Cost Accounting vs Financial Accounting

Financial and cost accounting are both sub areas of accounting with the main aim of offering information via recording the business transactions methodically and scientifically. A crucial purpose that it serves for the management incorporates the formulation of several policies and the essential control required to protect from outsiders. The imperativeness of accounting within an organization is well known as it assists the management to make core decisions; which ultimately generates profit. Owing to this significant role of the subject area, the distinction between cost and financial accounting is necessary.

The difference between both accounting can be based on several aspects incorporating the ones mentioned:

Function- Financial accounting sustains records for keeping accounts associated with all monetary transaction. Given this a financial statement intends to exhibit an accurate financial position of the corporation. On the contrary, cost accounting calculates cost of every unit of merchandise on the ground of which we can take precise decisions. This captures and proficiently manages a corporation’s cost of production by evaluating an assortment of alternative action.

Individuals who benefit– The main difference between financial and cost accounting is one of audience.  Information that is derived from calculations utilizing methods of cost accounting is beneficial for the internal management. This comprises of individuals such as managers, directors, supervisors and employees working in the company; facilitating them to make informed choices. On the other hand, users of data established from financial accounting are internal and external parties such as the customers, creditors and shareholders. 

Time Period– In financial accounting, the company is liable to report the financial status at the end of each year whereas reporting in cost accounting is made as per the necessity of management or as-and-when-required basis. This is because stakeholders tend to base their decisions after looking at the financial accounting reports but the cost accounting reports are  prepared if the management needs to take a new decision.

Valuation of inventory– When it comes to financial accounting, the stock is valued at a charge that is lower between the two; net realizable value or the cost. Whilst in cost accounting the stock within an organization is valued at the cost of the product.

Obligatory for– Cost Accounting reports are only compulsory for the organization that is engrossed in manufacturing and production activities. Conversely, Financial Accounting is obligatory for all the companies. Moreover, observance of the provisions of Companies Act and Income Tax Act is also a must.

In short, the two sorts of accounting systematically keep the record of business transactions, in order to determine the financial position and prosperity of the business while utilizing the information for imperative decisions for people within the organizations and those in the external environment.

It is essential that an organization take these cost side by side the information generated by the Cost Accounting is insightful for the decision making and controlling costs. However it tends to be deficient in comparability. Lastly, the data received from financial accounting is able to make comparisons; nevertheless forecasting cannot be done utilizing this information.

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