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Financial and cost accounting are a part of the company’s operations. Both help the company control its finances and formulate strategic organization policies. An overall picture of profit and loss is provided by financial accounting, while cost accounting provides a detailed analysis of a product’s cost.
Financial accounting keeps track of a company’s financial transactions for a given period of time which is usually for a year. Financial transactions are recorded using a standardized format and following certain guidelines and is presented in the form of income statement or balance sheet.
Cost accounting is a system of recording all the costs incurred in a business. It includes the cost of used to calculate each overhead product-wise, such as materials, labor, direct and indirect expenses, etc.
Financial accounting is done for a set of audiences who need to analyse the profitability of the company and make business decisions. The various stakeholders who are interested in financial accounting include company’s management, investors, creditors, credit rating agencies, and other regulatory agencies.
Cost accounting is required by stakeholders within the company. This includes board of directors, business owners, departmental heads, etc. Cost accounting helps the management make better business decisions.
Financial accounting uses the information of cost accounting for multiple products and the figures are represented in the balance sheet.
Cost accounting includes the cost of raw materials, work in progress, and finished goods to determine the cost of a product. The information is provided in a detailed manner.
Valuation of Inventory
Financial accounting values inventory at cost or net realizable value (market price) whichever is less. Net realizable value is the value of the asset which is realized only when the asset is sold.
In cost accounting, only the cost price of the inventory is considered.
The transactions are recorded in the books of account as and when they occur. However, the final report is often presented at the end of the financial year.
Cost accounting is reported as and when the management requires it for making decisions such as increasing the production or change in the price of labor, etc.
Initially, the transaction are entered into journal entries and then ledger accounts are made. Once the ledger accounts are prepared, they are converted into trial balance and finally the financial statements are prepared.
For cost accounting, you need to first determine the cost of sales. This includes expenses such as prime cost, administrative costs, financial costs, selling and distribution, etc. Once the cost of sales are determined, you need to add margin/profit in order to get the selling price for a product.
Apart from the above mentioned points, there are other differences such as fixation of selling price which is not an objective of financial accounting but cost accounting helps in determining selling price, possibility of forecasting, etc. If you need more information or any help relating to difference between financial accounting and cost accounting, then do not hesitate in consulting a professional accountant.