Cost accounting and financial accounting are two of the important branches of accounting and everyone who is dealing with the accounting of the companies will come across these two branches at some point of time. Before looking at either cost accounting statements or financial accounting statements one should know some of the important differences between cost accounting and financial accounting –
Cost Accounting Vs Financial Accounting
Meaning
Cost accounting refers to that branch of accounting that deals with costs whether they are fixed or variable which is associated with the production of goods related to a company operating in the manufacturing sector while financial accounting refers to that branch of accounting that records all the transactions related to business done by the company during a financial year.
Objective
The objective behind cost accounting is to ascertain the cost related to the production of a product so that company can add a profit margin to that cost in order to decide the selling price of the product while the main objective behind financial accounting is to assess the profitability and ascertain the financial position of the company at the end of the financial year.
Users
Cost accounting has a limited number of users which involve top management of the company, employees of the company, department heads of the company, and other internal parties related to the company while the users of financial accounting include not only the internal management of the company but also shareholders of the company, creditors of the company and other external parties interested in the company.
Scope
The scope of cost accounting is limited in the sense that companies operating in the manufacturing sector only will need cost accounting but as far as financial accounting is concerned its scope is wide as every company whether it’s in the manufacturing sector or service sector will need financial accounting to record various transactions done by the company during the financial year.
Compulsion
Cost accounting is not compulsory as it is for internal management only and the company does not require to publish cost accounting statements in the public domain while as far as financial accounting is concerned the company needs to publish profit and loss accounts as well as the balance sheet of the company every quarter in the public domain. In simple words cost accounting is like a rehearsal of speech just like when we rehearse the speech at home nobody is there to listen to that speech in the same way cost accounting is done for management purpose while financial accounting is like giving an actual speech, just like in case of actual speech there are many people to listen to the speech and give their reaction in the same way in case of financial accounting there are many outsiders who look at financial statements and react to those financial statements.
Forecasting and Control
In the case of cost accounting, not only present costs are ascertained but one can also make forecasts of future costs and compare that with actual costs which in turn helps the management of the company to control excess expenditure and help the company in having more profit margin but as far as financial accounting is concerned it is based on historical costs and thus one cannot forecast or control the final figure of the profit or loss during a financial year.
Periodicity
In case of weather, the cold season comes every year at a fixed time period of the year but floods come once in a while in the same way financial accounting statements are published regularly every quarter while as far as cost accounting statements are concerned they are not prepared regularly rather they are prepared as and when they are required by the management of the company.
As one can see from the above that financial accounting and cost-accounting are miles apart from each other and that is the reason why any company especially operating in the manufacturing sector should be careful while preparing cost accounting statements and financial accounting statements as both serve a different purpose and are not same.