Difference between financial accounting and cost accounting!
Financial accounting is concerned with recording, classifying and summarizing financial transactions pertaining to an accounting period.
The basic objective is to provide a commentary to the shareholders and outside parties on the financial status of an enterprise in the form of a profit and loss account and balance sheet.
Cost accounting, on the other hand, aims at providing prompt cost data for managerial planning, controlling and decision making.
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It offers a complete explanation as to how the scarce inputs are put to use in business. The sources of efficiency or inefficiency are revealed through periodic reports. The profit or loss relating to each job, department or product can also be found out easily.
Learn about the Difference between Financial Accounting and Cost Accounting
Difference between Financial Accounting and Cost Accounting
Difference # Financial Accounting:
1. Distinction period/amount – Transactions are recorded for a definite period.
2. Coverage of transactions – It covers transactions of the whole firm pertaining to business—complete.
3. Purpose – It is prepared to show the final results during a particular period to owners, outsiders etc.
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4. Analysis of expenditure – It analyses the expenditure under different types of expenses, e.g., wages, salaries, depreciation etc.
5. Efficiency – The overall result of the business can be revealed by profit and loss account, but results of each department cannot be known; as such corrective measures cannot be taken.
6. Material control – It does not tell us the inefficiencies of material handling, as the figures are available in aggregate.
7. Independent entity – It is quite independent of cost accounting. It can work even in the absence of cost accounting system.
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8. Reconciliation of results – It does not need any such reconciliation.
9. Nature – It is a positive science.
10. Wastages – There are no such categories.
11. Transactions – It deals with external transactions.
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12. Dealings – It deals with actual facts and figures.
13. Classifications – It makes no distinction between controllable and uncontrollable or fixed and variable costs.
14. Stock – It is valued at cost price or market price whichever is less.
15. Relative efficiency – It does not reveal the relative efficiencies of workers, plant, machineries etc.
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16. Legal requirements – They are kept as required by Companies Act, Income Tax Act.
Difference # Cost Accounting:
1. Distinction period/amount – Transactions are identified with cost units.
2. Coverage of transactions – It covers only a part of the transactions viz., manufacturing, sales, services etc. — partial
3. Purpose – It aims to guide the management for proper planning, control and decision-making.
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4. Analysis of expenditure – It analyses the expenditure under different heads of performance as distinct from types of expenses, e.g., direct labour, indirect labour direct materials etc.
5. Efficiency – It analyses the profitability and unprofitability of each department. It reveals the unprofitable product of each department. So corrective measures can be taken.
6. Material control – It provides a system of good inventory control through a prescribed procedure for purchases, storage, issue etc.
7. Independent entity – It depends upon financial accounting for the supply of basic data for analysis.
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8. Reconciliation of results – It needs reconciliation of its profit with that of financial records to find out correct profit.
9. Nature – It is a positive as well as normative science.
10. Wastages – Wastages, shortages, losses etc., are categorised into normal and abnormal; and aim to eliminate abnormal losses.
11. Transactions – It deals with internal transactions.
12. Dealings – It deals partly with actual facts and figures and partly with estimates.
13. Classifications – It makes clear distinction between controllable and uncontrollable or fixed and variable costs. Thus, costs can be reduced to the minimum.
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14. Stock – It is valued at cost.
15. Relative efficiency – It provides information for all operations and can compare with standard cost; and deviations can be analysed for corrective actions.
16. Legal requirements – These accounts are generally kept to meet the requirement of the management. Now, it is obligatory to keep such records.
Difference between Financial Accounting and Cost Accounting
Financial Accounting refers to recording of all money transactions on double entry principles in a set of books with an object to prepare final accounts of the business. Cost Accounting refers to accumulation, classification, analysis and presentation of costs for managerial control. Both the systems of accounting make use of the same items of expenditure but in different ways, to serve their own purposes.
Due to the complexities of large scale production in the modern business activities, the financial accounting falls short of meeting these challenges. Hence, cost accounting has come into existence to solve all the managerial problems.
The following are the differences between financial accounting and cost accounting:
Difference # Financial Accounting:
i) Coverage – It covers accounts of whole business relating to all commercial transactions.
ii) Purpose – Its purpose is external reporting mainly to owners, creditors, tax authorities, Government and prospective investors.
iii) Statutory Requirement – These accounts have to be prepared according to the legal requirements of the Companies Act and Income Tax Act.
iv) Recording of transactions – It records, classifies and analyses the transactions in a subjective manner i.e., according to the nature of expenditure.
v) Nature of costs – It records only historical costs.
vi) Nature of expenses incurred – In Financial Accounts expenses are recorded in totals.
vii) Analysis of cost and profit – It disclose profits for the entire business as a whole. It does not show the figures of cost and profit for individual products, departments and processes etc.
viii) Duration of Reporting – The reports are prepared periodically, usually on an annual basis.
ix) Control aspect – It does not make use of any control techniques. It does not control material and labour cost.
x) Types of Statements prepared – It prepares general purpose statements like Profit and Loss A/c and Balance Sheet.
xi) Pricing – It fails to guide the formulation of pricing policy.
xii) Valuation of Stock – Stock is valued at cost price or market price, whichever is less.
xiii) Evaluation of Efficiency – The information provided by the Accounts is not sufficient to evaluate the efficiency of the business.
xiv) Break-up of costs – Costs are not broken up, according to their nature and functions.
xv) Inter/lntra Firm comparison – Under Financial Accounting, Inter-firm or Intra- firm comparison cannot be made.
xvi) Classification of Costs – There is no system of classification of costs into fixed and variable or controllable and uncontrollable.
xvii) Reference – In Financial Accounting reference can be made in case of difficulty to the company law, case decisions and to business ethics.
xviii) Dealing of Transactions – It deals with only monetary transactions and it deals only with actual facts and figures.
