There are several types of accounting. Every accounting type varies depending on the nature of transaction and type of business. In this we will learn about Cost Accounting and Financial Accounting and the major differences between them.
Cost Accounting:
Cost can be of anything which is measurable in terms of money. Costing is a process for determining the cost. It is a technique for ascertaining the cost of production of any product or service in the business organisation. Cost accounting is basically the next step to costing. Cost Accounting involves analysing relevant costing data and interpreting it and present various management problems to management.
To elucidate the difference between Cost Accounting vs Financial Accounting, Unlike financial accounting which provides information to external financial statement users, cost accounting is not required to set standards and can be flexible to meet the needs of the management. Cost accounting considers all input costs associated with the production including both variable and fixed cost. Some of the types of cost accounting are:
Standard cost accounting
Activity based cost accounting
Managerial cost accounting and
Lean accounting.
Financial Accounting:
Financial accounting summarises the activities of the organisation. Financial statements are the product of applying Accounting Principles legal requirements and management judgement financial accounting. All the financial transactions are summarised in preparation of financial statements including the balance sheet, income statement and cash flow statement. The record the company’s operating performance over a specific period. The financial accountant duties may differ from those of a General accountant who work for himself rather than directly for a company or organisation.
Some of the issues in financial reporting are Political environment, Expectations gap, Financial reporting challenges, Ethics and International accounting standards.
Difference between Cost Accounting and Financial Accounting:
| Financial Accounting | Cost Accounting |
|---|---|
| Meaning | |
| Recording the transaction is part of a financial accounting. Financial statements are made to the transactions. With the help of financial statements we analyse profitability of the company | Cost accounting is used to calculate the cost of the product and also helpful in controlling the cost |
| Objective | |
| Financial performance and position | Ascertain cost and cost control |
| Types of Report | |
| General reports like profit and loss account, balance sheet, cash flow statement | Cost accounting generate special cost reports and cost analysis report. |
| Control | |
| In financial accounting correctness of transaction is important without taking care of the cost control | Cost accounting is done with the purpose of control over cost with help of caution tools like standard costing and budgetary control. |
| Legal Need | |
| Statutory requirement | Voluntary, except for some cases |
| Transactions | |
| Record external transactions | Record both internal and external transactions. |
Reconciliation of Cost and Financial Accounts (Conclusion):
The cost can be either computed or estimated depending on the basis of the operation. Since cost accounts are meant to function as a control device it will be appropriate to adopt estimated costing or preferably standard costing system while preparing cost accounts. Estimates or standards can be the actual but in most cases they cannot be the same.
This necessarily means that the profit shown by the cost accounts is to be different from the profit shown by the financial accounts. So the Reconciliation of both of the accounts has to be made in order to make a proper appropriation of the company’s financial status and also to maintain its financial activities. These are the major differences between Cost Accounting vs Financial Accounting.
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