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written by | August 12, 2022

Difference Between Cost Accounting and Financial Accounting

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Cost accounting helps in determining the production cost of a unit. This data helps track operations' information to maximise the efficiency and revenue generated. Financial accounting is different from cost accounting. Financial accounting means tracking all the money going in and out of an organisation.

Let’s distinguish between cost accounting and financial accounting. Financial accounting records the financial transactions that help determine a company's profitability. It recognises the financial amounts for different accounting periods. Also, financial accounting recognises the stance of liabilities and assets on the final day of the period.

Did you know? The first name recorded in the history of accounting was Kushim. He was an accountant and used to record transactions of Barley in the Uruk period, which lasted from 4000 BC to 3100 BC.

Cost Accounting vs Financial Accounting

Cost and financial accounting assist the administration in formulating and supervising organisational strategies.

Financial management provides an overall view of profit and loss. Cost accounting, on the other hand, gives detailed product-wise calculations. There is no doubt that the purposes of both are the same. 

Also read: All Facts and Figures About the Nominal Account in Accounting

However, there are a lot of differences between cost accounting and financial accounting. Suppose a business handles ten different services and products. In that case, financial accounting gives data of all services and products under various categories of expense heads. It’s used in preparing the overall company’s financial reports.

On the other hand, cost accounting provides details of all production overhead costs, like material, labour, and indirect and direct expenditures used in every product. With costing, we obtain product-wise profitability, cost and selling price.

The Difference Between Cost Accounting and Financial Accounting

Category of Differentiation

Cost Accounting

Financial Accounting

Meaning 

Cost accounting can help find out the production cost or the cost per unit. It can also help in cost controlling.

Financial accounting helps in recording the transactions company-wide. Accountants use this transaction information in preparing financial statements. This determines the company's financial position and profitability.

Objective

Cost accounting gives us details about the cost of production. The administration can use this data to calculate the product's selling price. 

Financial accounting indicates the company's financial position.

Costs Types Used 

Cost accounting shows real estimates and expenses.

Financial accounting gives actual figures and costs.

Recording 

Cost accounting refers to both cost estimation and recording of real transactions. 

In financial accounting, real transactions are considered and it does not show estimation. 

Controlling 

The main objective of cost accounting is to control cost. It uses costing tools to do this, like budgetary control and standard costing.

In financial accounting, the emphasis is mainly on transaction accuracy.

Period 

Cost accounting has no such accounting period. It is performed on demand.

The reporting period in financial accounting is generally quarterly, semi-annually or annually.

Reporting 

Cost accounting has all the characteristics of cost per unit.

Financial accounting does not record non-financial details.

Fix Selling Price 

Cost accounting procures the data that helps in specifying the price for selling the products and services.

Financial accounting cannot help fix the price for selling products and services. It shows the company’s financial position and the revenue generated with the selling price that is fixed.

Report Content

A cost accounting summary might have both operational and financial information. The operational data comes from sources that are not from the accounting office.

All information on finances is included in the financial report as per the accounting procedure. 

Relative Efficiency 

Important information is provided by cost accounting on the relative efficiency of machinery, plants and workers.

There is no such information in financial accounting.

Regulatory Framework 

No regulatory body governs cost accounting reporting.

The system of financial accounting summary is governed by IFRS (International Financial Reporting Standards) or GAAP (Generally Accepted Accounting Principles).

Inventory Valuation 

Accountants value the stock at the cost price in cost accounting.

The market price or the cost price, the lower price, is valued by financial accounting. 

Tools/Statements or Process

Cost accounting mainly contributes to the cost determination of the products and services, and the company adds margin and the selling price. It helps in borderline cost analysis and break-even calculation and also helps in variance.

The process of financial accounting has a ledger, journal entries, financial statements and trial balance. Financial statements have the balance sheet, income statement, cash statement, and statement for shareholders' equity.

Examples

The information is provided for each product separately in cost accounting. Information like direct and indirect expenses, material costs, etc., for every unit. This data is taken into account for fixing the selling price.

When a business handles ten products, financial accounting gives data about all of them in totality. The data is stated under different categories like material cost, as well as direct and indirect expenses, etc.

Format

Cost accounting does not have a set format. The provision for cost accounting can customise the format.

The reports and records are put together by financial accounting. The transactions are in a fixed format, and make sure they are uniform in the economy. GAAP ( Generally Accepted Accounting Principles) or the IFRS (International Financial Reporting Standards).

Users

Cost accounting data is used internally by the employees and management. 

Every stakeholder, including creditors, investors, owners, management, analysts, and government, use financial accounting or statements.

Necessity

Cost accounting tends to be necessary when the government advises it. Production firms maintain cost records.

In financial accounting, it is mandatory, and all public companies have to keep a document of the monetary transactions.

Forecasting

Forecasting has a critical role in a few budgeting strategies in cost accounting.

Financial accounting has no involvement from accountant forecasting, using real figures in order to make financial statements.

Coverage

Cost accounting decides different operations into components such as contracts, division, and geographical segments.

Financial accounting evaluates operations across the company.

Report Timing

Cost accounting issues reports all the time as and when the administration needs it.

Reports are issued when the reporting period gets over in financial accounting.

Time Horizon 

Cost accounting also reports the results. However, they also provide future projections too.

When the reports are completed, financial accounting reports the result. 

The differences between cost accounting and financial accounting are noted above. In short, the key differences between financial and cost accounting are that financial accounting focuses on providing transaction information and statements while cost accounting helps in determining the production cost of a unit. It is mainly for parties outside, and cost accounting helps the management inside to make decisions.

Also read: What Are Different Types of Accounting Explained With Examples & Importance

Conclusion

Both financial and cost accounting documents assist the company in developing strategies. Both kinds of strategies are components of the double-entry system and complete each other. Cost accounting data helps the company make cost control judgements. However, there is no comparability. Financial accounting data is analogous but needs relevant data for future forecasting. Therefore, both cost and financial accounting are important and incomplete without each other. 

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FAQs

Q: What kind of data does financial accounting procure?

Ans:

Financial accounting procures comprehensive data on the revenue of a company, its expenses, assets, net worth and liabilities. It also procures data on the financial stance of the business at all points in time.

Q: Is it mandatory to keep financial accounts?

Ans:

It is mandatory for a business to keep a financial account. Nevertheless, cost accounts may not be compulsory. However, the maintenance of financial accounts is advantageous to a business.

Q: Who uses cost accounting?

Ans:

Both inside and outside users of an organisation use cost accounting. The outside users are trading partners, the government, creditors, investors, regulatory agencies, journalists, and international agencies. Inside users are directors, owners, managers, and company employees.

Q: How are cost accounting and financial accounting similar?

Ans:

Cost accounting and financial accounting both handle business and economic events and they quantify the outcomes of business transactions and activities. They also deal with financial statements, cash flow, liabilities, revenues and assets.

Q: Why is it critical to contemplate and differentiate between cost accounting and financial accounting?

Ans:

Financial accounting assists in better understanding the profitability of a company through financial statements. Cost accounting can help in determining the expenditure of every product and service.

Q: Is financial accounting correlated to cost accounting?

Ans:

The cost and financial accounting system are both interrelated. They complement each other, and one is incomplete without the other.

Q: What are the main differences between cost and financial accounting?

Ans:

Financial accounting combines the cost information into the financial reports they provide, mainly into the balance sheets. Cost accounting records the raw material cost, work-in-progress, and inventory of finished goods.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.