Difference # Cost Accounting:
i) Coverage – It covers the transactions relating to certain specific activities only for e.g., production, sales, services etc.
ii) Purpose – Its purpose is the internal reporting i.e., to the management of every business.
iii) Statutory Requirement – These Accounts are generally prepared to meet the requirements of the management. But now it has been made obligatory to keep cost records under the Companies Act.
iv) Recording of transactions – It records the expenditure in an objective manner i.e., according to the purposes for which cost are incurred.
v) Nature of costs – Cost Accounts records both historical and estimated costs.
vi) Nature of expenses incurred – In Cost Accounts, cost are expressed by proper analysis and classification in order to find out cost per unit.
vii) Analysis of cost and profit – It show the profitability or otherwise of each product, process or operation, so as to reveal the areas of profitability.
viii) Duration of Reporting – It is a continuous process and may be prepared daily, weekly, monthly etc.
ix) Control aspect – It makes use of some important control techniques such as Standard costing, Marginal costing, Budgetary costing etc. It exercises control over material cost by ABC Analysis, level setting, EOQ etc. and over labour cost by minimising idle time, overtime etc.
x) Types of Statements prepared – It generates special purpose statements and reports like Report of Loss of Materials, Idle Time Reports, and Variance Report etc.
xi) Pricing – It provides adequate data for formulating pricing policy.
xii) Valuation of Stock – Stock is always valued at cost price.
xiii) Evaluation of Efficiency – The cost data helps in evaluating the efficiency of the business.
xiv) Break-up of costs – The costs are analysed according to their nature and functions for further analysis and control.
xv) Inter/lntra Firm comparison – Under Cost Accounting it is possible to make Inter-firm and Intra-firm comparison.
xvi) Classification of Costs – Since, there is classification of costs into controllable and uncontrollable costs, the management can reduce the controllable costs. The distinction between fixed costs and variable costs also helps the management to take vital decisions.
xvii) Reference – In Cost Accounting no such reference is possible. Guidance can be had only from a body of conventions followed by cost accountants.
xviii) Dealing of Transactions – It deals with monetary as well as non-monetary transactions and it deals partly with the facts and figures and partly with estimates.
Difference between Financial Accounting and Cost Accounting
Difference # Cost Accounting:
1. Concern / Scope:
Cost accounting is concerned with the accumulation, classification, analysis, recording, allocation, apportionment, summarization, interpretation, and reporting of costs. It also ascertains the cost of a product or a service and helps in 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:
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 to decide 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 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, balance sheet, cash flow statement 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 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 as 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 provide indicators about company’s profitability, liquidity, solvency, efficiency and growth.
Difference between Financial Accounting and Cost Accounting
The function of accounting is to provide the financial information for different parties who are interested in the welfare of the enterprise. Both cost accounting and financial accounting are concerned with the collection and presentation of information to serve the needs of the management and outsiders. The sources of both the accounts for recording the transactions are the same.
The cost accounting is based on the same principles regarding debit and credit as are applied in financial accounting. Both are in monetary terms. But the two differ in their purpose and scope.
The important differences may be named as follows:
Financial Accounting:
1. Purpose – Provides information in a general way by providing information in financial statement i.e. profit and loss account and balance sheet.
2. Forms of Accounts – Accounts are required to be kept as per the requirement of Cos. Act and IT Act.
3. Recording – Records, classifies and analyses in subjective manner i.e., according to the nature of expenditure.
4. Analysis of Profit – Reveal the profit or loss of the business as a whole. But it does not show the cost figures of individual products or departments.
5. Control – Lays the emphasis on the recording aspects and no consideration is given to control aspects.
6. Periodicity of Reporting – Provides reports of business performance and financial state of affairs usually at the end of accounting year.
7. Historical and Pre-determined Cost – The information provided in financial accounting is historical in nature.
Cost Accounting:
1. Purpose – Provides information for the guidance of the management for the proper planning, operation, control and decision making.
2. Forms of Accounts – Accounts are voluntarily kept to serve the Management in the discharge of functions.
3. Recording – Records all expenses in an objective manner i.e., according to the purpose for which costs are incurred.
4. Analysis of Profit – Shows the result of each operation, process and product and disclose unprofitable Product or product line.
5. Control – Provides for a detailed system of control with the help of standard and budgetary control.
6. Periodicity of Reporting – Provides continuous flow of cost data and other selected information in the form of costs reports to management.
