Difference between cost accounting and financial accounting

Categories: AccountingBusiness

?In recent years, the range of accounting application is expanding rapidly, along with the increasing demand of economic market. As is well known, accounting is a key aspect of business. And in the accounting profession, there has been already existed interpenetration and overlapping among the different kinds of accounting. Cost accounting and financial accounting are two main components of accountancy. The former one is a part of accounting. In cost accounting, it dramatically researches the variable cost, fixed cost, overheads and capital cost, which is beneficial to calculate the cost and control the cost.

And in another part of accounting, financial accounting, we record the business and make the financial statements through this kind of approaches. There are lots of similarities and differences between these two methods. Meanwhile, each of them has its own scope of application. People use different accounting methods to solve different financial problems. Cost accounting refers to the total cost of the products. It is a mixture of financial accounting and management accounting, and it is a method to analyze the cost information.

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The former method is a procedure of gathering, calculating, concluding and evaluating various alternative courses of action, (Vanderbeck, E. J. 2013), while the latter one is a field of accounting, which is considered to be the provision of financial statements prepared for decision makers and other stakeholders. (Wikipedia, 2013). The latter method is the process of integrating financial data that taken from an organization’s accounting records and issuing in the form of statements for the advantages of people outside the organization for an interval time.

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(Weil, R. L. 2012).

More and more differences are appeared in cost accounting and financial accounting. Firstly, we use them for different purposes. Cost accounting aims at calculating cost of production or service in a scientific way and then facilitating cost control and cost reduction. The main purpose of cost accounting is to analyze, determinate and control of the total cost. The purpose of financial accounting is to find out the results of an accounting year in the form of Profit and Loss Account and Balance Sheet. The main function of financial accounting is to record financial transactions, find out profit or loss and identify financial position.

Next, they are different in recording. In cost accounting, both actual transactions record and estimations are used. For example, when we mentioned budgetary control and variance analyze, we set the standard cost which is based on the estimations on previous data. And these estimations may differ slightly from actual cost. While in financial accounting, since the recording is limited to use actual transaction, the estimation is not allowed to prepare income statements and balance sheets. In addition to the above, their control aspects are also diverse.

For the cost accounting, we focus on the techniques of controlling the cost. For instance, a company is planning to generate three products, A, B and C. If the percentage of C is 40%, product A and B are produced at only 10%. We will intend to manage the cost of product A and B by means of different approaches. However, in financial accounting, we just ensure to record the transactions correctly, but are not concerned with the controlling of cost. (Kumar, V. 2012). At last, their forms of reference are different. In cost accounting, it is possible that there is no reference following.

Regulation can be had only from a body of conventions followed by cost accountants. Nevertheless, in financial accounting, references can be made in case of difficulty to the company laws and case decisions. It is also a challenge for the canons of sound professional practice when to devise or operate a system of financial accounting. Although there are a number of differences between cost accounting and financial accounting, they still have something in common. One of the similarities is that they both based on the financial reports.

Management accounting and financial accounting are two major branches of accounting. Therefore financial accounting belongs to the second level. Cost accounting is in the third level, as a branch of accounting information system, it provides record of cost and reports the number of information, and all these information is for the financial accounting. Financial accounting is used to produce financial reports and statements, including the balance sheet, income statement and statement of cash flows. Their financial reports are supported by each other.

Moreover, both of them focus on ways to improve company performance. Even though one concentrates on parts of company, the other one focuses on the entire company. According to the financial statements, it can supply information of profitability and financial status to the interested outsiders. Useful information not only can be provided to the businessman for making decisions; also the reports can be used for cutting cost and acquiring more profit and wealth of business. The final objective is to take measures to understand their finances and enhance the performance through the financial report analysis.

Accounting brings a great deal of help to us, at the same time we have to take into account the limitations of different accounting methods. One of the limitations facing by the cost accounting is that its inapplicability. Cost accounting is normally to accounting for the cost of industries. It is significant to identify the different categories of expenses and allocation of expenses, which is considered as a complicated system for accounting. In order to collect the data and prepare for the reports, different forms and formulas are needed.

It is true that cost accounting cannot be applied with advantage to trading concerns and concerns of small size. As claimed by Nigam Lal B. M. et al. (2004), “There is no ready-made system of cost accounting applicable to all industries irrespective of their nature or the nature of the article produced or service rendered. The system should be adapted to the industry concerned. ” Hence, it becomes complicated and it cannot apply to all types of industry. What is more, financial accounting also has some limitation such as its untimely information.

This method is defined to supply information in the form of statements which always include Balance Sheet and Profit and Loss Account for a period, once a year as usual. The information of expenditures is provided on the basis of historical transactions. So the information which merely indicates the past action is only concerned with historical interest and previous analysis. According to Siyanbola, T. T. (2012) said, “the business requires timely information at frequent intervals to enable the management to plan and take corrective action.

” For example, during the current year, if a corporation has budgeted ? 240,000 sales for a year whereas the exact budget of every month is difficult to be recognized. In other words, the information about a relatively short period time can hardly be produced to some extent. Furthermore, financial accounting also lacks analysis of losses. It does not provide complete assessment of losses because of defective material, idle time, idle plant and equipment. Besides, it is difficult to analyze the distinction between avoidable and unavoidable wastage. People will not know the information about losses.

In summarize, both of the two accounting methods are good techniques for ascertaining profitability and helpful for decision making. Cost accounting is an essential aspect of accounting information about the problems of core managerial control while the object of financial accounting, which is different from the former one, is to identify the profitability and to give information about the financial position of the business. Even though there are some distinguish and approximation between them, we regard different accounting methods as guidance in the office, so long as more attention should be paid to their limitations.

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Difference between cost accounting and financial accounting. (2016, Jul 20). Retrieved from https://studymoose.com/difference-between-cost-accounting-and-financial-accounting-essay

Difference between cost accounting and financial accounting

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