Fundamentals of Cost Accounting

Financial Accounting vs Cost Accounting

The three main branches of accounting – financial accounting, cost accounting and management accounting. While all of them deal with the recording and presentation of financial information, their purposes differ. Let us take a closer look at Financial Accounting vs Cost Accounting to understand each of them better.

What is Financial Accounting?

Financial accounting is the recording of all the monetary transactions of an organization.

Further, it records and reports these financial data in proper formats that ensure uniformity in the industry/economy.

For example, financial accounting reports final accounts (profit and loss, balance sheet etc) in the given format only.

The purpose is to ascertain the financial position of the firm on a given date and the profitability of the firm in a given period.

The users of these financial statements are the stakeholders of the firm, both internal and external. These include the management, owners, investor, creditors, government etc.

Read more about Traditional Approach to Financial Accounting here in detail.

Cost Accounting

Cost accounting is the process that records, summarizes and reports cost information of an organization.

The primary function of cost accounting is to ascertain the costs of the firm and perform the functions of cost control.

It traces the costs of every unit in production right from the input of raw materials to the output produced.

Cost accounting aides management in important decisions such as fixing the selling price, controlling costs, efficiency measurement and improvement, projecting plans, making budgets etc.

It also adds effectiveness to financial accounting by providing useful cost information.

Financial Accounting vs Cost Accounting

Financial Accounting vs Cost Accounting

Let us now look at some key differences in Financial Accounting vs Cost Accounting.

Sr No Financial Accounting Cost Accounting
1 Records financial data of the organization. So it records all relevant monetary data Records and summarizes cost information and data. This includes information about labour, materials and various overheads of the manufacturing process.
2 Financial accounting only deals in historical costs (only actual costs and figures) Cost accounting uses both historical and pre-determined costs (standard costs, estimates etc.)
3 The users of the information provided by financial accounting are both internal and external users Information provided by cost accounting is only meant for people within the firm like management, employees etc.
4 Financial accounting is mandatory for all firms. Every organization has to keep some record of its financial transactions Cost accounting is only done by manufacturing firms. And in most cases, it is not mandatory.
5 The emphasis here is on recording the transactions/data and presenting it in the given format. Other than recording data it also provides a system of cost control of labour, material, overhead costs
6 Financial accounts deal with the business in its entirety. So it provides us with profit or loss for the whole concern Costing will enable us to get the profit or loss for individual products, process, job etc.
7 In financial accounting, there is no aspect of forecasting. It is simply a record of the financial position of the firm In Cost accounting, forecasting is possible using some of the budgeting techniques
8 Financial accounting is strictly a positive science. There is rigidity in the process due to legal requirements Cost accounting is both a positive and normative science.

Solved Question on Financial and Cost Accounting

Q: In financial accounting stock is valued at cost or market price whichever is less, and in cost accounting stock is valued at ____

  1. cost
  2. market price
  3. both
  4. neither

Ans: The correct answer is A. This is one of the major differences in Financial Accounting vs Cost Accounting.

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