7. Historical and Pre-Determined Cost – Is concerned not only with historical cost but also with pre-determined cost.
Difference between Financial Accounting and Cost Accounting
Difference # Cost Accounting:
1. It is prepared mostly for internal management
2. The reports prepared are on the formats as required and designed by the management.
3. Focuses on the financial position of specific products, product lines etc.
4. No regulatory framework
5. Cost reports can be prepared as and when required at frequent intervals. There is no specific time
6. Past data and future aspects are taken into consideration while preparing reports
7. Cost of raw material, WIP and finished goods are compiled by cost accounting
8. Main purpose is to analyse, ascertain and control cost
9. It is voluntary to meet the requirements of the management
10. It is objective in nature towards recording transactions (costs)
11. It aims at computing cost of production
12. It is subject to cost audit to verify whether cost accounts disclose true and fair view of the cost of production
13. Stocks are valued at cost price
14. Monetary and non-monetary data are considered
Difference # Financial Accounting:
1. It is prepared mostly for outsiders like investors, government, creditors, owners etc.
2. The reports prepared are specific in format prescribed by GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards)
3. Focuses on the entire financial position of the company
4. Regulated mostly by GAAP and IFRS
5. Financial reports are prepared once in every twelve months
6. Only past data are taken into consideration while preparing reports
7. It only incorporates the information compiled (in cost accounting) into the Balance Sheet
8. Main purpose is to record financial transactions and find out profit or loss
9. It is compulsory to meet the requirements of Companies Act and Income Tax Act
10. It is subjective in nature towards recording transactions (nature of expenses)
11. It aims at finding out results in the form of profit or loss
12. It is subject to statutory audit to verify whether financial accounts disclose true and fair view of the profit and loss as well as financial position
13. Stocks are valued at cost or market price whichever is lesser
14. Only monetary data is considered
Difference between Financial Accounting and Cost Accounting
The deficiencies suffered by financial accounting procedures and the techniques developed by costing to make them up themselves constitute the distinctions between the two.
The important points of difference may be summarised as follows:
Difference # Financial Accounting:
1. Purpose – The purpose of financial accounting is external reporting mainly to owners, creditors, government and prospective investors.
2. Coverage – Transactions are recorded for a definite period. It deals with all commercial transactions.
3. Statutory Requirements- It is almost necessary to maintain this accounting to run business. To meet the requirements of Companies Act and Income Tax Act, it is obligatory to keep them.
4. Analysis of Profit – It discloses profit for the entire business as a whole.
5. Analysis of Costs- Expenditure is analysed item-wise, e.g., wages, salaries, depreciation, etc. and hence not amenable for offering a commentary.
6. Stock Valuation – Stocks are valued at cost price or market price, whichever is lower.
7. Duration of Reporting – Generally, financial accounts provide financial information once a year.
8. Figures – It deals mainly with actual facts and figures.
9. Evaluation of Efficiency- The information provided by financial accounts is not sufficient to evaluate the efficiency of the business.
10. Comparison of Cost Figures – Data is not sufficient for drawing inter-period and inter-firm comparison from time to time.
11. Pricing – It fails to guide the formulation of pricing policy.
Difference # Cost Accounting:
1. Purpose – The purpose of cost accounting is internal reporting i.e., to the management of every, business.
2. Coverage – Transactions are identified with cost units. Attention is focused on transactions relating to manufacturing and sale of products and services.
3. Statutory Requirements – The Companies Act has made it obligatory for certain industries to maintain cost accounting; otherwise it is voluntary to maintain them.
4. Analysis of Profit – It shows the profitability or otherwise of each product, process or operation so as to reveal the areas of profitability.
5. Analysis of Costs – Records expenses by departments, elements, products or processes to study them analytically.
6. Stock Valuation – Stocks are valued at cost price.
7. Duration of Reporting – Cost accounting furnishes cost data at frequent intervals. Some reports are made daily, some are weekly and some are monthly.
8. Figures – It deals partly with facts and figures and partly with estimates.
9. Evaluation of Efficiency – The cost data helps in evaluating the efficiency of the business.
10. Comparison of Cost Figures – Detailed comparison of results of two periods or two firms in an industry is possible.
11. Pricing – It provides adequate data for formulating pricing policy.
Difference between Financial Accounting and Cost Accounting
Both financial accounting and cost accounting are concerned with systematic recording and presentation of financial data. Further, both the accounting systems depend on the same source and transactions are recorded in both the sets with the same documentary evidence. Again, the principles of debit and credit are common to both.
Cost accounting differs from financial accounting in the following respects:
(i) Purpose:
The main purpose of financial accounting is to prepare profit and loss account and balance sheet for reporting to creditors, shareholders, potential investors, regulatory agencies, income-tax department, etc. The main purpose of cost accounting is to provide detailed cost information to management for proper planning, decision-making and control.
(ii) Total vs. Segments:
Financial accounting reveals the profit and loss of the business as a whole, while cost accounting measures the relative profitability of each product, job, process, department and operation.
(iii) Sources of Economies and Losses:
Financial accounting does not provide adequate information about various types of inefficiencies, losses and wastes in the use of material, labour time and plant facilities. Cost accounting provides all such information which can help management to identify avoidable and unavoidable wastes and losses.
(iv) Control Aspect:
Financial accounting does not provide for adequate control over material, wages and overhead costs. Cost accounting involves and takes care of control over all elements of cost.
