profit, Periodicity of Reporting and a Few Others
Accounting may broadly be classified into two categories:
(a) Financial Accounting and
(b) Management Accounting.
Financial Accounting is concerned with recording, classifying and summarising financial transactions and preparing statements relating to the business in accordance with generally accepted accounting concepts and conventions. It is mainly meant to serve all parties external to the operating responsibility of the firm such as shareholders and creditors of the firm besides providing information about the overall operational results of the business, while management accounting is concerned with accounting information which is useful for the management.
It is “the presentation of accounting information in such a way as to assist the management in the creation of policy and day to day operation of the undertaking.” It includes the methods and concepts necessary for effective planning, for choosing between alternative business actions and for control through the evaluation and interpretation of performance.
It embraces within its fold several subjects and cost accounting is one of them. Though Financial Accounting and Cost Accounting each rests on the same principles of debits and credits and uses the same records, but each deals with matters special to itself. Financial Accounting reveals the profit or loss of the business as a whole during a particular period while cost accounting shows, by analysis and localisation, the unit costs and profits and losses of different product lines.
Take for instance a factory manufacturing four products A, B, C and D. Financial accounting will tell about the overall profit or loss made by the factory on these products. It cannot explain whether product A is more profitable than B, or the production of product C should be stopped because the enterprise is suffering a loss on its production.
If proper cost accounts are maintained, the management can come to know not only about the profitability or non-profitability of each process involved in the production of the product. Such detailed information facilitates better control over business which ultimately helps in achieving maximum efficiency at every point.
The points of difference between cost accounting and financial accounting may be summarised as follows:
1. Objectives:
Financial accounting aims at safeguarding the interest of the business and its proprietors and others connected with it. This is done by providing suitable information to various parties such as shareholders or partners, present and prospective creditors etc. Cost accounting, on the other hand, renders information for the guidance of the management for proper planning, organisational control and decision-making.
For example, if the materials have been purchased, financial accounts will only tell whether they have been correctly accounted and paid for, while cost accounts will reveal whether the quantity purchased was reasonable, whether the purchase was at all necessary and whether the quantity of material utilised was reasonable. Similar considerations also apply to the utilisation of labour and capital resources.
2. Mode of Presentation:
Financial accounts are prepared according to some accepted accounting concepts and conventions. They are kept in a manner so as to comply with the requirements of the Companies Act, Income Tax Law, Excise and other statutes. Maintenance of cost records is purely voluntary and, therefore, there are no statutory forms regarding their presentation. However, the Central Government has now the power to require by notification any company engaged in production, processing, manufacturing or mining activities to maintain proper cost records.
3. Recording:
In case of financial accounts stress is on the ascertainment and exhibition of profits earned or losses incurred in the business. On account of this reason in financial accounts the transactions are recorded, classified and analysed in a subjective manner, i.e., according to the nature of expenditure.
In cost accounts the emphasis is more on aspects of planning and control and therefore, transactions are recorded in an objective manner, i.e., according to the purpose for which costs are incurred. For example, if Rs. 5,000, Rs. 8,000 and Rs. 7,000 have been paid as wages for products A, B and C, financial accounts will record the total wages paid, while cost accounts will record wages separately for each product. Besides this, in cost accounts a difference will also be made between direct and indirect wages etc.
4. Analysing Profit:
Financial accounting reveals the profit of the business as a whole, while cost accounting shows the profit made on each product, job or process. This enables the management to eliminate less profitable product lines and maximise the profits by concentrating on more profitable ones.
5. Periodicity of Reporting:
Financial accounting is largely concerned with the transaction between the undertaking and the third parties and therefore it has to observe the accounting period convention which is usually a year. The income statement and the balance sheet are therefore prepared and presented before the members usually once at the end of the accounting period.
While cost accounting is mainly concerned with the people in the organisation and, therefore, it is not subject to the domination of this convention. The cost reports are frequently submitted to the management and in some cases they are submitted every week.
6. Degree of Accuracy:
Financial accounting provides information which is more useful to the outsiders hence greater accuracy is required as compared to cost accountancy which provides information for the insiders i.e., the management.
The above analysis reveals the following limitations of financial accounting:
(i) It does not classify the accounts so as to give data regarding costs by departments, processes, products, in the manufacturing division; by units or product lines, and sales territories in the selling or distribution division; and by departments, services and functions in the administration division.
(ii) It does not classify the expenses as direct and indirect items nor does it assign them to the product at each stage of production. Thus, controllable and uncontrollable items of overhead costs are not shown separately.
(iii) It does not provide day-to-day cost confirmation because the data are summarised at the end of the accounting period. Thus, it does not permit computation of predetermined costs which help in taking corrective steps at appropriate stages.
(iv) It does not provide analysis of losses due to idle plant and equipment, defective material, inefficient labour or seasonal conditions. It does not also distinguish between avoidable and unavoidable losses.
(v) It does not provide adequate information for reports to outside agencies such as banks, government, insurance companies and trade associations.
