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Difference
between Cost Accounting and Financial Accounting
In
financial accounts, the monetary transactions of the business are recorded,
classified and analysed in an orderly manner, so as to prepare periodic results
in the form of profit and loss account or income statement and balance sheet,
indicating the financial position of the business at the end of that period.
The financial accounting is guided by various rules and regulations, some of
which are mandatory. The system cannot normally deviate from the accepted
accounting practices.
The
object of financial accounting is to provide information mainly to outsiders
such as shareholders, investors, government authorities, financial
institutions, etc. The analysis and interpretation of financial data contained
in the income statement and the balance sheet enable persons interested in the
business to make meaningful judgement about the profitability, liquidity and
solvency of the enterprise. Besides,
income-tax, central excise,
banks and insurance companies rely on the data
contained in the financial statements. Cost accounting, on the other hand,
deals with the ascertainment of the cost of product or service. It is a tool of
management that provides detailed records and reports on the costs and expenses associated with the operations, mainly for
internal control and decision making. Cost accounting basically relates to the
utilisation of resources, such as material, labour, machines, etc. and provides
information like products cost, process cost, service or utility cost,
inventory value, etc.so as to enable management
taking important decisions like fixing
price, choosing products, preparing
quotations, releasing or withholding inventory, etc.
The
objective of cost accounting is to provide information to internal managers for
better planning and control of operations and taking timely decisions. In the
early stages, cost accounting was considered as an extension of financial
accounting. Cost records were maintained separately. Cost information and data
were collected from financial books, since all monetary transactions are
entered in the financial accounts only. After developing product cost or
service cost and valuation of inventory, the costing profit and loss account is
prepared. The profit and loss figures so derived by the two sets of books i.e.
financial accounts and cost accounts, would have to be reconciled, since some
of the income and expenditure recorded in
financial books do not enter into product cost, while some of the expenses are
included in cost accounts on notional basis i.e. without having incurred actual
expense. However, a system of integrated account has been developed
subsequently, wherein cost and financial accounts are integrated avoiding
maintaining two sets of books. The basic difference between financial and cost
accounting may be summarised as follows:
Cost Accounting VS Financial Accounting
Difference
between cost accounting and financial accounting as per following point
Meaning
The cost accounting system is an accounting
system that captures the profitability of different products, processes or
projects, etc.
And
Financial accounting is an accounting system that
captures the overall profitability of the company and the financial position of
the company and maintains the transparency of business.
Dependency
Cost accounting is depending on the information
provided by financial accounting.
And
Financial accounting does not depend on the
information provided by cost accounting.
Type of data used
Cost accounting is used both types of data
historical cost and pre-determined cost.
And
Financial accounting uses historical cost only.
Objective
The main objective of cost accounting is to find
out per unit cost of product, projects, or process.
And
The main objective of financial accounting is to
provide accurate financial results and financial position of the company to
external stakeholders.
Scope
The scope of cost accounting revolves around
management and its decision-making processes. It is more of an internal score
than outside reflection.
And
The scope of financial accounting is more
pervasive; because it tries to disclose an accurate financial picture to its
stakeholders.
Estimate
Cost accounting is based on a comparison of
estimate and actual data.
And
Financial accounting records the only actual
transaction. There is no place for estimation.
Reporting period
The reporting period of cost accounting is done
as per the requirement of management.
And
The reporting period of financial accounting is
at the end of each financial year. The reporting period of financial accounting
is usually yearly.
Valuation of
inventory
Inventory should be valued at always cost under
the cost accounting.
And
Inventory should be valued at ‘cost or market
price whichever is less’ in financial accounting.
Fixation of the
selling price
Cost accounting provides sufficient information
which helpful for setting up the selling price of products and services.
And
Fixation of the selling price is not an objective
of financial accounting.
End results
The end result of cost accounting is the cost
sheet of the product.
And
The end result of financial accounting is the
income statement (also known as profit and loss account) and the balance sheet
of the company.
Users
Users of the information provided by cost
accounting are used by only internal management such as employees, directors,
managers, and supervisors, etc
And
Users of the information provided by financial
accounting are used by internal management as well as external users such as
shareholders, bankers, suppliers, and customers.
Mandatory
Cost accounting is not compulsory for all
companies. It is applicable to the only big company.
And
Financial accounting is compulsory for all companies.
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