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Key Differences Between Cost Accounting And Financial Accounting

March 3rd, 2015 Admin Accounting Tutor
Key Differences Between Cost Accounting And Financial Accounting

Known as the language of business, accounting is popular in business and commerce circles. It deals with recording of business transactions and auditing them as per the regulatory requirements. They are various kinds of accounting from management/cost, financial, social, project based, governmental, forensic to environmental accounting. Of the lot, Management or Cost accounting as it is also called and financial accounting are very important. Both these techniques weigh in on decision making aspects in business and yet, they are very different in their purpose and applications. While financial accounting is a summary of expenses and shows historical data, cost accounting deals with detailed accounting of all the expenses.

For instance, if there are ‘x’ number of products, financial accounting deals with the representation of the costs associated with them such as material cost, expenses (both direct and indirect) and profit details. Cost accounting on the other hand goes into each product’s material, labour and overhead cost while also going into the net and sale profit for each product. Read on to learn the basic differences between these two systems of accounting.

Definition

  1. Cost Accounting helps in detailing and thus controlling the cost. Variable cost, overheads, fixed cost and capital cost are studied in detail here.
  2. Financial Accounting helps in recording transactions. This section of accounting involves the preparation of financial statements and these provide the overall financial position of the company to the stakeholders.

Audience

  1. Cost Accounting is used internally in most cases for preparing reports to be submitted to the management and influences business decisions.
  2. Financial Accounting is aimed at providing an idea as to the exact financial position of the company to the share holders, creditors, rating agencies and so on.

Report Format

  1. Cost Accounting is usually used for internal purposes and thus can follow any format suited to the management.
  2. Financial Accounting has strict guidelines and formats that need to be adhered to as they are issued to the public. They usually follow the IFRS guidelines or the governing body’s regulatory requirements.

Content of the Report and Timing Restrictions

  1. Cost Accounting reports usually carry both financial and operational data/information. The frequency and timing of these reports are dependent on the management. Estimations and actual transactions are taken into account.
  2. Financial Accounting reports have extensive details on transactions recorded using the accounting system. They are usually prepared during the end of a period – say during the end of a fiscal year, end of a quarter or even bi-annually. Only actual transactions are used here.

Time Consideration

  1. Cost Accounting deals with time periods in the past as well as in the future. We can make use of this form of accounting for projection of costs and so on.
  2. Financial Accounting deals with a reporting time period that has been completed.

The process/cycle

  1. Cost Accounting Cycle – Calculation of raw material cost, labour cost, direct material cost, overhead cost in the mentioned order. Addition of all these costs along with profit margin is then done and the calculation of estimated sale price is done finally. Controlling the cost of raw materials, labour cost and other overhead is explored at length here.
  2. Financial Accounting Cycle- Going through ledge entries and journals to prepare the trial balance. This is then followed by the final accounts and balance sheet.

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