DIFFERENCE BETWEEN FINANCIAL AND COST ACCOUNTING

 

DIFFERENCE BETWEEN FINANCIAL AND COST ACCOUNTING

Financial accounting  

Concept of Financial Accounting

Financial accounting is the process of identifying, measurement and communicating economic information to the users of such information. It is a branch of accounting which is primarily related to the recording, classifying, summarizing and presenting the day to day transaction. It aims to ascertain profit or loss incurred during a particulars period of time through profit and loss account. Similarly, it’s also shows the financial position on a given date through balance sheet.

Financial accounting is historical in nature, since, it records the past transactions.it is the oldest branch of accounting which is equally applicable in the all types of organization. The other branches of accounting have their roots on it. It is based on money measurement concept since, its record the transactions that can be measured in monetary terms only. The accounting principal and standards under financial accounting are generally accepted and universally practiced. It aims to provide information about result of the business operations and financial position to the external and internal users.

COST ACCOUNTING

Meaning of Cost Accounting:

Cost accounting is a branch of accounting that has evolved to overcome the limitations of financial accounting. It is the process of accounting for cost , which is concerned more with the ascertainment , allocation, distribution accumulation and accounting aspects of costs.it is that branches of accounting , which deals with the classifications , recording , allocation , summarization and reporting of current and prospective cost . Actually, it is the formal mechanisms by means of which costs of productions and services are ascertain and controlled.

It is an internal reporting system that aims to assist the management for planning and decision making. it primarily emphasizes on cost and deals with collections, analysis interpretation and presentation for managerial decision making on various business problems.

Cost accounting is more concerned with short-terms planning and its reporting period is much lesser than financial accounting. It deals with historic data but it is also futuristic in approach. Cost accounting system cannot be installed without proper financial accounting system. Each organization can be develop a costing system best suited to its individual needs. In financial accounting the major emphasis is given in cost classification based on type of transaction e.g. salaries, repairs, insurance, stores, etc. but in the cost accounting , the emphasis is laid on functions, activities products , processes and on internal planning and control and information needs of the organization.

According to Harold j. Weldon “Cost accounting is the classification, recording, and appropriate allocation of expenditure for the cost of products or services, and for the presentation of suitability arranged data for the purpose of control and guidance of management.”

Similarly, accounting to National Association of accountants – USA. “Cost accounting is a systematic set of procedure for recording and reporting measurement of the cost of manufacturing goods and performing services in the aggregate and in details.”

From the above definitions, it can be concluded that cost accounting is the accounting for cost which aims to provide cost data, statement and reports the costs to assist the management in the planning, decision making and controlling costs.

The differences between financial accounting and cost accounting are mentioned 

in the following table:

BASES OF DIFFERENCES	FINANCIAL ACCOUNTING	COST ACCOUNTING
Purpose	The main objective of financial accounting is to ascertain the profit earned or loss suffered by a firm during a particulars period of time as well as financial position on a given date.	The main objective of cost accounting is to provide costing information to the management to facilitate planning, policy making and decision making.
Statutory obligation	It is a statutory obligation for a firm to maintain financial accounting.	It is not a statutory obligation for a form to maintain cost accounting.
users	The users of financial accounting are external to the organization like shareholders, investors, creditors, labor union, etc.	The users of cost accounting are internal to the organization i.e. different level of management
pattern of analysis	It analyses the business affairs in totality.	It analysis the business affairs product-wise, service-wise, element –wise or activity –wise.
cost control	It does not have any provision of cost control. It merely focuses on recording the cost.	Besides recording, it aims on controlling costs such as material, labor and overhead
period of reporting	It generally intends to report the result of business operation and financial condition on annual basis.	It provides costing reports to the management as and when required.
orientation	It is historical I nature since it records the past transaction only.	It is historical as well as futuristic in nature since it is based on future estimation along with the past transaction.
inventory valuation	Under it, the valuation of inventory is made on cost or market price whichever is less.	Under it, the valuation of inventory is made on cost price.