Both financial accounting and cost accounting are concerned with systematic recording and presentation of financial data. Financial accounting reveals profits and losses of the business as a whole during a particular period, while cost accounting shows, by analysis and localization, the unit costs and profits and losses of different product lines. The main difference between financial accounting and cost accounting are summarized below:
- Financial accounting aims at safeguarding the interests of the business and its proprietors and others connected with it. This is done by providing suitable information to various parties, such as shareholders or partners, present or prospective creditors etc. Cost accounting on the other hand, renders information for the guidance of the management for proper planning, operation, control and decision making.
- Financial accounts are kept in such a way as to meet the requirements of the Companies Act, Income-tax Act and other statues. On the other hand cost accounts are generally kept voluntarily to meet the requirements of management. But now the Companies Act has made it obligatory to keep cost records in some manufacturing industries.
- Financial accounting emphasizes the measurement of profitability, while cost accounting aims at ascertainment of costs and accumulates data for this very purpose.
- Financial accounts disclose the net profit and loss of the business as a whole, whereas cost accounts disclose profit or loss of each product, job or service. This enables the management to eliminate less profitable product lines and maximize the profits by concentrating on more profitable ones.
- Financial accounting provides operating results and financial position usually gives information through cost reports to the management as and when desired.
- Financial accounts deal mainly with actual facts and figures, but cost accounts deal partly with facts and figures and partly with estimates.
- In case of financial accounts stress is on the ascertainment and exhibition of profits earned or losses incurred in the business. In cost accounts the emphasis is more on aspects of planning and control.
- Financial accounting is concerned with historical records, while cost accounting is concerned with historical cost but also with pre-determined cost
- Financial accounts are concerned with external transactions i.e. transactions between the business concern on one side and third parties on the other. These transactions form the basis for payment or receipt of cash. While cost accounts are concerned with internal transactions which do not form the basis of payment or receipt of cash.
- The costs are reported in aggregate in financial accounts but costs are broken into unit basis in cost accounts.
- Financial accounts do not provide information on the relative efficiencies of various workers, plants and machinery while cost accounts provide valuable information on the relative efficiencies of various plants and machinery.
- Financial reports (profit and loss account and balance sheet) are prepared periodically – quarterly,
- Half yearly or annual basis. But cost reporting is a continuous process and may be daily, weekly, monthly etc.