Differences between Financial Accounting and Cost Accounting – 10 Points of Differentiation
Difference # Financial Accounting:
1. It is kept by all business undertaking either big or small, whether engaged in trading or non-trading.
2. It records all types of expenses and incomes but they do not keep detailed records for major elements of cost.
3. Stock is valued at cost or market price whichever is less.
4. No correct tender price can be quoted.
5. Charts or graphs are not used to present the information.
6. It is both for internal and external transactions.
7. It provides operating net results and financial position at the end of the financial year.
8. It does not show profit or loss on each product job or order individually.
9. It is mandatory as per Company’s Act and Income Tax Act for all business undertakings.
10. It provides general information in the form of profit and loss account to the management.
Difference # Cost Accounting:
1. It is kept by business engaged in manufacturing of goods or rendering of services and where the cost per unit is ascertained.
2. It records the detailed information about the major elements of cost but not the income.
3. Stock is valued at cost.
4. Correct tender price can be quoted as it is based on the estimation.
5. Charts or graphs are used to present the information.
6. It is for only internal transactions
7. It provides information to the management as and when required i.e. daily, weekly, monthly quarterly, half yearly and yearly.
8. It shows the profit or loss on each product, job or order individually.
9. It is obligatory for certain industries
10. It provides data and reports for cost ascertainment, cost control, planning and decision making.
Differences between Financial Accounting and Cost Accounting – 19 Main Points of Distinction
Difference # Financial Accounting:
1. Objective – To calculate the profit or loss and also to determine the financial position.
2. Form of accounts – These are maintained according to the guidelines of the Income Tax Act of India and the Companies Act of India.
3. Nature of transactions recorded – All the transactions of an organization are recorded.
4. Terms of recording – All the transactions are recorded in terms of their monetary values only.
5. Nature of information used – Financial Accounting deals with actual facts and figures.
6. Valuation of stock – Stocks are always valued at then- cost or market values whichever are lesser.
7. Periodicity of reporting – The reporting is done generally at the end of the accounting year.
8. Provision for control – There is no provision for controlling.
9. Efficiency analysis – No information is provided to compare the related efficiencies of workers, departments, products etc.
10. Method of recording – The Transactions are recorded according to the nature of them.
11. Content of reporting – Reporting is always done in aggregate.
12. Compulsion – Financial Accounting has to be maintained and presented according to the guidelines issued by the Companies Act.
13. Nature of costs recorded – Financial Accounting deals with historical costs only.
14. Statements prepared – Following statements are generally prepared – Profit and Loss account and balance sheet are prepared.
15. Information for pricing – Financial Accounting does not provide much information for price fixation.
16. Responsibility fixation – Financial Accounting does not provide a basis for fixing responsibility.
17. Decision making – Financial Accounting provides limited information for decision making.
18. Extent of transactions – Only external transactions – transactions between the organization and the outside World only are recorded.
19. Access to information – Anybody can access financial accounting information.
Difference # Cost Accounting:
1. Objective – To calculate the cost of production for the purposes of price fixation and also cost control.
2. Form of accounts – These are maintained in a way to suit the requirements of the company itself.
3. Nature of transactions recorded – Only those transactions relating to cost of manufacture/operation are recorded. Therefore transactions like issue of dividend, payment of income tax etc. are not recorded.
4. Terms of recording – The transactions are recorded in terms of monetary values as well as quantity.
5. Nature of information used – Cost Accounting deals with actual facts and figures and also with estimates.
6. Valuation of stock – Stocks are always valued at cost.
7. Periodicity of reporting – The reporting is done at the request of the management.
8. Provision for control – There is a comprehensive system to control the costs of material, labour and overheads through techniques such as standard costing, budgetary control etc.
9. Efficiency analysis – Comprehensive information is provided to find out and compare the relative efficiencies.
10. Method of recording – The transactions are recorded according to the purpose for which recording is done.
11. Content of reporting – Reporting is done in terms of products, units, departments etc.
12. Compulsion – Maintenance of Cost Accounting is optional (Except in certain industries and they can be maintained in any manner).
13. Nature of costs recorded – Cost Accounting deals with historical as well as pre-determined costs.
14. Statements prepared – Several statements are prepared according to the requirement.
15. Information for pricing – Cost Accounting provided detailed information for price fixation and also price quotations.
16. Responsibility fixation – Cost Accounting provides a comprehensive basis for responsibility.
17. Decision making – Cost Accounting provides comprehensive information for decision making.
18. Extent of transactions – External as well as internal transactions – transaction between two departments of an industry are recorded.