(v) Analysis of Costs:
In financial accounting, no distinction is made between direct and indirect costs, fixed and variable costs and controllable and uncontrollable costs. In cost accounting, costs are distinguished according to their identifiability with cost units (direct and indirect), according to their variability (fixed and variable) and according to responsibility (controllable and uncontrollable costs).
(vi) Use of Standards:
In financial accounting, there are no predetermined standards of cost and performance to evaluate the efficiency of operations as regards .the use of material, labour and overhead facilities. Cost accounting, on the other hand, makes use of standard costs against which actual costs are compared, variances are calculated and analysed into their causes so that corrective action may be taken.
(vii) GAAP vs. Flexibility:
Financial accounts are prepared in accordance with generally accepted accounting principles (GAAP) so that comparisons are possible. Cost accounting information is presented in a more flexible manner. Since it is for a wide variety of purposes, the basis for measurement of operations may be monetary (historical, present or replacement cost) or physical (labour hours, machine hours or units produced.)
(viii) General Purpose vs. Special Reports:
Published financial accounts are general purpose in nature. Cost accounts, however, prepare special purpose reports for different levels and different decision areas. The slogan here is “Different costs for different purposes.”
(ix) Report Frequency:
Financial accounts are generally published annually. However, cost accounts supply quarterly, monthly or even weekly and daily cost reports needed for planning and control.
(x) Legal Requirements:
Financial accounts are to be kept according to the provisions of Companies Act and Income-Tax Act. Maintenance of cost accounts is not compulsory except where cost accounting record rules have been framed for maintenance of cost accounting records.
Difference between Financial Accounting and Cost Accounting
Financial accounting is concerned with recording, classifying and summarizing financial transactions pertaining to an accounting period. The basic objective is to provide a commentary to the shareholders and outside parties on the financial status of an enterprise in the form of a profit and loss account and balance sheet.
The profit or loss of business operations is revealed through these statements year after year, observing the statutory requirements of the Companies Act, 1956.
Cost accounting, on the other hand, aims at providing prompt cost data for managerial planning, controlling and decision making. It offers a complete explanation as to how the scarce inputs are put to use in business. The sources of efficiency or inefficiency are revealed through periodic reports. The profit or loss relating to each job, department or product can also be found out easily.
The difference between financial accounting and cost accounting is as follows:
Financial Accounting:
1. Objective – Find out the profitability of operations during a particular period for the benefit of owners and outsiders
2. Coverage – Transactions are recorded for a definite period. Deals with all commercial transactions
3. Analysis of costs – Expenditure is analysed item-wise, e.g., wages, salaries, depreciation etc., and hence not amenable for offering a commentary
4. Analysis of profits – The profitability of individual products or departments is not known
5. Material control – Material control is not ensured, as figures are not available.
6. Labour cost control – Wage sheets under financial accounting do not reveal Labour efficiency, idle time and effective hours of work. Hence, control is not possible
7. Cost classification – Distinction between fixed (uncontrollable) and variable (controllable) costs not maintained
8. Stock valuation – Stock valued at cost price or market price whichever is less.
9. Means of control – Does not provide any means to measure the efficiency and exercise control over costs
10. Recording of transactions – Records actual (historical) costs. It is only a post mortem examination of events that have taken place, leaving very little room for initiating corrective steps promptly
11. Comparison of cost figures – Data not sufficient for drawing inter-period and inter-firm comparisons time to time
12. Legal necessity – Statements prepared as per Legal the legal requirements, i.e., as necessity laid down by the Indian Companies Act, Income Tax Act.
13. Approach – Data generated for external parties. Deals with external transactions
Cost Accounting:
1. Objective – Help management prompt cost information and thereby improve managerial decision making
2. Coverage – Transactions are identified with cost units. Attention is focused on transactions relating manufacturing and sale of products and services
3. Analysis of costs – Records expenses by departments, elements, products or processes to study them analytically
4. Analysis of profits – The profit or loss relating to each job process, operation, department can be found out.
5. Material control – A systematic procedure for purchasing, storing and issuing of materials exists
6. Labour cost control – Labour time records and wage sheets permit management to find out effective and idle hours and ensure control accordingly
7. Cost classification – Costs are classified into fixed and variable elements and attention is focused on controllable costs, which can be reduced by suitable steps.
8. Stock valuation – Stock valued at cost
9. Means of control – Techniques like standard control costing employed to ensure control over operations
10. Recording of transactions – Actual facts are combined transactions with estimated ones while recording transactions. Transactions are recorded in an objective manner, according to the purpose for which costs have been incurred.
11. Comparison of cost figures – Detailed comparison of results of two period or two firms in an industry possible
12. Legal necessity – Statements prepared as per managerial requirements
13. Approach – Data generated for managerial decision-making. Deals with internal transactions.
Difference between Financial Accounting and Cost Accounting
Both cost accounting and financial accounting are concerned with systematic recording and presentation of financial data. The two systems rest on the same principles concerning debit and credit and have the same sources of recording the transactions. However, there are important differences between the two.
These are as follows:
1. Purpose:
The main purpose of financial accounting is to prepare profit and loss account and balance sheet for reporting to owners and outside agencies.
