Cost Accounting: The Basics

Financial Accounting and Cost Accounting

The major differences between Financial Accounting and Cost Accounting are as follow:

S.No.Financial AccountingCost Accounting
 1Provides general information about the business- profit and loss account, balance sheet of business owners- to business owners and outside partners.Provides information to the management for proper planning, operation, control, and decision making.
 2Classifies, records, and analyses the transactions in a subjective manner -according to the nature of expense.Records expenditure in an objective manner- according to purpose for which costs are incurred.
 3Lays emphasis on recording without attaching importance to control.Provides a detailed system of control for materials, labour, and overhead costs with the help of standard costing and budgetary control.
 4It reports operating results and financial position (usually) at the end of the year.It gives information through cost reports to management as and when desired.
 5Financial accounts are accounts of the whole business and are independent in nature.Cost Accounting is only a part of the financial accounts and discloses profit or loss of each product, job or service.
 6Only transactions which can be measured in monetary terms are recorded.Non-monetary information like number of units/ hours, etc. are used.
 7Deals with actual facts and figures only.Deals partly with facts and figures and partly estimates/ standards.
 8Do not provide information on efficiencies of various workers/ plant and machinery.Provides valuable information on the efficiencies of employees and plant & machinery.
 9These accounts are kept to meet the statutory requirements (of Companies Act)Generally, cost accounts are kept voluntarily to meet the requirements of the management. Cost Accounting records are kept as per the Companies Act in some industries only.
Table 1. Differences between Financial Accounting and Cost Accounting

Some items are included in financial accounts but not in cost accounts:

  1. Appropriation of profits
    • Dividends paid
    • Taxes on income and profits, etc.
  2. Matters of pure finance
    • Purely financial charges (interest on bank loan, mortgages; penalties and fines, etc.)
    • Purely financial incomes (interest received on bank deposits; rent receivable; profits made on sale of investments, etc.)
  3. Abnormal gains and losses
    • Losses or gains on sale of fixed assets.
    • Loss to business property on account of theft, fire, or other natural calamities.

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