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Difference Between Cost Accounting & Financial Accounting

Update on 18 Oct, 22

5 minutes read

Difference Between Cost Accounting & Financial Accounting

Differences Between Cost Accounting and Financial Accounting: The main purpose of cost accounting and financial accounting is to keep a record of the financial information of a company. Both cost accounting and financial accounting are very important for a company as it helps to forecast growth and understand the profit or loss that the company has incurred.

Both cost accounting and financial accounting are absolutely essential for a company as it helps to understand the business policies and estimate the growth curve. Cost accounting helps in the planning and decision-making of a company through accurate procurement of goods while financial accounting helps to estimate a company’s financial position by keeping a record of the overall financial transactions.

To understand the difference between cost accounting and financial accounting it is necessary to know what exactly is cost accounting and financial accounting.

Cost Accounting:

Cost accounting, also known as Managerial accounting, is the analysis, allocation, summarization and interpretation of the overall cost of a company that is important for decision-making. The main objective of cost accounting is to keep a track of costs at different levels of a business. This involves procurement of goods, inventory analysis, cost of labour, freight charges, material charges and direct expenses.

Cost accounting is very important to record the cost incurred at every step of a company to forecast profitability and reduce chances of loss, damage or misuse of resources.

Importance of Cost Accounting:

  • It helps to understand and evaluate the actual cost of products and raw materials thereby making an estimate of the budget and preventing any losses.
  • It helps in providing cost information of a company to external sources like suppliers, investors or government tax departments.
  • It helps to make an estimate of the overhead cost of labour, daily wages and contract details thus maintaining transparency.
  • It helps in fixing the selling price of products to incur a certain amount of profit for the company.
  • It helps to channelise the production in the right direction thereby increasing the profit margins of a company.
  • It helps in preparing data on the overall cost information of a company thus improving efficiency and making way for employee incentives and bonuses.

Financial Accounting:

Financial accounting helps to ascertain the financial transactions of a company at any given point in time. Financial accounting is significant in managing the assets and liabilities of a company and preparing a roadmap of growth and profit.

The main objective of financial accounting is to summarize a company’s actual transactions that including cash flow statements, income statements and balance sheets. If we analyze cost accounting vs financial accounting, the latter also helps to reduce the monetary issues of a company and make plans to attract more investors in future. If you want to know more about this career you can check the Financial Accounting course and Career.

Importance of Financial Accounting:

  • It helps to make the financial information of a company available to all the stakeholders thereby increasing transparency.
  • It helps the management to take important decisions that will increase the overall efficiency of the company.
  • It helps in the accurate reporting of the assets, liabilities and financial statements of a company to the Income Tax Department.
  • It helps to communicate information on the position of the company to the investors and suppliers.
  • It helps to compare the financial health of the company with that of peer groups to make ways of improving and reducing business-related risks.
  • It helps to prepare the overall financial statement of a legally registered company.

Top 10 Differences Between Cost Accounting and Financial Accounting:

If we summarize Cost accounting vs financial accounting, we find the following differences:

Cost Accounting

Financial Accounting

Cost Accounting helps an organization keep track of the production operations like labour costs, procurement of raw materials and inventory.

Financial accounting helps in summarizing the financial reports of a company to assess profitability.

Cost Accounting assists in the preparation of internal reports of a company that will help the management to run the business.

Financial Accounting assists in the preparation of reports for external sources like shareholders and investors.

Cost accounting is compulsory for manufacturing and production industries.

Financial accounting is compulsory for all kinds of businesses.

Cost Accounting is necessary to reduce costs and prevent wastage.

Financial accounting is essential for understanding and evaluating the financial transactions of a company.

Cost Accounting is not bound by the principles of the Government regulatory framework.

Financial Accounting has to comply with the regulations and standards of accounting.

Cost Accounting helps to forecast the probability of profit or loss in a business.

Financial Accounting is the overall financial transactions of a company over a given period of time and does not help in business forecasting.

Cost Accounting involves the total estimates and expenditures of a company in the production of goods.

Financial Accounting helps to analyze the actual costs and transactions of a company.

Cost Accounting analyzes the segment-wise profit of a company.

Financial Accounting analyzes the overall profit of a company.

Cost Accounting helps to measure and control the costs of a company.

Financial accounting helps to prepare the financial statement of a company like the balance sheet and income statement.

Cost accounting involves both monetary and non-monetary transactions and is prepared by the company when required.

Financial Accounting is a summary of the overall monetary transactions of a company and is prepared at the end of the financial year to determine profitability.

Cost Accounting Begins Where Financial Accounting Ends:

If you ask the question, Cost accounting vs financial accounting, which is better for pursuing, here is a quick review:

Cost Accounting and Financial Accounting are necessary to understand the policies of an organization. Cost Accounting gives a vivid picture of the cost of procurement of products and manpower that is necessary to run the production whereas Financial Accounting shows the overall profit or loss that the company has incurred in a year.

Cost Accounting is very important for taking managerial decisions of a company that will help to reduce costs and prevent the wastage of resources. Financial Accounting on the other hand keeps a record of the overall financial status and overall profitability of the company in that particular year.

Cost Accounting takes place throughout the year and involves making cost estimates of raw materials, labour, indirect expenses and fixed costs. Financial Accounting involves the analysis of the entire financial transactions of a company at the end of the financial year. This will also help in determining the overall profit or loss incurred by the company at the end of the year.

Therefore it is logical to say that cost accounting begins when financial accounting ends.

Advantages of Cost Accounting vs Financial Accounting:

Advantages of Cost Accounting:

  • Cost information helps to fix the prices of products for a company. Cost accounting will help the companies to understand the prices that will render profitability. 
  • Cost Accounting helps in taking major decisions that will prevent wastage of the price of products and raw materials.
  • Cost expenditure helps to control the overall purchasing and stocking of materials that will minimize wastage.
  • Cost Accounting helps in increasing the overall efficiency of a company while procuring a particular product by analyzing and making comparisons between different prices of the same product.
  • Cost Accounting helps to understand a company’s cost of operations and allocate resources accordingly.
  • Cost Accounting helps to create an effective budget for a company and determine the operating costs of each department and production. This improves accountability and prevents excessive costs for the company.

Advantages of Financial Accounting:

  • Financial Accounting helps to maintain all the financial transactions of a company and thus keeps a business record.
  • It helps the members of the management to make important decisions based on surplus funds or shortage of funds.
  • Financial Accounting keeps a track of the assets and liabilities of a company by maintaining the accounts systematically.
  • Financial Accounting helps in maintaining transparency in the financial data thus preventing fraudulent transactions.
  • It helps in preparing the financial statement and balance sheet of a particular business.
  • Financial Accounting helps in presenting the correct financial position of a company.
  • It acts as legal evidence of the cash flows of the company and helps to raise loans from lenders.
  • Financial Accounting helps to maintain proper business records and income statements of a company thus helping to plan a budget for the forthcoming year.
Conclusion:

Cost Accounting and Financial Accounting are very important to maintain the continuity and profitability of a company or business. Cost Accounting and financial accounting are important for decision-making, planning and allocation of resources, preventing wastage, recording overall monetary transactions and improving business performance. By the way, you can also check out Best Accounting Courses in India.

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