The main purpose of cost accounting is to provide detailed cost information to management.
2. Statutory Requirements:
Financial accounts are required to be kept as per the requirements of the Companies Act and Income Tax Act. The Companies Act lays down the forms of Profit and Loss Account and Balance Sheet. Cost accounts, on the other hand, are voluntarily kept to serve the management in the discharge of its functions. Recently, the Companies Act has made obligatory the keeping of costing records in some manufacturing companies.
3. Periodicity of Reporting:
Financial accounting reports (i.e., Profit and Loss A/c and Balance sheet) are prepared periodically, i.e., at the end of the accounting year.
Cost accounting aims at continuous reporting of costs and related information at short intervals. Cost reporting may be daily, weekly, fortnightly, monthly, etc.
4. Analysis of Cost and Profit:
The cost figures are, no doubt, available in financial accounts, but only in totals. Financial accounts do not reveal the figures of cost and profit for individual products, departments, processes, etc.
Cost accounts, on the other hand, disclose detailed cost and profit information for each section of the business i.e., product line, department, process etc. This enables the management to eliminate less profitable product lines and maximising the profits by concentrating on more profitable ones.
5. Control Aspect:
Financial accounting lays more emphasis on recording of transactions and does not provide for adequate control over costs.
Cost accounting provides for detailed systems of control over all elements of cost.
6. Nature:
Financial accounting is concerned almost exclusively with historical records. The historical nature of financial accounting can be easily understood in the context of the purposes for which it was designed.
Cost accounting is concerned not only with historical costs but also with predetermined costs. This is because cost accounting does not end with what has happened in the past but extends to plans and policies to improve performance in the future.
7. Types of Statements Prepared:
Financial accounting prepares general purposes statements like Profit and Loss Account and Balance Sheet That is to say that financial accounting must produce information that is used by many classes of people, none of whom have explicitly defined informational needs.
Cost accounting generates special purpose statements and reports like Report of Loss of Materials, Idle time Report, Variance Report, etc. Cost accounting identifies the user, discusses is problems and needs and provides tailored information.
Difference between Financial Accounting and Cost Accounting
Even though there are some similarities between cost accounting &financial accounting, there are some differences between cost accounting system & Financial accounting system.
They are:
Difference # Cost Accounting:
1. The purpose of cost accounting is to provide detailed information about cost to the management.
2. Cost reports are prepared at short intervals [daily, weekly, fort-nightly, monthly, and quarterly, etc.]
3. Generally Cost Accounts are maintained voluntarily by certain industries to meet the requirements of the management and Cost Accounting records are kept as per the Companies Act.
4. Cost accounts disclose detailed cost & profit information for each product, department, process, etc.
5. It provides a detailed system of control for materials, labour and overhead costs with the help of standard costing and budgetary control.
6. It is concerned with historical costs & also with predetermined costs. It helps to improve performance in the future.
7. Cost accounting cannot be adopted without the help of financial accounting.
8. In cost accounting special purpose statements like report of loss of materials, idle time report, variance reports etc., are prepared.
9. In cost accounting stocks are valued at cost figure.
10. The costs are recorded, classified & analysed in an objective manner. (According to the purpose for which costs are incurred)
11. Both the monetary information as well as non – monetary information are recorded under cost accounting.
12. Cost Accounting relates to the transactions connected with Manufacturing of goods and services, (expenses which enter into the process of production).
13. Cost Accounts are concerned with internal transactions, which do not involve any cash payment or receipt.
14. Cost Accounting deals with partly facts and figures and partly estimates / standards.
15. Cost Accounts provide valuable information on the efficiencies of employees and Plant Machinery.
16. Cost Accounting is not only positive science but also normative because it includes techniques of budgetary control and standard costing.
Difference # Financial Accounting:
1. Its main purpose is to prepare Profit & Loss A/c & Balance Sheet for reporting to the owners.
2. Financial accounting reports are prepared at the end of the accounting year.
3. These accounts are maintained by all types of organizations in such a way to meet the requirements of Companies Act as well as the Indian Income Tax Act.
4. It discloses the Profit or Loss of the business as a whole.
5. It lays emphasis on recording aspect without attaching any importance to control.
6. It is concerned with almost historical costs.
7. Financial accounting can be adopted without the help of cost accounting.
8. Financial accounting prepares general purpose statements such as Profit & Loss A/c and Balance sheet.
9. In Financial accounting stocks are valued at cost or market price whichever less is.
10. The costs are recorded, analysed & classified according to the nature of expenditure like salaries, rent, wages, etc.
11. Only monetary information is recorded under financial accounting.
12. Financial Accounts records all the commercial transactions of the business and include all expenses i.e. Manufacturing, Office, Selling, etc.
13. Financial Accounts are concerned with external transactions i.e., transactions between business concern and third parties.
14. Financial Accounting deals with actual figures and facts only.
15. Financial Accounting do not provide information on efficiencies of various workers / Plant & Machinery.
16. Financial Accounting is a positive science as it is subject to legal rigidity with regarding to preparation of financial statements.
Difference between Financial Accounting and Cost Accounting
In financial accounts, actual monetary transactions of the business are recorded in accordance with established concepts, principles, accounting standards as well as legal requirements, classified and analysed in an orderly manner, so as to prepare profit and loss account or income statement and balance sheet for a selected period of time, indicating the financial position of the business at the end of that period.
