Accounting is the process of recording, categorizing, summarizing, analyzing, and presenting an organization’s or entity’s financial transactions, records, statements, profitability, and financial condition. Accounting is a specialized business language. Accounting work is often performed by an organization’s own workers. Accounting is done on a near-daily basis. Cost accounting, management accounting, financial accounting, and other fields of accounting exist.
There are various sorts of accounting, but if you’re in company, the two most common are “Financial Accounting” and “Cost Accounting.” Both of these disciplines are critical, but their methodologies and commercial rewards are vastly different. In this post, we’ll look at what each of them performs and how they differ in certain key aspects.
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A strong mix of cost accounting and financial accounting may improve a company’s health, save money, and assist risk managers manage risk more efficiently. We’ll look at:
a. An introduction to financial accounting
b. An introduction to cost accounting
c. Financial and cost accounting are two different types of accounting.
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What is Financial Accounting?
Financial accounting is focused on examining existing and future business operations in order to determine how much they are costing now or will cost in the future. Cost accounting analyzes corporate data and provides the following categories of information using specialized tools and techniques:
a. The price of hiring persons and groups (i.e. payroll and benefits).
b. Project and program expenses, either actual or projected.
c. The amount of money that various segments of the company are expected to spend.
d. Recommendations on how to make the company more cost-effective.
e. Knowing how much it costs to provide products and services from beginning to end.
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What is Cost Accounting?
Cost accounting is focused on examining existing and future business operations in order to determine how much they are costing now or will cost in the future. Cost accounting analyzes corporate data and provides the following categories of information using specialized tools and techniques:
a. The price of hiring persons and groups (i.e. payroll and benefits).
b. Project and program expenses, either actual or projected.
c. The amount of money that various segments of the company are expected to spend.
d. Recommendations on how to make the company more cost-effective.
e. Knowing how much it costs to provide products and services from beginning to end.
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18 Differences Between Cost and Financial Accounting
1. Meaning: Cost accounting is the field of accounting that deals with cost estimation, recording, and control. Financial accounting is the process of identifying monetary transactions, classifying them, summarizing them, analyzing, interpreting, and communicating financial data to users.
2. Recorded Information: Labor costs, material costs, and overhead costs are all recorded in cost accounting records.
All monetary transactions and events are recorded in financial accounting.
3. Recording costs: What kind of costs are used? For the purposes of cost accounting, historical costs or predefined costs are used.
In the books of accounts, only historical expenses are utilized as the basis for documenting transactions.
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4. Users: Cost accounting is the organization’s internal accounting. Manufacturers, managers, and employees are the primary users. Management, owners, creditors, lending agencies, research researchers, government, customers, and the general public are among the internal and external users of financial accounting.
5. Stock value estimation: The stock is valued at its original cost in cost accounting. In financial accounting, the stock is valued at the lower of the original cost or the realizable cost.
6. Mandatory: With the exception of manufacturing companies, cost accounting documents are not required. The keeping of financial records is required.
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7. Accounts publication: The expense accounting records do not have to be made public. At the end of the fiscal year, the financial accounts must be published and filed with the registrar.
8. Product Prices: Cost accounting compiles the cost of raw materials, work-in-process, and finished goods inventory (primarily into the balance sheet). Financial accounting includes the cost of raw materials, work-in-process, and completed products inventory into its financial reporting.
9. Format: Cost accounting entails the creation of reports in any format chosen by management, with the goal of containing only data relevant to a certain decision or scenario. Financial accounting reports must follow strict guidelines in terms of structure and content, as dictated by generally accepted accounting principles or international financial reporting standards.
10. Audience: Cost accounting entails the creation of a wide range of reports that management requires in order to run a company.
Financial accounting entails creating a set of standard reports for an external audience, which could include investors, creditors, credit rating agencies, and regulatory agencies.
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11. Reporting Time: The cost accounting records are submitted to management at regular intervals, such as weekly, biweekly, or monthly. Quarterly, half-yearly, or annual financial statements are issued.
12. Profit examination: The profit is calculated separately for each procedure, unit, task, contract, operation, and so forth. The summary of profit and loss account is used to examine the total profit situation.
13. Purpose: The goal of keeping cost accounting records is to keep track of and control expenses. The goal of financial accounting is to determine the organization’s financial situation.
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14. Forecasting: Cost forecasting may be accomplished using budgeting approaches. Forecasting is not feasible in financial accounting.
15. Estimation: Cost accounting is based on a comparison of the transaction’s actual and projected costs. The recording of financial accounting transactions is always done on the basis of real transactions. There is no room for guesswork.
16. A specific time period: Cost accounting is not done on a period-by-period basis. Rather, it is carried out in accordance with the demands of the management. The accounting period idea is used to keep financial accounting records for a certain year.
17. Tools: Standard costing and variance analysis, marginal costing, budgetary analysis or break-even point are some of the cost accounting methods. Trial balance, journal, ledger, cash books, and various subsidiary books are examples of financial accounting instruments.
18. Efficiency measurement: As cost accounting attempts to determine the pixel perspective of operations, it is possible to uncover a plethora of labor and other input loopholes, as well as provide vital recommendations on how to enhance the efficiency of the inputs.
As a consequence of its ability to provide the full picture of a firm, financial accounting is unable to increase the efficiency of the inputs.
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Conclusion
Cost accounting is both an indirect and direct aspect of financial and management accounting. Both cost accounting and financial accounting may be used in tandem to cut expenses and boost a company’s profitability. Various studies, like as ratios, growth and margin trends, and industry comparisons, can be generated based on information recorded under cost and financial accounting. Information from cost accounting is used to compare the cost to the revenue recorded in financial accounting. Whereas cost accounting is used as a tiny portion of an analysis, financial accounting is needed as a compliance under generally recognized rules.
Cost accounting identifies operational savings or inefficiencies that may then be reflected in the financial statements as a whole. Both branches aid in the making of critical decisions; however, whereas cost accounting results in an internal decision with a direct impact on employees, financial accounting retains the decision-making area outside the business with an indirect impact on employees. It is critical to maintain a firm’s financial and operational records organized and categorised according to general accounting principles. Cost accounting indicates profitability on a unit level, but financial accounting shows profitability overall.
Edeh Samuel Chukwuemeka, ACMC, is a lawyer and a certified mediator/conciliator in Nigeria. He is also a developer with knowledge in various programming languages. Samuel is determined to leverage his skills in technology, SEO, and legal practice to revolutionize the legal profession worldwide by creating web and mobile applications that simplify legal research. Sam is also passionate about educating and providing valuable information to people.