Difference Between Cost Accounting and Financial Accounting

Cost Accounting and Financial Accounting are the terms used for systematically recording, analyzing and presenting the financial data about a company and its product lines. It becomes pertinent for the corporations to maintain such financial data for their further growth and to bolster the confidence among their shareholders as well as the Management.

This guide will briefly analyze the difference between financial accounting and cost accounting and for what purpose the companies use them.

Defining Cost Accounting

Cost accounting is the branch of accounting primarily concerned with recording, organizing and summarizing the costs, profits and losses of different products during a specific period. Unlike Financial accounting, it analyzes each product line with the aim of cost reduction and cost control, thus reinforcing the Management to make better decisions.

Further, it records the cost incurred on the product during production, distribution and selling. Such detailed analysis helps the Management to brainstorm better investment options and how they can control the costs.

For example, the XYZ organization has 4 product lines with different productions and sales. Cost Accounting helps them analyze the financial data of all the products individually. By looking at the data, the Management will try to infer how they can reduce and control the cost of the product and make it more profitable for the venture.

Defining Financial Accounting

Moving with the previous example, financial accounting will deliver the detailed financial data of all the 4 products and other transactions of the XYZ Company in a single document in a lucid manner. Therefore, financial accounting records and summarizes the data of all the financial transactions made by the company in a given financial year or Quarter. It is presented in an uncomplicated language with visual elements to make it readable for its readers.

The readers range from shareholders, investors, government organizations and creditors to the Company’s Management. Moreover, the financial statement’s major subheads are the balance sheet, Cash Flow Statement, Profit & Loss statement and Income Statement.

Financial accounting helps in making comparisons of the profitability, financial health and overall performance among different corporations in a particular time period. It also allows for analyzing and comparing the monetary data of different financial periods. Now let’s further analyze the key differences between cost accounting and financial accounting.

Cost Accounting vs Financial Accounting

PRIMARY OBJECTIVE

Financial accounting aims to maintain the complete financial information of the organization, thus protecting the interests of the business and its Management. The financial data is also shared with its shareholders, creditors, investors and other partners. While Cost accounting summarizes the cost records to guide the Management in making more profitable decisions.

ADHERENCE TO REQUIREMENTS

The companies maintain financial accounting to meet the requirements of the Income-tax Act, Companies Act and other government regulations. In comparison, Cost accounting is based on a voluntary basis for fulfilling the internal requirements of the Management. However, the Companies Act has now made it mandatory to maintain regular cost records in some manufacturing sector enterprises.

STOCK ESTIMATION

Estimation of the stock value in cost accounting is calculated at cost. Whereas, in financial accounting, the stock value is chosen from the lesser value between cost and net realizable value.

PROFIT AND COST ANALYSIS

Cost Accounting focuses on the cost and profit of a particular product without any ascertained time period. It helps the Management eliminate the cost burden across different product lines and focus on more profitable products. Therefore the cost is divided into separate units in cost accounting. Whereas in Financial accounting, the costs are aggregated as it includes the financial statement of all the products and services delivered by the company during a particular financial period.

TIME PERIOD

A financial statement is released after the completion of a certain time period, and it might be quarterly, half-yearly or yearly. Whereas Cost accounting is a regular process, it can be made daily, weekly or monthly, depending on the Management’s needs.

TYPE OF TRANSACTION

Financial accounting predominantly focuses on the External transactions between the company’s Management and the third parties. These sorts of transactions also form the basis for payment receipts. Whereas cost accounting is chiefly concerned with the internal transaction and does not form the basis for the payment receipts.

INFORMATION CLASSIFICATION

Cost accounting provides valuable information about the labor and machinery used during manufacturing. It delivers valuable information about the relative efficiency of different manufacturing units. Whereas financial accounting only concentrates on the monetary data. Here you cannot analyze and compare the efficiency of different plants and machinery along with the costs incurred.

TYPE OF COSTS INCLUDED

Cost accounting includes both historical and predetermined costs. Further, cost accounting provides actual facts and figures as well as estimated costs. Whereas financial accounting only focuses on historical costs and includes only actual facts and figures. These were the following critical parameters on which we distinguish between financial accounting and cost accounting.

Wrapping Up

By now, you must have understood why you should look out for the difference between cost and financial accounting before analyzing any financial data. The above parameters are the critical basis for distinguishing both terms.

In summary, cost accounting helps the organization’s internal Management to control and reduce the cost of respective product lines by stimulating the efficiency of the manufacturing factors, thereby boosting the company’s profit. In comparison, financial accounting is a lucid and visual representation of the organization’s overall financial performance in a given financial period, thus helping the Management and shareholders to make the blueprints for future growth.