The aim of financial accounting is to provide information to the shareholders, investors, financial institutions, Government authorities, etc., from which they can assess the profitability, liquidity and solvency of the enterprise. Moreover, Government authorities, e.g., Income-tax, banks, central excise, insurance companies, etc., rely fully on the data provided in the financial statements.
Cost accounting deals with the ascertainment of the cost of a product, service, process or an operation. The objective of cost accounting is to provide adequate information to departmental managers for optimum utilization of available resources, i.e., material, labour and machines etc., and taking timely decisions in solving complex problems like determination of most profitable product mix, fixing price, preparing quotations, releasing or withholding inventory, make or buy decisions, introduction of a new product, equipment replacements, discontinuing a less profitable product, processing a by-product etc.
Generally, a cost accountant collects the data from financial books, analyses them, re-classifies and ultimately finds the cost of sales, inventory and prepares the costing profit and loss account. The profit and loss figures derived from financial accounts and cost accounts do not agree as some of the expenditures and incomes recorded in financial books are not considered for product cost, while certain expenditures are included in cost accounts without incurring it actually. To avoid maintenance of two sets of books, a system of integrated account has been developed by combining cost and financial accounts.
Distinction between Financial and Cost Accounting:
Financial Accounting:
1. Prepares profit and loss account and balance sheet mainly for external reporting to the shareholders, investors, financial institutions, Government authorities and outside parties.
2. Deals with financial transactions of the business.
3. Records, classifies and analyses monetary transactions according to the nature of expenses.
4. It is mandatory and structured according to Companies Act, Income-tax Act, etc.
5. Values stock at cost or net realisation value whichever is lower.
6. Subject to verification by external auditor.
7. Prepares profit and loss account and balance sheet annually or at periodic interval and reports aggregate costs.
8. Emphasis is not given on the control aspect but on the recording of financial transactions.
9. Keeps historical records.
10. Shows the profit and loss of the entire business for a particular period.
Cost Accounting:
1. Prepares routine cost reports, special reports and forwards them to the departmental managers for internal control and decision making.
2. Deals with product cost or service cost.
3. Records expenditure according to the purposes for which the cost is incurred, e.g., report of loss of material, idle time report, variance report, etc.
4. It is not mandatory, except those covered by cost audit required u/s 233B of Companies Act, 1956.
5. Values stock at cost.
6. Cost audit is not mandatory but selective to some particular industries.
7. Develops product or service costs, showing element wise cost break-up and profitability of each product or service. Prepares cost reports as and when required, i.e., daily, weekly, monthly, etc.
8. Controls with the help of standard costing and budgetary control.
9. Considers both historical and predetermined costs and uses these costs for development of future performance.
10. Shows detailed cost and profit for each product, process, department etc.
Difference between Financial Accounting and Cost Accounting (With Similarities)
Relationship with Financial Accounting:
Cost accounting is a branch of accounting in much the same way as financial accounting. In fact, financial accounting provides the data base for cost accounting. Necessary information relating to costs are obtained from financial accounting records. As such, cost accounting and financial accounting are complementary to each other.
The similarities between the two branches of accounting are:
1. Both cost and financial accounting are the branches of accounting.
2. Both are concerned with recording and reporting accounting information.
3. Both the sets of accounts use the same basic documents for recording transactions and events.
4. Both record transactions and events on the basis of double entry.
5. Both the sets of accounts record information in monetary terms although cost accounting records contain additional information.
6. Each of these branches is mutually helpful to the other. While financial accounting provides basic information for writing up cost records, cost accounting assists financial accounting in inventory valuation thereby facilitating the preparation of financial statements.
7. Both the sets of accounting records furnish the required information to interested parties.
8. Each of these branches facilitates performance appraisal in its own way.
9. Both the sets of accounts are a means of control.
Differences between the Two:
In spite of the above points of similarity between financial and cost accounting, the two branches of accounting differ from each other in the following respects:
1. Purpose:
Financial accounting records disclose profitability or otherwise, i.e., trading result as well as the financial position of a business. The chief purpose of cost accounting, however, is cost ascertainment for price fixation and decision-making.
2. Nature:
Financial accounting is historical in nature. The information provided by the records is in respect of only monetary transactions and events which have already occurred and about which nothing can be done. Cost accounting, on the other hand, focuses not only with past transactions but of the future ones also. Besides monetary information, the records furnish quantitative information also.
3. Legality:
Financial accounting is legally necessary, especially in the case of companies. Even in the case of other forms of business, financial accounting has almost become mandatory by virtue of the application of other enactments such as the Income Tax Act and Sales Tax Act. Cost accounting is not legally necessary except in a few cases.
4. Persons Interested:
Financial accounting is of interest to a number of groups of persons such as shareholders, creditors, potential investors, workers, taxation authorities, financial analysts. Government, trade unions, etc. Cost accounting, on the other hand, is of interest only to management for use internally.
5. Reporting:
Since varieties of persons belonging to different groups outside the organisation are interested in financial accounting, this branch of accounting accomplishes only external reporting of financial information. Cost accounting, however, serves the needs of management and thus accomplishes internal reporting.
