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 and it is calculated at the discretion of the management whereas financial accounting is done with the purpose of disclosing the right information and that too in a reliable and an accurate manner.
Both allow the management to make good decisions though the nature and scope of both of this accounting are quite contrary.
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 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.. 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. plus other operating expenses), then the profit of the company for the year is $35,000.
Cost Accounting vs Financial Accounting Infographics
- Cost accountingCost AccountingCost accounting is a defined stream of managerial accounting used for ascertaining the overall cost of production. It measures, records and analyzes both fixed and variable costs for this purpose. deals with the internal aspect of the business. As a result, cost accounting helps to improve the flaws of a company. Financial accounting, on the other hand, handles the external aspect of the company. How much profits the company makes, how much cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. the company brings in, in a given year, etc. As a result, the goodwill of a companyThe Goodwill Of A CompanyIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price. depends on financial accounting.
- Cost accounting is used basically to reduce cost and to improve the efficiency of business processes. It acts as a tool for management. On the other hand, financial accounting doesn’t concern itself about controlling anything; instead, its objective is to create an accurate and fair picture of the financial affairs of the company.
- Cost accounting is a lot about knowing the pixel view of a business. On the contrary, financial accounting shows us the big picture.
- Cost accounting is not mandatory and applicable to all organizations. Only the organizations which are engaged in manufacturing activities are bound to report through cost accounting. On the other hand, financial accounting is mandatory for all organizations.
- Since cost accounting is used to control costs and take prudent management decisions, cost accounting is performed in every short interval. Financial accounting, on the other hand, is bound to report the financial affairs of the company at the end of the year.
- In cost accounting, estimation has a great value in determining and comparing the cost of sales per unit. In financial accounting, every transaction and reporting is based on actual data.
|Basis for Comparison||Cost Accounting||Financial Accounting|
|1. Definition||Cost 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. is to reflect the accurate financial picture of an organization to the external stakeholders, toward whom the organization is responsible.|
|3. Scope||The 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. Estimation||Cost 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 period||Cost 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. 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 control;Cost Control;Cost 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. rather, its only purpose is to disclose the right information in an accurate way.|
|7. Tools/Statements||There 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 StatementStatement of Cash flow is a statement in financial accounting which reports the details about the cash generated and the cash outflow of the company during a particular accounting period under consideration from the different activities i.e., operating activities, investing activities and financing activities..|
|8. Measurement of efficiency||As 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.|
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 which are involved in cost and financial accounting, data points of cost accounting help to 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. 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, along with infographics and comparison table. You may also have a look at these articles to learn more about these accounting topics –