12 DIFFERENCES BETWEEN FINANCIAL ACCOUNTING AND COST ACCOUNTING

J.O. EMMANUEL
0

There are three major branches of accounting; Financial accounting, management accounting and cost accounting.

However, in this post, we will be distinguishing between financial accounting and cost accounting.

What is financial accounting?

Financial accounting can be defined as the systematic process of preparing financial statements that will assist in measuring financial performance and financial position.

In other words, it involves preparing financial statements ( such as income statements, and balance sheets) in a way that helps users determine the financial performance and position of a business.

The purpose of financial accounting is to provide financial reports that will be used by outside parties to assess an organization's financial performance.

What is cost accounting?

On the other hand, cost accounting is a branch of accounting that focuses on determining how much it costs to produce goods or services and using the information to manage and control production costs.

It refers to the systematic process of identifying, recording, and analyzing the cost of producing goods and services.

The purpose of cost accounting is to prepare cost data to assist internal users in making decisions about the cost of production.

Differences Between Cost accounting and Financial accounting

1. Generally Accepted Accounting Principles (GAAP) are used to prepare financial accounting, however, they are not used to prepare cost accounting.

2. Financial accounting is an external reporting system in the sense that the report obtained from financial accounting is mostly used by external users such as creditors and investors.

In contrast, Cost accounting is an internet reporting system as its reports are mostly used by internal users such as management.

To put it another way, cost accounting focuses on delivering information to internal decision-makers like management, whereas financial accounting focuses on reporting financial information to external stakeholders, such as shareholders and creditors.

3. Cost accounting considers both actual costs and other cost estimations, whereas financial accounting considers only actual costs.

4. Cost accounting works with current and future cost data, whereas financial accounting deals with historical and past financial data.

5. The objective of cost accounting is to reveal information about the cost of production or unit cost of production of an organization

On the other hand, the objective of financial accounting is to reveal the financial performance and position of an organization.

6. Another difference between cost accounting and financial accounting is that cost accounting offers the cost data required to calculate the selling price of production whereas financial accounting does not.

7. Financial accounting is done by financial accountants, whereas cost accounting is done by cost accountants or management accountants.

8. Cost accounting reports are not typically based on International Financial Reporting Standards (IFRS), in contrast to financial accounting reports, which are typically based on International Financial Reporting Standards (IFRS).

9. Cost accounting reports are more specialized and concentrate on specific goods or departments, whereas financial accounting reports are wider and cover the entire organization.

10. Financial reports are often prepared on a periodic basis, which could be quarterly, semi-annually, or annually.

Cost reports, on the other hand, are created as needed.

11. Cost accounting mostly focuses on producing reports about cost data and cost analysis of an organization, whereas financial accounting primarily focuses on producing reports about the profit or loss of an organization.

12. Financial accounting frequently classifies costs according to the type of transaction.

For example, we could categorize costs based on rent, earnings, salaries, interest, insurance, and rates.

In contrast, Cost accounting classifies cost based on the basis of functions, activities, products, processes and internal planning and control and information needs of the organization.

Tabular Comparisons Between Financial Accounting and Cost Accounting

Features Financial AccountingCost Accounting
Data usedHistorical dataCurrent and future data 
Emphasized onThe financial aspect of the organizationThe cost and operational aspects of an organization
UsersMostly external usersMostly internal users
Compulsory use of Generally Accepted Accounting principlesYesNo
MeasuredOnly financial transactionsCost information
RequirementStatutoryVoluntarily
Frequency of reportsQuarterly, semi-annually or annually Prepared as demanded by management
Shows financial performance and financial positions?Yes No
Used for planning, controllingNoYes
Generate financial statementsYes
No

Post a Comment

0Comments

Post a Comment (0)