Tuesday, 9 July 2013

Difference between Cost Accounting and Financial Accounting

Difference between Cost Accounting and Financial Accounting

The function of every accounting is to provide the financial information for different parties. Both financial accounting and cost accounting are concerned with the accumulation and presentation of information to serve the needs of management and outsiders. The source of two accounts of recording the transactions is the same. Cost Accounting is based on the same principles regarding debit and credit as are applied in financial accounting. But the two differ in their purpose and scope.

The following are the important points of difference:

1.         Purpose:
Cost Accounting and financial accounting have different purposes. Financial Accounting provides information about the enterprise in a general way. It safeguards the interests of business and other parties by providing suitable information in the financial statements i.e. Profit and Loss Account and Balance Sheet. Cost Accounting gives information for the guidance of the management for the proper planning, operation, control and decision making.

2.         Recording:
Financial Accounting consists of classification, recording and analysis of transaction in a subjective manner according to the nature of expenditures. Cost Accounting records expenditures in an objective manner, i.e. according to the purpose for which costs are incurred.

3.         Analysis of Profit:
Financial Accounting reveals the profit and loss of the business as a whole at the end of a trading period, usually a year. Cost Accounting discloses the result of each operation, process and product.
The total results, at the end of certain period, as reported by the financial accountant will not be of much help to the management for control and various other purposes; while the cost accountant reveals the profit and loss as and when the job or process is completed which helps the management in taking prompt and effective measures.

4.         Control:
Financial Accounting lays emphasis on the recording aspect, no consideration is given to control aspect. Cost Accounting provides information for a detailed system of control with the help of standard costing and budgetary control.

5.         Periodicity of Reporting:
Financial Accounting reports about the business performance and financial state of affairs usually at the end of the accounting year. Cost Accounting supplies cost data and other related information in the form of cost reports to management promptly and quite frequently. In General or Financial Accounting day-to-day cost information are not available thus costs can not be controlled.

6.         Checking of Efficiency:
General or Financial Accounting does not give costs of each process or activity, therefore management is unable to judge efficiency and inefficiency of each department or worker. While in Cost Accounting, efficiency and inefficiency in consumption of materials, labour and other costs can be judged, compared, analysed and controlled.

7.         Classification of Costs:
In Cost Accounting, costs are classified according to functions (manufacturing, selling, distribution and administration); according to elements of cost (Direct Materials, Direct Labour and Factory Overhead); according to variability (Fixed Cost, Variable Cost, and Semi Variable Cost). These classifications indicate controllable and uncontrollable production costs, but this information cannot be obtained from financial accounting.


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