Cost Accounting is a technique that focuses on providing internal data for reducing expenses and raising the efficiency of the business, while financial accounting reports the company’s results of operations to the outside world, i.e. shareholders, and other stakeholders in the form of financial statements.
By reading this article, you will learn about cost accounting and financial accounting issues and get familiar with the major difference between cost accounting and financial accounting. Besides the differences, the article discusses the advantages, features of cost accounting and financial accounting.
What is Cost Accounting?
Cost Accounting is a technique that focuses on recording, analysing, and controlling an organisation’s expenses to assist the management in making business decisions. It also offers internal reporting for the calculation and management of the production of goods and services. Both of these processes are instrumental in recognising the areas where cost control and improvement can be practised, and they also entail gathering, allocating, and disbursing.
Features of Cost Accounting
- Cost Classifications: It refers to breaks and categorisations of costs based on their nature, behaviour and decision making. Cost classification also distinguishes direct vs indirect costs, fixed vs variable costs.
- Cost Analysis: This means the breakdown of various cost elements with the aim of learning their nature and behaviour, as well as their influence on the total cost of the products and services.
- Cost Recording: This cost recording is definitely a feature that is involved in standardising and systematically documenting the production costs of goods or services.
- Cost Control: It forms a means for limiting costs through the control of wastes that are caused by inefficiency, and the consequent reduction of costs and the rise of financial gains.
- Budgeting and forecasting: These activities allow a business to prepare a financial plan required for forecasting and for allotting resources based on the guidance given by the plan. Besides that, they are helping organisations to realise their financial goals.
What is Financial Accounting?
Financial accounting refers to the activities of recording, summarizing, and reporting the financial transactions of a firm to external stakeholders. It is about the preparation of the main financial statements, like the income statement and balance sheet or cash flow statement, that reflect a company’s financial performance and position. The accounting system is there to maintain openness and adherence to the rules, and it is the means by which the investors, creditors, and regulators obtain information to their decision-making.
Features of Financial Accounting
- Recording Transactions: In which all financial activities are systematically recorded, and using a double-entry system to maintain the accounting equation: Assets = Liabilities + Equity.
- Summarising and reporting: The support to the summarising and reporting process involves the engagement of the financial transactions that have been classified, summarised, and then communicated through regularly issued financial statements.
- External communication: It mainly aims at providing information to outside people like potential investors, lenders, and suppliers, who can use it to evaluate the business stability and trustworthiness of the company.
- Compliance and standards: Financial accounting is performed according to certain rules and regulations, for instance, GAAP (Generally Accepted Accounting Principles), in order to maintain the uniformity and comparability of businesses in different locations.
Differences between Cost Accounting and Financial Accounting
In this Article, major difference between cost accounting and financial accounting are discussed.
Cost Accounting Differences (Steps)
- It is limited only to production costs and focuses on the three major components of production material, labour, and overhead.
- The primary users of this kind of information are internal management who make decisions based on it.
- Submit detailed information on each product or process separately.
- Besides cost control, it also assists in the preparation of budgets and increasing operational efficiency.
- It is not limited to any standard; you can change its format as per its requirements.
- It mainly deals with present and forthcoming cost figures.
- Management accounting reports communicate the idea of the cost to make one unit or run a department.
- These decisions, such as setting the price, planning, and identifying areas for cost-cutting, are the other benefits of the system.
Financial Accounting Differences (Steps)
- Concentrates on the comprehensive financial performance of a business entity.
- They are used mainly by the external parties, such as investors, banks, auditors, and the government.
- It offers concise reports such as the Balance Sheet, Profit & Loss Account, and the Cash Flow statement.
- It adheres to exact standards, for example, GAAP or IFRS, for disclosing information.
- The main focus of a financial accounting system is on the historical financial data.
- Besides profit, the reports reveal the company’s assets, liabilities, and cash position.
- Ensures legal compliance by facilitating audits and tax reporting activities.
- The financial reports/statements are the outcome of a period’s work and are meant for external users’ examination.
Advantages of Cost Accounting
- It helps to calculate the per-unit cost of various goods or services
- Provide an accurate report of operations and process costs
- Supply historical cost reports and trends that help to create an accurate budget and forecast
- Inform management regarding profitability and help maximise profit.
- It helps to identify waste allowance for target cost control and reduction measures.
- Provides benchmarks to enhance the performance and improve the efficiency of different departments and employees.
Advantages of Financial Accounting
- It provides a complete and organised record of all business transactions. That is really important for tracking financial health
- Help to supply relevant financial data for management, like profit and loss, that helps to improve decision-making and the strategic plan.
- It reports past performance for implementing such good decisions in future.
- Provide accurate data, as it helps to reveal the position of the firm.
Conclusion
Both cost and financial accounting are an essential part of organisational accounting. There are huge difference between cost accounting and financial accounting, like cost accounting involves internal data and helps with budgeting and forecasting, while financial accounting involves external data and systematically records past events. Also, understand the major features and advantages of cost and financial Accounting.