6. Periodicity:
The period covered by financial accounting is normally one year. As such, financial accounting reports financial information annually whereas cost records and cost reports are presented to the management as and when information is sought by them.
7. Recording:
In the case of financial accounting, transactions are analysed and classified into personal, real and nominal accounts. Such a method of classification, which is known as ‘primary’ classification, is based on the nature of expenditure. In the case of cost accounting, however, the emphasis is on a more detailed analysis of cost. As such, accounts are classified and recorded objectively according to the purpose for which costs are incurred.
8. Form:
Financial accounting records contain details of transactions and events with those external to the business and with whom the business has contractual relationship. Owing to this fact as well as legal necessity, the information contained in the records should be factual as well as accurate and information should be furnished to outsiders in a particular form. In the case of cost accounting, however, there is no particular form to present the information. The form in which information is presented depends upon managerial needs.
9. Secrecy:
Financial accounting records, especially of companies, are meant for outsiders with whom the business has contractual relationship. As such, there is no secrecy about the information furnished by financial accounting. Cost information, on the other hand, is meant only for managerial purposes. Hence, they are secret and outsiders cannot have access to cost accounting records.
10. Scope:
The scope and extent of financial accounting are limited to providing information about the business as a whole, about its trading results and of its financial position. The information furnished by cost accounting is more detailed in relation to every segment of the business and every product, process, job, sales territory, etc.
Difference between Financial Accounting and Cost Accounting (With Similarities)
Similarities between Cost Accounting and Financial Accounting
Cost accounts and financial accounts which are kept quite separate in a business concern, are similar in certain respects while in some other respects these differ from each other.
The various similarities between cost accounts and financial accounts may be given as follows:
(i) Both cost accounts and financial accounts are maintained on the basis of Double Entry System of Accounting,
(ii) Recording of transactions, both under cost accounting system and financial accounting system, is made on the basis of common vouchers, invoices and documents.
(iii) Both cost accounts and financial accounts disclose the profit or loss of the business.
(iv) Both cost accounts and financial accounts involve the process of matching the costs and revenues of the related activity for the current period.
(v) Both the accounting systems contain the record of direct costs and indirect costs.
(vi) Both the accounting systems enable the business concern to compare and reconcile the trading results.
(vii) Both the accounting systems assist the management in formulating the future business policy and making various managerial decisions.
Differences between Cost and Financial Accounts:
Although, both cost accounts and financial accounts are prepared on the basis of common principles and common vouchers and documents, they differ from each other on the following points –
(i) Financial accounts are very comprehensive in nature and cover all business transactions while cost accounts cover only the transactions relating to the manufacturing and sale of products and services.
(ii) Financial accounts deal with all items of expenses, losses, income and gains but cost accounts deal with only those items of expenses which enter into the cost of production.
(iii) Financial accounts do not contain analysis of expenditure according to elements, functions, behaviour, departments or products. Cost accounts record expenses by elements, functions, variability, departments etc., to study them analytically.
(iv) Financial accounts do not present the accounting information in a well- classified and analysed form so as to disclose the cost per unit at all stages. Cost accounts present well-classified and analysed details of expenses to disclose per unit cost at all stages of production.
(v) Financial accounts disclose the overall profitability of the business whereas cost accounts deal with product-wise, job-wise, department-wise and process-wise profitability.
(vi) Financial accounts deal with facts or actual figures alone. Cost accounts deal with facts as well as estimates as a result of which the results of cost accounts do not always tally with those of financial accounts.
(vii) Financial accounts do not disclose information relating to wastage of materials and the loss of man-hours and machine-hours. Cost accounts, on the other hand, contain full information relating to all types of wastage incurred during production.
(viii) The maintenance of financial accounts is compulsory in a business while cost accounts, though important and advantageous, need not be maintained compulsorily.
(ix) Financial accounts cannot be incorporated in cost accounts whereas cost accounts may be incorporated in financial accounts.
(x) Financial accounts do not provide any means to measure the efficiency and to exercise control over costs. Cost accounts develop standard costs against which actual costs can be compared and reasons for variances may be enquired into for taking corrective action.
(xi) Financial accounts fail to guide the businessman in the fixation of selling prices and calculation of estimates. Cost accounts furnish detailed cost information at different levels of production which forms basis for determining selling prices and calculating the tender price.
Difference between Financial Accounting and Cost Accounting
After studying financial accounting and cost accounting, you can understand the difference between these two accounting systems.
Therefore, differences between financial accounting and cost accounting are as follows:
Difference # Financial Accounting:
(i) Objective – It provides information about the financial performance and financial position of the business
(ii) Nature – It classifies, records, presents and interprets transactions in terms of money
(iii) Recording of data – It records historical data
(iv) Users of information – The users of financial accounting statements are shareholders, creditors, financial analysts and government and its agencies etc.
(v) Analysis of costs and profits – It shows the profit / loss of the organisation
(vi) Time period – Financial statements are prepared for a definite period, usually a year.
