Written by There are three major branches of accounting; Financial accounting, management accounting and cost accounting.
However, in this post, we will be distinguishing between financial accounting and cost accounting.
Table of Contents
Financial accounting?
Financial accounting is the systematic process of preparing financial statements that will assist in measuring financial performance and financial position.
It deals with the preparation, presentation, and interpretation of financial information for external users, such as investors, creditors, and regulatory authorities.
It involves preparing financial statements ( such as income statements, and balance sheets) in a way that helps users determine the financial performance and position of a business.
Cost accounting
Cost accounting is the branch of accounting that is concerned with determining the costs of producing goods or services and using the information to manage and control production costs.
It refers to the systematic process of identifying, recording, and analyzing the cost of producing goods and services.
Cost accounting involves identifying, measuring, and allocating the costs of a company’s products or services to help internal users make decisions about the cost of production.
Differences Between Cost accounting and Financial accounting
1. One major difference between cost accounting and financial accounting is the use of Generally Accepted Accounting Principles (GAAP).
Financial accounting follows GAAP to ensure consistency in reporting financial statements for external stakeholders such as investors, creditors, and regulators.
Cost accounting, on the other hand, does not follow GAAP since its primary focus is to provide internal decision-makers with relevant cost data for decision-making purposes.
2. Financial accounting is an external reporting system that provides financial information to external stakeholders, like creditors and investors.
In contrast, cost accounting is an internal reporting system that provides cost information to internal stakeholders such as management.
To put it in another way, cost accounting focuses on delivering information to internal decision-makers like management, whereas financial accounting focuses on reporting financial information to external stakeholders, such as shareholders and creditors.
3. Financial accounting deals with historical and past financial data, while cost accounting focuses on current and future cost data.
Financial accounting records transactions as they occur and summarizes them into financial statements at the end of the period.
Cost accounting, on the other hand, is more forward-looking and analyzes data from current and future periods to assist managers with planning and decision-making.
4. Cost accounting works with current and future cost data, whereas financial accounting deals with historical and past financial data.
5. The objective of cost accounting is to reveal information about the cost of production or unit cost of production of an organization
On the other hand, the objective of financial accounting is to reveal the financial performance and position of an organization.
6. Another difference between cost accounting and financial accounting is that cost accounting offers the cost data required to calculate the selling price of production whereas financial accounting does not.
7. Financial accounting is typically done by financial accountants, while cost accounting is done by cost accountants or management accountants.
Financial accountants prepare financial statements for external stakeholders such as investors, creditors, and regulators whereas cost accountants provide cost information to internal stakeholders such as management to assist with decision-making in the organization.
8. Financial accounting reports are typically based on International Financial Reporting Standards (IFRS), while cost accounting reports are not.
IFRS are sets of accounting standards developed by the International Accounting Standards Board (IASB) that provides a common global language for financial reporting.
Since cost accounting is an internal reporting system, it does need to follow IFRS.
9. Cost accounting provides detailed information on specific products, departments, or activities to management for decision-making purposes.
In contrast, financial accounting reports provide a broader overview of the organization’s financial performance and position.
Consequently, cost accounting reports are usually more specialized and concentrate on specific goods or departments, while financial accounting reports are wider and cover the entire organization.
10. Financial reports (such as income statements, and balance sheets) are often prepared periodically, which could be quarterly, semi-annually, or annually.
Cost reports, on the other hand, are created as needed. Cost reports could be prepared for a specific product line or department, or for a particular project or activity.
11. Cost accounting mostly focuses on producing reports about cost data and cost analysis of an organization, whereas financial accounting primarily focuses on producing reports about the profit or loss and financial position of an organization.
12. Financial accounting frequently classifies costs according to the type of transaction.
For example, we could categorize costs based on rent, earnings, salaries, interest, insurance, and rates.
In contrast, cost accounting classifies cost based on functions, activities, products, processes, and internal planning and control and information needs of the organization.
13. Financial accounting has two methods for recording financial transactions, namely; the cash method and the accrual method.
In contrast, cost accounting uses costing methods such as job costing, batch costing, process costing, batch costing, and operating costing.
Comparison Chart
| Basis for Comparison | Financial Accounting | Cost accounting |
|---|---|---|
| Data used | Financial Accounting make use of Historical data | Cost accounting use vurrent and future data |
| Emphasis | It focuses on the financial aspect of the organization | It focuses on the cost and operational aspects of an organization |
| Users | Financial accounting is mostly external users | Cost accounting is mostly internal users |
| Generally Accepted Accounting principles (GAAP) | It makes use of GAAP | It does not make use of GAAP |
| Measurement | Financial accounting only measures financial transactions | Cost accounting measures cost information |
| Legal requirement | It is statutory as it is required by law. | It is voluntarily since it is not required by law. |
| Frequency of reports | Financial accounting reports are measured in quarterly, semi-annually or annually | Cost accounting reports are prepared as demanded by management |
| Purpose | It is mostly used for showing the financial position and financial performance of an organization. | It is used for planning and controlling. |
