Financial Accounting vs Cost Accounting
Accounting is divided into two main categories known as financial accounting and cost accounting. Financial accounting is mostly used for external reporting purposes, in which financial transactions are recorded according to the generally accepted accounting principles. Cost accounting is mostly used for internal purposes where financial information is recorded and analyzed in order to improve internal company performance levels. While there are many differences between these two forms of accounting, there are also quite a number of similarities. The article that follows offers a clear explanation of each accounting type and highlights these similarities and differences.
What is Financial Accounting?
Financial accounting is the process used to record transactions and report summarized financial information in order to display a precise picture of the company’s financial performance, financial standing, and financial position. The main objective of financial accounting is in the preparation of financial reports, which include the income statement, balance sheet, and cash flow statements. These statements need be prepared according to the generally accepted accounting principles as they need to follow accounting concepts and principles that are universally accepted. The aim of producing such reports is to share the company’s financial information with the company’s stakeholders and the general public.
What is Cost Accounting?
Cost accounting is used to evaluate costs that are incurred throughout the production process by looking into the variable costs and fixed costs that are incurred during each step of production. Cost accounting will help determine the costs associated with running business operations in the current manner. Cost accounting can also be used to predict changes to costs in the future which can greatly aid budgeting and target setting and will result in greater control and management. In cost accounting, the documents that were produced in financial accounting are used by the company’s employees for internal management and decision making purposes. Statements that are created in cost accounting include the product cost sheets, labor cost statements, overhead cost records, etc.
Cost accounting can also aid making very important decisions. For instance, cost accounting can help determine whether a new product can be produced at a low cost, by considering the total costs that are incurred in delivering the product to the customer (raw material cost, labor cost, overhead cost, marketing cost). This can help a company decide whether the particular product can be produced and sold to yield a reasonable profit.
What is the difference between Financial Accounting and Cost Accounting?
Cost accounting and financial accounting are both essential to a firm as they help in accurate recording, reporting, analyzing, and decision making. Both cost and financial accounting make use of similar accounting terms and are based on the same types of accounts to record transactions. Both types of accounting separate transaction recording into assets, liabilities, capital, income, and expenses. Both forms of accounting are focused on improving company performance; however, while financial accounting looks at the company as a whole cost accounting concentrates on improving performance in certain divisions, units, locations, etc. The major differences between the two lie in the purpose for which they are created, the statements that are produced, and the type of information that are collected for the documents that are produced.
Summary:
Financial Accounting vs Cost Accounting
• Accounting is divided into two main categories known as financial accounting and cost accounting.
• Financial accounting is the process used to record transactions and report summarized financial information in order to display a precise picture of the company’s financial performance, financial standing, and financial position.
• Cost accounting is used to evaluate costs that are incurred throughout the production process by looking into the variable costs and fixed costs that are incurred during each step of production.
• Financial accounting looks at the company as a whole while cost accounting concentrates on improving performance in certain divisions, units, locations, etc.
• The major differences between the two lie in the purpose for which they are created, the statements that are produced, and the type of information that are collected for the documents that are produced.