19. Access to information – Cost Accounting information is generally for the insiders of the organization only.
Distinction between Financial Accounting and Cost Accounting – 10 Major Points of Distinction
Difference # Financial Accounting:
1. It aims at determining the profit of an organisation.
2. It is not prepared from cost accounting.
3. Financial accounting is meant for external users.
4. It is prepared in accordance with generally accepted accounting principles.
5. It uses natural classification of income and expenses.
6. It strikes a balance between relevance and reliability.
7. It uses matrices that use accounting numbers.
8. Periodicity of financial reporting is fixed, e.g., quarterly, annually.
9. Financial accounting uses only actual costs and revenues.
10. It is prepared in the format prescribed by regulatory authorities.
Difference # Cost Accounting:
1. It aims at determining the cost of a product or service.
2. It is prepared from financial accounting.
3. Cost accounting is meant for internal users.
4. It is prepared in accordance with established cost accounting principles.
5. It uses different classification of income and expenses.
6. It emphasises only relevance.
7. Along with accounting numbers, it also uses non-financial measures.
8. Periodicity of cost accounting depends on the need of the organisation.
9. Along with actual costs and revenue, cost accounting uses notional costs and revenues.
10. It is prepared in the format internally decided by the firm.
Difference between Cost Accounting and Financial Accounting
Difference # Cost Accounting:
1. Concern/Scope:
Cost accounting is concerned with the accumulation, classification, analysis, recording, allocation, summarization, interpretation and reporting of costs. It also ascertains the cost of a product or a service. The cost accounting extends to cost control, cost reduction and managerial decision making.
2. Nature of Information:
Cost accounting provides information about costs to internal users for purpose of cost ascertainment, control, planning and decision-making. The information, though not always very precise, is made available as and when needed. It may be about past, present and future cost and based on cost accounting principles, methods and techniques.
3. Focus on Segments:
Cost accounting focuses on individual products, services and departments, etc. It reveals specific areas of efficiency/inefficiency, idle time, material losses and profitable / unprofitable activities.
4. Useful to Inventory Valuation:
For preparing financial statements, inventories are usually valued at cost or net realizable value, whichever is lower. The determination of the cost of various types of inventories is possible through cost accounting.
5. Help in Price Determination:
The cost accounting system helps in determining appropriate selling prices of various products of a firm under different situations.
6. Optional Rather than Mandatory:
It is the management’s option to introduce cost accounting systems or not. However, in the case of certain industries, the Central Government has made it compulsory to maintain cost records.
7. Useful to Managerial Decision Making:
Cost accounting is very useful for managerial decision-making. Techniques of marginal costing and relevant costing provide suitable data and information to the management on host of problems such as whether to make or buy a component, whether to accept an order below total cost, whether to purchase a new machine or replace the existing one, at what price to sell during a period of depression, whether to replace manual labour with machines, whether to continue or close down a particular business in periods of depression, etc.
Difference # Financial Accounting:
1. Concern/Scope:
Financial accounting is concerned with recording, classifying, and summarizing in terms of money transactions and events leading to the preparation of profits and loss account and balance sheet and interpreting them.
2. Nature of Information:
Financial accounting provides precise information regarding the working results and the financial state of affairs of a business to both internal and external users. This information is generally available after the close of the accounting year. The preparation of financial statements is governed by generally accepted accounting principles and practices.
3. Focus on Segments:
Financial accounting does not point out the specific activities or areas of efficiency or inefficiency. It focuses on the entire business and reveals only the net profit or loss of the business in totality.
4. Useful to Inventory Valuation:
Financial accounts do not provide information for the valuation of inventories at cost.
5. Help in Price Determination:
Financial accounts are inadequate for the determination of selling price because complete information is available at the end of the accounting year.
6. Optional rather than Mandatory:
Financial accounts are invariably prepared by all enterprises. In the case of companies, financial accounts are kept to meet the requirements of the Companies Act, Income Tax and Sales Tax Acts, etc.
7. Useful to Managerial Decision Making:
Financial accounting is not of much use for purpose of managerial decision-making because it does not provide separate data on the cost of various products, activities, departments, etc. But financial statements produced by financial accounting safeguard the interest of both the owners and the creditors. They supply indicators to the company’s stability, profitability, solvency, liquidity, efficiency and growth.
Difference between Cost Accounting and Financial Accounting – Explained!
Financial accounting is primarily concerned with the preparation of financial statements, which summarise the results of operations for selected period of time and show the financial position of the company at particular dates.
Cost accounting is primarily concerned with determination of cost of something, which may be a product, service, a process or an operation according to costing objective of management. A cost accountant is primarily charged with the responsibility of providing cost data for whatever purposes they may be required.
A cost accountant, unlike a financial accountant, acts in a dual capacity. He has an obligation to both external reporting and internal reporting. His two important functions are – (i) determination of product cost, that is necessary in the preparation of financial statements and (ii) collection of pertinent quantitative information that will be helpful in solution of complex managerial problems like determination of most profitable mix, make or buy decisions, replace equipments, introduction of a new product and discontinuance of a not very profitable product.
In contrast to financial accounting, cost accounting is chiefly concerned with internal reporting for management requirement. Cost accounting helps to give cost information in such a way that management is given as clear indication as possible of their economic performance and the direction in which they must move in order to improve their economic efficiency.
Generally, a cost accountant collects the data from financial accounting, breaks them down, re-classifies and finally computes cost of sales and inventory, In special cost studies, a cost accountant selects data which are pertinent to problem, adjusts them to fit in the particular problems and then arranges the cost information in such a way that it can be interpreted by those who are seeking an answer to a question.
Cost accounting primarily helps management in planning, control and decision-making. In order to show now valuable the presentation of cost accounting information may be, same information is presented under two sets of accounts, i.e., financial accounting and cost accounting.