Tuesday, February 7, 2012

Difference between financial accounting and cost accounting

Winners of the accountancy awards 2008 at Birm...
Winners of the accountancy awards 2008 at Birmingham City University (Photo credit: Birmingham City University)
Financial Accounting Vs Cost Accounting
1) It involves the preparation of a set of final accounts for each accounting period in accordance with the accounting standards and company legislation. It gives the overall financial picture of a company. 1) It is an internal management tool which provides appropriate timely information of management to help them for taking better decisions by applying the techniques viz; standard costing, budgetary control, marginal costing.
2) It can not provide information for future period 2) It can forecast for future period by the techniques of budgeting.
3) It can not provide information for day to day decision making . 3) It can provide day to day decision by applying the concepts of marginal costing , budgetary control etc.
4) It can not provide information to assess the performance of various persons of the department to see that cost don not exceed the reasonable limit for a given quantum of work. 4) The techniques of budgeting and standard costing enable the management to perform the function.

Besides above, the following distinction between financial and cost accounting has been discussed –
i) Purpose-
To provide investors, creditor or other external parties with useful information about the financial position, financial performance and cash flow prospect of an enterprise.
i) To provide the manager with information useful for planning, evaluation and rewarding performance and sharing with other outside parties and to apportion decision making authority over the firm resources.
ii) Types of report-
Primarily financial statements (profit & loss a/c and balance sheet and cash flow statement and related notes) provides investors, creditors and other users of information to support external decision making process.
ii) Many different types of report depending on the nature of business and the specific information needs of the management. Example; Budget financial projection, bench mark studies, activity based cost report and cost of quality assessment.
iii) Standards for presentation -
It follows generally accepted accounting principles including those formally established in the authoritative accounting literature and standard industry practice.
iii) rules are set within the organization to produce information relevant to the needs of management.
i) Time Periods-
Usually a year, quarter or month. Most report focus on completed periods. Emphasis is pl aced on the current period with prior periods often shown for comparison.
v) Any period- year, quarter , month,week,day even a work shift .Some reports are historical in nature. Other focus on estimates and results expected in the future period.
ii) User of information-
Outsiders as well as managers . These outsiders includes shareholders, creditors, prospective investors, regulatory authorities and the general public.
vi) Management (Different reports to different managers), customers, auditors, suppliers and others involved in an organization value chain.


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