(vii) Presentation of information – A set format is used for presenting financial information
Difference # Cost Accounting:
(i) Objective – It provides information of ascertainment of cost to control cost and decision making about the cost
(ii) Nature – It classifies, records, presents and interprets in a significant manner the material, labour and overheads cost
(iii) Recording of data – It also records and presents the estimate / budgeted data. It makes use of both the historical costs and pre-determined costs
(iv) Users of information – The cost accounting information is used by internal management at different levels
(v) Analysis of costs and profits – It provides the details of cost and profit of each product, process, job, contract etc.
(vi) Time period – Its reports and statements are prepared as and when required.
(vii) Presentation of information – There are not any set formats for presenting cost information.
Difference between Financial Accounting and Cost Accounting
Difference # Financial Accounting:
1. Scope:
The scope of Financial Accounting extends to cover both the operating and the non-operating activities. That means, it considers both the operating and the non-operating transactions for the purpose of preparing the final accounts (viz., Profit and Loss Account, and Balance Sheet). The Profit and Loss Account reveals the profit earned by the company during an accounting period from all its activities (viz., both operating and non-operating).
2. Parties Served:
It primarily aims at furnishing the information for use mainly by the parties who are external to the company like, shareholders, debenture holders, employees, customers, financial institutions, and governments and their agencies, etc. However, this information and the reports may also be used by the parties who are internal to the company viz., management.
3. Periodicity of Reporting:
Financial Accounting is normally concerned with the preparation of financial reports (comprising of, among others, Profit and Loss Account, Balance Sheet, Directors’ Report, and Auditors’ Report) at the end of each accounting year (i.e., only once in a year that too after the completion of the accounting year).
4. Format of Reports:
Financial Accounting reports which include among others, Profit and Loss Account, Balance Sheet, Directors’ Report, and Auditors’ Report are prepared in accordance with the format specified by the relevant Provisions of the Companies Act, 1956.
5. Contents of the Reports:
Financial Accounting reports which are also known as Annual Reports include the facts and figures as specified by the relevant Provisions of the Companies Act, 1956. They also include other information which are commonly required by the external parties for taking proper decisions. Further, they include the information which the management wishes to report to the external parties
6. Purpose:
Financial Accounting reports primarily aim at providing information to the external parties for taking decisions by them.
7. Unit of Study:
Annual reports cover the overall performance of the company.
8. Objectivity:
Financial reports should be, as far as possible, objective ones. That means, they should contain only those entries which are solidly supported by evidences such as – documents, deeds, invoices, vouchers, etc. They lay greater emphasis on the objectivity of data.
9. Publication:
The annual reports are prepared and published for circulation among the external parties.
10. Valuation of Stock:
Stocks are valued at cost or market price whichever is lower.
11. GAAPs:
Financial Accounts are prepared in accordance with the Generally Accepted Accounting Principles (GAAPs).
12. Nature of Reports:
Financial Accounting aims at preparing a single set of financial reports which are meant for circulation among all external parties. Hence, these reports are called General Purpose Reports.
Difference # Cost Accounting:
1. Scope:
Cost Accounting considers only the operating activities for the purpose of preparing cost books of accounts and for submitting cost reports to the interested parties (viz., internal parties i.e., management). Costing Profit and Loss Statement which is popularly known as Costing Income Statement, therefore, reports the profit earned by the company only from its operating activities during an accounting period (i.e., profit earned from the production and sale of goods and services).
Non-operating expenses (such as, legal charges, loss on sale of fixed assets, etc.,) and non- operating incomes (such as, profit on sale of fixed assets, rent and dividend received, etc.,) are not considered for cost books of accounts purposes.
2. Parties Served:
It aims at providing information for use by the internal parties for taking necessary decisions. This information and other cost reports are not normally supplied to the external parties.
3. Periodicity of Reporting:
In Cost Accounting, there is a continuous flow of cost information and other cost reports to various levels of management depending upon their requirements – yearly, bi-annually, quarterly, monthly, bi-monthly, weekly, daily, hourly, etc.
4. Format of Reports:
No such rigidity is found in the case of cost reports. Instead, there is a flexibility in the format depending upon the requirements, suitability and convenience.
5. Contents of the Reports:
Contents of the cost reports are generally governed by the requirements of the managerial personnel and the problems to be tackled by them. The information which have a bearing on the decisions under the consideration of the management are included in the cost reports.
6. Purpose:
Cost reports are meant only for use by the people who are internal to the company (i.e., management) for proper planning, control, decision-making, etc.
7. Unit of Study:
A cost report normally concentrates on a comprehensive study of a segment of the organisation such as – division, product, activity, issue, etc.
8. Objectivity:
No such rigidity is observed while preparing and submitting cost reports. They include both the objective and estimate figures. Estimates, based on the past, also form part of cost reports. They, therefore, lay emphasis on relevancy.
9. Publication:
Cost reports are, meant for circulation among the managerial personnel and they are normally not published.
10. Valuation of Stock:
Under Cost Accounting, stocks are normally valued at cost.
11. GAAPs:
Cost Accounts are prepared in a more flexible manner.
12. Nature of Reports:
Cost Accounting prepares different sets of reports to different levels of management for taking different kinds of decisions. Therefore, the contents, format, etc., of each report differ from others depending upon the nature of the decision under consideration and/or depending upon the level of management to whom report shall be sent. Hence, these reports are called Special Reports.