Difference between Financial Accounting and Cost Accounting

Introduction

Both financial accounting and cost accounting are concerned with the formal documentation and reporting of financial data. Financial accounting indicates the income and losses of a company as a whole for a given period. But cost accounting demonstrates, by measurement and localization, the unit costs and profits/losses of various product lines.

The key distinction between financial accounting and cost accounting is outlined below:

Key points of difference - Difference between Financial Accounting and Cost Accounting
Difference between Financial Accounting and Cost Accounting
1. What they mean?

The role of financial accounting is to present an accurate and fair image of the overall results or activities carried out by a company over a particular year (through the statement of profit and loss) and its financial condition at the end of the year (through the balance sheet). In other words, financial accounting reports on the resources available with a business (balance sheet) and what has been done with these resources (profit and loss account).

Cost accounting, as the name suggests, is mainly concerned with assessing the cost of something which may be a product, service, process, or procedure. Such costs are assessed according to the costing guidelines of an entity’s management. Cost accountants are primarily responsible for supplying cost data for whatever purposes they may be needed for.

2. What purpose do they serve?

The purpose of financial accounting is to safeguard the interests of a company, its shareholders, and others affiliated with it. This is achieved by rendering relevant information to different parties, such as shareholders or associates, current or prospective creditors, etc. Cost accounting, on the other hand, offers information for the guidance of a company’s managerial personnel to aid in proper planning, operation, monitoring, and decision-making.

3. Compliance with the law

Financial accounts need to be kept in such a way as to comply with the conditions of the Companies Act, the Income Tax Act, and other laws. On the other hand, cost accounts are usually maintained willingly in order to satisfy the requirements of a company’s management. Now, however, the Companies Act has made it compulsory to maintain cost records in some specific manufacturing industries.

4. Emphasis

Financial accounting emphasizes the calculation of profitability, while cost accounting focuses on cost determination and accumulates data for this very purpose.

5. Disclosure of Profit or loss

Financial statements report the net profit and loss of a company as a whole while cost accounts disclose the profit or loss of each product, job, or service.This allows the management to eradicate less profitable product lines and increase profits by focusing on more profitable ones.

6. Kind of reports

Financial accounting provides operating results and the details of financial position. On the other hand, cost accounting typically provides managerial information through cost reports as and when needed.

7. What do they deal with?

Financial reports deal largely with actual facts and figures, but cost accounts deal partly with facts and figures and partly with estimates.

Financial accounting is concerned with historical data, whereas cost accounting is concerned with both historical costs as well as pre-determined costs.

8. Planning and control functions

In the case of financial statements, stress is put on the determination and disclosure of profits earned or losses incurred in a business. Whereas, in cost accounts, more focus is put on planning and control aspects.

9. What type of transactions are recorded?

Financial accounts are related to external transactions, i.e., the transactions entered into between a business entity on one hand and its third parties on the other. Such transactions form the very basis for receipts or payments of cash. Whereas, cost accounts relate to internal transactions that do not equate to any receipt or payment of cash.

10. Cost aggregation

Costs are listed in financial statements as a whole (i.e., in aggregate), but such costs are broken down into a unit basis in cost accounts.

11. What do financial statements lack?

Financial accounts do not provide statistics on the relative productivity of different employees, plants, and machines, while cost accounts provide useful information on the relative efficiency of different plants and machines.

12. Period

Financial reports (profit and loss account and balance sheet) are prepared on a periodic basis – quarterly, half-yearly or annual basis. However, cost reporting is a regular and continuous process that can take place daily, weekly, monthly, etc.

13. Monetary/Non-monetary

In financial accounts, only those transactions that can be measured in monetary terms are recorded. While cost accounts also use information that is non-monetary in nature such as no. of units produced, labor hours worked, etc.

14. Valuation of stock

In financial accounts, the stock is valued at cost or market price, whichever is lower. Whereas, in cost accounts, stocks are valued at cost only.

Comparison table – Difference between Financial Accounting and Cost Accounting

Basis of differenceFinancial AccountingCost Accounting
EmphasisPresent the financial position and profitability of the business as a wholeAssess the cost of a product, service, or process
PurposeServes the interests of all stakeholdersServes the interests of internal management
Deals withActual facts and figuresBoth actual figures as well as with pre-determined/ estimated costs
Planning and controlDoes not attach any importance to planning and controlFocuses on proper planning, operation, control, and decision-making.
Nature of reportingExternal reporting (creditors, shareholders, government, investors, and persons outside the management)Internal reporting (company’s management)
PeriodQuarterly, half-yearly or annualDaily, weekly, monthly, etc.
Adherence to LawComply with the requirements of the Companies Act, the Income Tax Act, etc.According to management’s requirements
Kind of reportsOperating results and financial positionCost reports
Stock valuationCost or market price, whichever is lowerAt cost

Takeaway

Cost accounting has been introduced due to the shortcomings of financial accounting in terms of management control and internal reporting.

Financial accounting lays emphasis on recording monetary aspects of business transactions without attaching any importance to control. Whereas, cost accounting provides a comprehensive control structure for materials, labor, and overhead costs with the aid of standard costing and budgetary control.

Read more: Difference between Financial Accounting and Management Accounting

Ruchi Gandhi

The author enjoys to write informational content in the domain of company law and allied laws. She takes interest in doing thorough and analytical research on legal topics. She is a CA along with MBA (Fin) and M. Com.

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