Both cost accounting and financial accounting are the parts of accounting. Both provide useful information to the businessman for decision making. Both can be used for reducing cost and increasing the profit and wealth of business. But there are lots of differences between cost accounting and financial accounting. Financial accounting provides the information of expenses on the basis of historical transactions. In cost accounting, we show the detailed information of expenses.
For example: We have 5 products. Financial accounting's income statement will show just the total material cost, direct expenses, indirect expenses, sale and net profit but it will not show the each product's material cost, labour cost, overhead cost, sale and net profit. All these information can be obtained through cost accounting.
Now, we are explaining the differences between cost accounting and financial accounting.
1. Meaning
Cost Accounting : Cost accounting is that part of accounting which is helpful to calculate the cost and control the cost. In cost accounting, we deeply study the variable cost, fixed cost, overheads and capital cost.
Financial Accounting : Financial Accounting is that part of accounting in which we record the transactions and we make the financial statements. Through making the financial statement, it provide information of profitability and financial position to the interested parties.
2. Objective
Cost Accounting : We can not take all decisions on the basis of information which have been provided by financial accounting. After making the financial statements under financial accounting, we calculate the cost of each unit and use the techniques of cost accounting for better decision making.
Financial Accounting : Main objective of financial accounting is to show the financial statement correctly.
3. Law
Cost Accounting : There is not any restriction on the cost accounts. It can be made according to the need of company but some company must audit their cost accounts under cost audit.
Financial Accounting : In financial accounting, there are lots of law restrictions. For example, company accounts and financial statements must be according to the format of company law. It should also follow the rules of IFRS and income tax law.
4. Controlling
Cost Accounting : In cost accounting, we study the techniques of controlling the cost. All the costs are calculated for the purpose of controlling the cost. For example, Company produces product A, B and C. If product C is generating 30% but product A and B is generating just 5%. We will try to control the cost of A and B product through different techniques of cost control.
Financial Accounting : In financial accounting, we just record the transactions correctly. We do not care to control the cost.
5. Profit Analysis
Cost Accounting : In cost accounting, to find the profit per job or per batch or per service unit is possible.
Financial Accounting : In financial accounting. we make the income statement which shows the net profit or loss or whole organisation not one job or batch.
6. Record
Cost Accounting : In cost accounting, both actual transactions record and estimations are used. For example budgetary control and variance analysis, we set the standard cost which is based on the estimations. These estimations may be differ from actual cost.
Financial Accounting : In financial accounting, we use actual transaction for recording purpose. We do not use the estimation for preparing income statements and balance sheet.
7. Valuation of Inventory
Cost Accounting : In cost accounting, inventory's valuation will be on cost.
Financial Accounting : In financial accounting, inventory's valuation will be on the cost or market value which will be low.
8. Cycle
Cost Accounting : In cost accounting, we first calculate the raw material cost. Then, we calculate the labour cost. Then, we calculate the direct material cost. After this, we calculate the overhead cost. All these cost are added. A profit margin is added. An estimated sale price is calculated. Its whole controlling cycle will be relating to control the cost of raw material, labour cost and overheads.
Financial Accounting : In financial accounting, we pass the journal entries. Then, we make the ledger accounts. Then, we prepare the trial balance. Then, we make the final accounts.
For example: We have 5 products. Financial accounting's income statement will show just the total material cost, direct expenses, indirect expenses, sale and net profit but it will not show the each product's material cost, labour cost, overhead cost, sale and net profit. All these information can be obtained through cost accounting.
Now, we are explaining the differences between cost accounting and financial accounting.
1. Meaning
Cost Accounting : Cost accounting is that part of accounting which is helpful to calculate the cost and control the cost. In cost accounting, we deeply study the variable cost, fixed cost, overheads and capital cost.
Financial Accounting : Financial Accounting is that part of accounting in which we record the transactions and we make the financial statements. Through making the financial statement, it provide information of profitability and financial position to the interested parties.
2. Objective
Cost Accounting : We can not take all decisions on the basis of information which have been provided by financial accounting. After making the financial statements under financial accounting, we calculate the cost of each unit and use the techniques of cost accounting for better decision making.
Financial Accounting : Main objective of financial accounting is to show the financial statement correctly.
3. Law
Cost Accounting : There is not any restriction on the cost accounts. It can be made according to the need of company but some company must audit their cost accounts under cost audit.
Financial Accounting : In financial accounting, there are lots of law restrictions. For example, company accounts and financial statements must be according to the format of company law. It should also follow the rules of IFRS and income tax law.
4. Controlling
Cost Accounting : In cost accounting, we study the techniques of controlling the cost. All the costs are calculated for the purpose of controlling the cost. For example, Company produces product A, B and C. If product C is generating 30% but product A and B is generating just 5%. We will try to control the cost of A and B product through different techniques of cost control.
Financial Accounting : In financial accounting, we just record the transactions correctly. We do not care to control the cost.
5. Profit Analysis
Cost Accounting : In cost accounting, to find the profit per job or per batch or per service unit is possible.
Financial Accounting : In financial accounting. we make the income statement which shows the net profit or loss or whole organisation not one job or batch.
6. Record
Cost Accounting : In cost accounting, both actual transactions record and estimations are used. For example budgetary control and variance analysis, we set the standard cost which is based on the estimations. These estimations may be differ from actual cost.
Financial Accounting : In financial accounting, we use actual transaction for recording purpose. We do not use the estimation for preparing income statements and balance sheet.
7. Valuation of Inventory
Cost Accounting : In cost accounting, inventory's valuation will be on cost.
Financial Accounting : In financial accounting, inventory's valuation will be on the cost or market value which will be low.
8. Cycle
Cost Accounting : In cost accounting, we first calculate the raw material cost. Then, we calculate the labour cost. Then, we calculate the direct material cost. After this, we calculate the overhead cost. All these cost are added. A profit margin is added. An estimated sale price is calculated. Its whole controlling cycle will be relating to control the cost of raw material, labour cost and overheads.
Financial Accounting : In financial accounting, we pass the journal entries. Then, we make the ledger accounts. Then, we prepare the trial balance. Then, we make the final accounts.
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