Cost Accounting vs Financial Accounting

Article bySayantan Mukhopadhyay
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Differences Between Cost Accounting and Financial Accounting

Cost accounting ensures that the costs involved in business operations are reduced, and it even reflects the actual picture of a company’s business operations. It is calculated at the discretion of the management, whereas financial accounting is done to disclose the right information and that too reliably and accurately.

Both allow the management to make good decisions through the nature and scope of both these accounts.

Cost accounting tells us the expenses of each unit of each product. For example, if a company sells three products – product A, product B, and product C; cost accounting helps us determine how much material, labor, etc., are expended in each unit of product A, product B, and product C.

On the other hand, financial accounting helps us understand how profitable a company is through financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more. For example, if a company has sold $100,000 worth of products in a year and expended $65,000 for making the sales (cost of goods soldCost Of Goods SoldThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more plus other operating expenses), then the company’s profit for the year is $35,000.

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Cost Accounting vs Financial Accounting Infographics

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Key Differences

Comparison Table

Basis for ComparisonCost AccountingFinancial Accounting
1. DefinitionCost accounting is the art and science of applying the costing methods, techniques, and principles to the products, projects, and processes to improve the profitability and to reduce the overall cost of the business.Financial accounting is the act of classifying, storing, recording, and analyzing the financial transactions of the company through financial statements to improve profitability and to maintain the transparency of the company.
2. Objective The main objective of cost accounting is to find out per unit cost of every product, process, or project.The main objective of financial accountingObjective Of Financial AccountingFinancial accounting discloses a company's profits and losses and offers an accurate and fair overview of the business. Its objectives are as follows: Compliance with statutory requirements, Safeguarding stakeholders, Measuring P&L, Periodic reporting, and Reliability and relevance. read more is to reflect the accurate financial picture of an organization to the external stakeholders, toward whom the organization is responsible.
3. ScopeThe scope of cost accounting revolves around management and its decision making processes. It is more of an internal score than external reflection.The scope of financial accounting is more pervasive; because it tries to disclose an accurate financial picture to its stakeholders.
4. EstimationCost accounting is based on the comparison between the actual transaction and the estimation of the cost of the transaction.In financial accounting, the recording is always done on the actual transactions only. There’s no place for estimation.
5. Particular periodCost accounting isn’t done as per any particular period. Rather it’s calculated as per the requirement of the management decision making process.Financial accounting is recorded at the end of a particular financial period. Generally, a financial period starts on 1st April of a year and ends on 31st March of the next year.
6. Reduction of cost Cost accounting serves two purposes. Firstly, it ensures that the cost of operations (or producing a product) is reduced by setting up an estimated costEstimated CostCost estimate is the preliminary stage for any project, operation, or program in which a reasonable calculation of all project costs is performed and thus requires precise judgement, experience, and accuracy.read more for each unit of a product. Secondly, cost accounting reflects the true picture of operations.Financial accounting, on the other hand, doesn’t concentrate on cost controlCost ControlCost control is a tool used by an organization in regulating and controlling the functioning of a manufacturing concern by limiting the costs within a planned level. It begins with preparing a budget, evaluating the actual performance, and implementing the necessary actions required to rectify any discrepancies.read more; rather, its only purpose is to disclose the right information in an accurate way.
7. Tools/StatementsThere are mainly three things that cost accounting ascertains – the cost of sales of the product, how much margin the organization would add, and the selling price of the product. Of course, cost accounting is much more than that, but these are the essentials of cost accounting.Financial accounting takes the help of a journal, ledger, trial balance, and financial statements such as income statement, balance sheet, shareholders’ equity statement, and cash flow statementCash Flow StatementA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more.
8. Measurement of efficiencyAs cost accounting tries to find out the pixel view of operations, it is able to provide a lot of information regarding the loopholes of labors and other inputs and also offers valuable feedback to improve the efficiency of the inputs.Financial accounting shows the big picture of a company; as a result, financial accounting isn’t able to improve the efficiency of the inputs.

Conclusion

From the above discussion, it’s clear that both accounting is quite different.

The organizations that are not performing cost accounting don’t get any benefits of cost accounting since they don’t have data points to look at each unit.

But the manufacturing organizations involved in cost and financial accounting, data points of cost accounting help create financial accountingFinancial AccountingFinancial accounting refers to bookkeeping, i.e., identifying, classifying, summarizing and recording all the financial transactions in the Income Statement, Balance Sheet and Cash Flow Statement. It even includes the analysis of these financial statements.read more at the end of the day. And they also get a comprehensive tool to look at their business internally and externally.

This was the guide to Cost Accounting vs. Financial Accounting, infographics, and a comparison table. You may also have a look at these articles to learn more about these accounting topics –