Lemon and sweet lime may look almost the same except for their size, but they do not taste the same. While one may taste bitter, the other will taste sweeter. Similarly, just because cost accounting and financial accounting come from the same family, it does not mean that they are one and the same. The difference between cost accounting and financial accounting will be enough for you to categorize them as distant cousins instant of siblings.
What is cost accounting?
Cost represents the source that has been to be sacrificed to attain a particular objective. Cost Accounting involves accountants collecting, analyzing, and interpreting information closely related to the overall cost structure. It involves the determination of the cost of something (product, service, operation, and process) according to the costing objective of the management. Any decision taken by the management of the business is based on analysis and results. Thus, cost accountants help them to provide a thorough analysis of every aspect of the cost incurred, and then objectives of cost accounting are accomplished like cost control, cost reduction, etc.
What is financial accounting?
Financial accounting involves the preparation of financial statements of a company to summarize the overall operations along with the results for a specified period of time. It reflects the financial position of a company at a particular date. Financial accounting is completely based on actuals and helps reveal the financial health of the company. It serves as a critical source of information to decide future plans and make financial decisions.
Difference between cost accounting and financial accounting:
Cost accounting and Financial accounting may resemble you, as the cost is a financial term itself. However, both differ in many ways as discussed below:
Both of them are defined true to their purpose. While cost accounting focuses on cost, financial accounting focuses on financial facts. Thus, the way they are defined itself distinguishes them.
- Reporting frequency
Cost accounting reports may be published regularly based on management’s requirements say weekly, biweekly, quarterly. Whereas financial accounting reports are prepared usually at defined intervals like quarterly, half-yearly, or mostly yearly.
- Mandate requirement
Financial accounting is mandated by law for every company. Cost accounting is not required for every company, except certain manufacturing companies. It is left up to the company to undertake this accounting procedure for better controls in place.
- Use of information
The cost accounting information is used internally by directors, staff, and managers. Financial accounting information is used internally as well as externally by shareholders, and customers.
- Profit or Loss calculation
Financial accounting helps to determine overall profit or loss for the organization. Cost accounting reveals it for a particular process, product, or unit only.
- End result
Cost accounting aims at cost control and cost reduction. Financial accounting aims at disclosing financial performance and tracking it.
- Stock valuation and costing method
Stock is valued at a cost in cost accounting but valued at cost or market price whichever is lesser in financial accounting. Cost accounting uses historic and pre-determined costs but financial accounting uses historic costs only.
Cost accounting gives you costing details of all units, products, or services. Financial accounting will give an overall view rather than deep diving into the details.
- Systems and methods.
Cost accounting uses different systems and methods depending upon the requirement. It uses unit costing, batch costing, process costing, contract costing, and operating costing systems. Techniques used are marginal Costing, CVP analysis, etc. Financial accounting has no such methods except following the generally accepted concepts and conventions.
Cost Accounting Vs Financial Accounting in tabular format
|Parameters||Cost Accounting||Financial Accounting|
|Definition||It involves the determination of the cost of something (product, service, operation, and process) according to the costing objective of the management||Financial accounting involves the preparation of financial statements of a company to summarize the overall operations along with the results for a specified period of time|
|Reporting frequency||Frequent reporting like weekly, biweekly, monthly, or quarterly||Not very frequent, usually quarterly, half-yearly, or mostly yearly reporting|
|Mandated by Law||It is not mandated by law, except in certain manufacturing companies||Mandated by the Income tax and Companies Act for every company|
|Stakeholders||The information is used by internal stakeholders like directors, managers, etc.||The information is used by both internal and external stakeholders like customers, shareholders, directors, etc.|
|Profit or Loss calculation||Profit or Loss is calculated for a particular product, service, process individually||Overall profit or loss for the business is calculated|
|Objective||Cost control and cost reduction||Reveal financial performance and track it|
|Stock valuation||Stock is valued at cost||Stock is valued at cost or market price whichever is lesser|
|Costing method||Uses historic and pre-determined cost||Uses only historical cost|
|Nature of transactions recorded||Includes both monetary and non-monetary transactions||Includes only monetary transactions|
|Type of View||Trickle-down view of the cost of each product, unit, process, etc.||Historic or overall view
|Systems||Cost Systems used are Unit costing, Batch Costing, process costing, contract Costing, and Operating Costing||No such financial systems are used|
|Techniques||Techniques like Marginal Costing, Cost Volume Price Analysis (CVP analysis), Budgetary Control and Standard Costing are used||No such techniques are used|
Above are the difference between cost accounting and financial accounting. Thus hope the concepts are pretty clear now.
Both of them are interdependent?
Agree that Cost accounting and Financial accounting are different, but they do have some similarities. After all, they belong to the same family of accounting. They do overlap each other and are interdependent in some ways. Below are some of the similarities discussed:
- Accounting family
Both belong to the accounting family and deal with the same set of procedures, systems, and verification points. Accountants are required for both, though they may specialize in respecting branches. A cost accountant is required for a cost accounting job whereas a financial accountant is required for financial accounting job.
- Financial performance
Both of them help in revealing the financial performance of the company be it holistically, or individually. Both of them are used to know the profit and loss whether for a particular product, service, product, or for overall business operations.
Both financial, as well as cost accounting, helps the management to take important financial decisions like strategy formulation, cost control, cost reduction, innovation, etc. Both help in quick decisions thus saving time and increasing the profitability of the company.
Both of them help in revealing financial performance and information which is vital for respective stakeholders. It helps in promoting transparency throughout the company. There is no room for dilemma or doubt. This further helps in building trust both internally and externally.
- Achieve financial goals
Both are undertaken to achieve respective KPIs, metrics, and short-term and long terms goals of the company. Both aim at achieving an attainable result that will help the company in the long run.
Both of them aim at revealing vital financial information to help in disclosing any red flags which the company has to focus on. This helps in minimizing all kinds of probable risks for the company. This helps in better risk management.
Many startups have entered the market by introducing accounting software. Recently “vyapar” an accounting and inventory management startup has received funding of $30 million to expand its operations.
What are your thoughts on cost and financial accounting?