Difference between Cost Accounting and Financial Accounting
The function of
every accounting is to provide financial information for different parties.
Both financial accounting and cost accounting are concerned with the
accumulation and presentation of information to serve the needs of management
and outsiders. The source of the two accounts recording the transactions is the
same. Cost Accounting is based on the same principles regarding debit and
credit as are applied in financial accounting. However, the two differ in their
purpose and scope.
The following
are the important points of difference:
1. Purpose:
Cost Accounting
and financial accounting have different purposes. Financial Accounting provides
information about the enterprise in a general way. It safeguards the interests
of business and other parties by providing suitable information in the
financial statements i.e. Profit and Loss Account and Balance Sheet. Cost
Accounting gives information for the guidance of the management for the proper
planning, operation, control, and decision-making.
2. Recording:
Financial
Accounting consists of classification, recording, and analysis of transactions in
a subjective manner according to the nature of expenditures. Cost Accounting
records expenditures in an objective manner, i.e. according to the purpose for
which costs are incurred.
3. Analysis of Profit:
Financial
Accounting reveals the profit and loss of the business as a whole at the end of
a trading period, usually a year. Cost Accounting discloses the result of each
operation, process, and product.
The total
results, at the end of a certain period, as reported by the financial accountant
will not be of much help to the management for control and various other
purposes; while the cost accountant reveals the profit and loss as and when the
job or process is completed which helps the management in taking prompt and
effective measures.
4. Control:
Financial
Accounting lays emphasis on the recording aspect, no consideration is given to the control aspect. Cost Accounting provides information for a detailed system of
control with the help of standard costing and budgetary control.
5. Periodicity of Reporting:
Financial
Accounting reports about the business performance and financial state of
affairs usually at the end of the accounting year. Cost Accounting supplies cost
data and other related information in the form of cost reports to management
promptly and quite frequently. In General or Financial Accounting, day-to-day
cost information is not available thus costs can not be controlled.
6. Checking of Efficiency:
General or
Financial Accounting does not give the costs of each process or activity, therefore
management is unable to judge the efficiency and inefficiency of each department or
worker. While in Cost Accounting, efficiency and inefficiency in the consumption of
materials, labour, and other costs can be judged, compared, analyzed, and controlled.
7. Classification of Costs:
In Cost
Accounting, costs are classified according to functions (manufacturing,
selling, distribution, and administration); elements of cost
(Direct Materials, Direct Labour, and Factory Overhead); according variability (Fixed Cost, Variable Cost, and Semi Variable Cost). These
classifications indicate controllable and uncontrollable production costs, but
this information cannot be obtained from financial accounting.
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