Difference Between Cost Accounting and Financial Accounting

Cost Accounting vs Financial Accounting

What is Cost Accounting?

Cost accounting is referred to as a form of managerial accounting that is used by businesses to classify, summarize and analyse the different costs with the purpose of cost control and cost reduction and thereby helping management in making better decisions.

The primary function of cost accounting is said to be arranging, recording and identifying suitable investment allocation for investment to determine the costs of goods and services. It also helps in presenting relevant data to the management related to service, contract or finding shipment cost.

It also includes information related to cost of production, distribution and selling.

You might also want to know: Difference between Fixed Cost and Variable Cost

What is Financial Accounting?

Financial accounting is a branch of accounting that is concerned with the summarizing, recording and reporting of financial transactions that take place in a business concern over a time period.

Financial accounting is used for the preparation of various financial statements that can be used by companies to showcase their financial performance to the various users of financial information like creditors, investors, customers and suppliers etc.

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Difference Between Cost Accounting And Financial Accounting

Cost Accounting Financial Accounting
                                                                Definition
Cost accounting is referred to as a form of managerial accounting that is used by businesses to classify, summarize and analyse the different costs with the purpose of cost control and cost reduction and thereby helping management in making better decisions. Financial accounting is a branch of accounting that is concerned with the summarizing, recording and reporting of financial transactions that take place in a business concern over a time period.
                                                      Type of Information documented
Documents the data associated with the labour and material which are utilised in the manufacturing procedure. Documents the data that are in monetary terms.
                                                                Estimation of Stock
Stock value is estimated at cost Stock value is estimated based on the lesser value between net realisable value or Cost
                                                            Analysis of Profit
Normally, the gains are investigated for a specified job, batch, product and procedure Profits, Income and expenditure are investigated together for a specific period of the entire trading concern
                                                              Primary Objective
Controlling and reducing cost Towards maintaining the complete record of the financial transactions

Top 5 Objectives of Cost Accounting

Cost accounting is a tool that can determine the accounting and costing methods and procedures to the ascertain the cost. Few objectives are mentioned below:

  1. To determine per unit cost of various goods produced by a business
  2. To present an accurate report of both operation and process cost
  3. To indicate and prepares a report for the wastage costs in terms of raw material, time or money used in machinery
  4. To provide important data and guidelines for determining the cost of manufactured goods or services rendered
  5. To understand the profitability of every commodity produced and inform management about how profits can be maximised

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Top 4 Objectives of Financial Accounting

The financial statements have different purposes and provide information to shareholders and loan creditors to enhance investment interest. Few other objectives are:

  1. Systematic Recording Of Financial Transactions
  2. Revealing The Financial Position Of The Firm
  3.  Ascertaining The Result Of Business Operations
  4. Reporting Past Performance And Future Prospect

What Are The Advantages of Cost Accounting?

Cost accounting is the process of assembling and evaluating information to discover how an organization can maximize its earning and utilise funds. There are various advantages of cost accounting, here are the few key advantages of to consider cost accounting:

  • Cost object analysis- Expenses and revenues can be gathered by cost object, like product line, distribution channel, and by-product to understand which is effective or require additional support.
  • Discovers causes-It discovers problems within a firm and learns the specific cause of the issue, additionally suggests solutions to the management.
  • Trend analysis- It can track a trend line to find the expense surges
  • Determine Cost- It can be used in various level of activity. For instance, if management is looking for a second shift, cost accounting can assume the extra costs linked with the second shift.
  • Capacity-The capacity of a business to encourage improved sales levels can be determined by examining the value of its excess capacity.

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What Are The Advantages of Financial Accounting?

The financial statements principal classifications are revenues, expenses, equity, assets and liabilities.  Few advantages of financial accounting are:

  • Maintenance of Business Record-All the details of the transaction are recorded in the book of account systematically.
  • Preparation of Financial Statements-All the records help the accountant to prepare a financial report of the company and check the financial status.
  • Comparison of Result-The financial statement reflects the profits of the company which can be used to check the previous year financial status.
  • Act as Legal Evidence-It sometimes it acts as evidence for a few cases.
  • Boost Leanders-The statement provides required information to the money lenders so that they raise the loans.
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The above mentioned is the concept, that is elucidated in detail about ‘Difference Between Cost Accounting and Financial Accounting’ for the Commerce students. To know more, stay tuned to BYJU’S.

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