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Financial Accounting Vs Cost Accounting – Introduction to Cost and Management Accounting | Management Notes

Financial Accounting Vs Cost Accounting

Both financial accounting and cost accounting deal with systematically recording and presenting financial information. While financial accounting reveals the profits and losses of a business as a whole during a given period, cost accounting displays, by analysis and localisation, the unit costs and profits and losses of different product lines. Here are the main differences between financial accounting and cost accounting:

(1) Financial accounting is designed to safeguard the interests of businesses, their owners, and others associated with them. Information is provided to various parties, such as shareholders or partners, present or prospective creditors, etc. Cost accounting, on the other hand, provides management with useful information for planning, operating, controlling, and making decisions.

(2) Financial accounts are kept as required by the Companies Act, Income-tax Act, and other laws. However, cost accounts are generally kept voluntarily to meet the requirements of management. Some manufacturing industries are now required to keep cost records under the Companies Act.

(3) The primary function of financial accounting is to determine profitability, whereas the primary function of cost accounting is to determine costs and assemble data for that purpose.

(4) Financial accounts present the net profits and losses of the business as a whole, while cost accounts present profit or loss for every product, job, or service offered. It allows management to focus on more profitable product lines and eliminate less profitable ones.

5) Financial accounting provides operating results and financial position usually provides up-to-date information to the management through cost reports when requested.

(6) Financial accounts are primarily based on facts and figures, whereas cost accounts consist partly of facts and figures and partly of estimates.

(7) In the case of financial accounts, emphasis lies on establishing and exhibiting the business’ profits and losses. Cost accounting focuses more on aspects of planning and controlling. 
(8) The focus of financial accounting is on historical records, while the focus of cost accounting is not only on historical costs but also on pre-determined costs 
(9) The financial accounts represent external transactions – that is, those conducted between the business concern and third parties. Payments and receipts are based on these transactions. The cost accounts are concerned with internal transactions which don’t result in cash payments or receipts. 
(10) In financial accounts, costs are reported in aggregate, but in cost accounts, the costs are broken down into individual units.
(11) Financial accounts cannot reveal the relative efficiencies of workers, plants and machinery, whereas cost accounts can reveal the relative efficiencies of various plants and machinery. 
(12) Financial reports (profit and loss account and balance sheet) are prepared periodically – quarterly, half-yearly, or annually. Cost reporting is a continuous process and may be carried out daily, weekly, monthly, etc.  

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