Difference Between Cost Accounting & Financial Accounting

Both cost accounting and financing accounting are vital for managing the finances of a business firm. Each of them tends to play a distinct role in accounting and facilitates the process of handling and projecting the financial standing of a business firm. Therefore, neither of these should be overlooked in a business setup.

With that being said, let’s take a quick look at the points of difference between cost accounting and financial accounting and their area of expertise.

What is Cost Accounting?

Cost Accounting is a branch of accounting that deals explicitly with the costs which have been incurred through the course of a production. The information generated through cost accounting is used to keep track and adjust the operations effectively to maximise both profit and their efficiency. 

For instance, with the help of cost accounting firm owners identify and record allocation of resources and determine the cost involved with each level of production of goods and dissemination of services. 

Therefore, it can be said that cost accounting enables business owners to analyse and classify expenditure of a specific production unit. It also helps to determine the input cost required to appoint labour and purchase raw materials at each level. In turn, it allows firm owners to control and lower unwarranted expenses significantly. 

Check Your Progress: Name three expenses that would be recorded and accounted for in cost accounting.

Objectives of Cost Accounting 

These are among the significant objectives of cost accounting –

  1. Determination of the cost per unit of goods that have been produced by the firm.

  2. Accurate reporting of both operational and processing cost.

  3. Formulating a report on cost-utility and recommendations to maximise profit on production. 

  4. Formulating data and guidelines to determine the accurate cost of manufacturing goods and rendering services.

Next, let’s move on to the perks that accompany cost accounting.

Benefits of Cost Accounting

These following pointers offer an overview of the perks accompanying cost of accounting –

  1. Cost objects analysis.

  2. Analysing trends to identify and lower associated expenses.

  3. Cost determination.

  4. Analysis of expansion capacity.

To move on to the next step of cost accounting vs financial accounting, let’s learn about the aspects of financial accounting in brief. 

What is Financial Accounting?

Typically, financial accounting is that branch of accounting, which is responsible for recording the aggregate financial data of a firm. It helps to measure the financial outcomes of a given accounting period and further helps to evaluate the position of assets and liabilities held with an organisation accordingly. Such an endeavour helps to measure the precise financial standing of a business firm in any given point of time. 

Hence, it can be said that financial accounting is the process, wherein, a business firm records, summarises and reports all the financial transactions that have taken place within a given period. Notably, such transactions are then compiled to work out crucial financial statements of the company, including – the cash flow, balance sheet, profit and loss account, etc.

Just like cost accounting, financial accounting also tends to follow specific objectives and strives to deliver the same. To gain a fair idea of financial accounting, you should make it a point to become familiar with them as well. 

Objectives of Financial Accounting 

These following are among the primary objectives of this branch of accountancy –

  1. Recording all financial transactions within a given period in a systematic manner.

  2. Evaluating the financial standing of the firm.

  3. Analysing the outcome of business operations.

  4. Analysing past performance.

  5. Highlighting a firm’s prospects.

Benefits of Financial Accounting

Now let’s take a quick look at these benefits of financial accounting to be able to provide the difference between cost accounting and financial accounting –

  1. Helps to maintain business records.

  2. Plays a vital role in formulating financial statements.

  3. Helps to compare business outcomes.

  4. Serves as legal and financial evidence. 

Test your knowledge: Which of these would be studied under financial accounting?

  1. Fixed cost b. Balance Sheet c. Overhead Expenses d. Selling Price 

Difference between Cost Accounting and Financial Accounting

Take a look at this table below to learn about the cost accounting and financial accounting differences –

Parameters 

Cost Accounting

Financial Accounting

Definition

It is the branch of accounting that helps to compute the cost of product and production in general.  It is mainly accountable for fixed costs, overhead expenses, capital costs, selling price, etc.

It is the branch of accounting that involves recording financial transactions effectively. In turn, it facilitates the process of analysing the financial standing and profitability of a firm in an accounting period. 

Purpose

It accounts for cost per unit of products.

It represents the financial position of a firm accurately. 

Relative Efficiency 

It provides valuable information about efficiency.

It is not useful in determining the relative efficiency of workers, machinery, etc. 

Reporting Time

It is frequently prepared and monitored accordingly. 

It is reported mostly at the end of an accounting period.

Forecast

Budgeting makes forecasting possible.

It cannot be forecasted.

Profit measurement

It only measures the profitability of a product or a service.

It helps to measure the overall profitability of a firm. 

Stock  Valuation

It always takes into account the cost price of inventories.

It always takes into account either the cost or market price. 


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FAQ (Frequently Asked Questions)

1. What is Cost Accounting?

Ans. Cost accounting is a branch of accounting that deals with responsibilities like tracking different costs involved in a business venture at its various levels. It helps to figure out the cost per unit of a product and helps to lower it eventually.

2. What is Financial Accounting?

Ans. This branch of accounting is responsible for recording accurate information about all financial transactions of a firm. It helps to evaluate a firm’s financial standing at a given point of time.

3. What is the difference between Finance and Accounting?

Ans. Accounting is mostly responsible for keeping track of the flow of money to and from a firm.  On the other hand, finance is a broader concept that is responsible for managing assets and liabilities and adopting suitable plans for growth prospects. 

4. Differentiate between Financial Accounting and Management Accounting.

Ans. The primary point of difference between financial accounting and management accounting is that the former deals with the accurate collection and representation of financial data. On the other hand, the latter is concerned with those internal processes that are used to keep track of all business operations.