the cost accounting vs financial accounting

the cost accounting vs financial accounting

Comparative Analysis of Cost Accounting and Financial Accounting

1. Introduction to Cost Accounting and Financial Accounting

Financial Accounting deals with the financial aspects of business transactions; it is also called accounts or financial accounting. According to the American Institute of Certified Public Accountants (1933): “Accountancy is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events, which are in part at least of financial character, and interpreting the results thereof.” As such, the figures induced, at the end of a specified period, are series of transactions expressed in monetary terms. The transactions relate to the receipt and payment of cash, the purchase, sale and transfer of property of every kind, the promises to pay, the creation and the discharge of obligations and other similar acts and events. Only those transactions which are expressed in monetary terms are recorded in financial accounting. Although it may be felt that all transactions should be expressed in terms of money before they are summarized, it does serve some very important functions too. Types of transactions that are considered in the financial accounting of an enterprise are limited to those outside its detailed operating cycle.

Every business enterprise, whether manufacturing or trading, renders at the end of a specified period, a summary statement of the transactions that have taken place during the period, showing the actions and the cash transactions in respect of such financial matters. These statements are designed to serve the needs of the person interested in the resources of an industrial or business concern and their application during a specific period. For operational reasons both, cost accounting and financial accounting are necessary, but are not designed to fulfill the same objectives.

2. Key Differences between Cost Accounting and Financial Accounting

4. Purposes: Cost accounting focuses its attention on providing information required by management to exercise control and make productive decisions. It helps to regulate the day-to-day business of management. Financial accounting, on the other hand, is enlisted to safeguard the interest of shareholders and fulfill legal requirements. Its information output is summarized periodically for those individuals who make both internal decisions (i.e., management) as well as external decisions that deal with the readiness of the business as an entity.

3. Perspective: Cost accounting is forward-looking. It plans and originates information supplied to management to act as a guide to the future. The emphasis of financial accounting is on past performance. Its aim is to inform investors and tax authorities about how well management did its job in the past.

2. Development: Cost accounting is a recent development and can be seen as an extension of the principles of management. Cost accounting assumes new meanings depending on the application and specific needs of management. Financial accounting, on the other hand, has no such flexibility and is more rigidly structured to meet legal and tax requirements.

1. Subjective/Objective: Cost accounting is subjective because it depends upon the exactness of subjective decisions made by accountants and management. Financial accounting is, on the other hand, objective because it is based on historical facts relating to transactions that have already taken place.

The following are the key differences between cost accounting and financial accounting.

3. Importance and Applications of Cost Accounting and Financial Accounting

Managements always strive to achieve high profits or to further the objective for which the firm is established. Of course, it is established with the primary purpose of earning profits. Profits are the yardstick of efficiency in the field of business. This needs and continuous advancement or profit or its long file; usefulness depend on the fact that the business is efficient in its operations. But, businessmen are confronted with the primary question of how efficient the business and its various parts – workshops, departments, sections, machines etc., are in everyday operations. One way of determining the efficiency of a business is by using accounting. If the businessmen are to know one segment of the question, the tool of accounting must be refined and developed. It should be more comprehensive than the traditional financial accounting. Cost accounting is a two-faceted discipline that must serve both management and other reporting requirements of cost. Its major purposes are the development of product costs or the fulfillment of strategic planning, control of operations, and responsibility accounting. The primary purposes of cost accounting are, however, to compile, analyze, interpret and report cost data for use by management. The cost accounting should not be discussed as a separate field of accounting but integrated with financial accounting and management accounting for the advancement of a business firm. In the dissemination of a good many policies, it is important to be more critical. The major measurement problem is the inventory deviations between the assignment of values to items for financial reporting purposes and the “actual operational” values of these items at the time the assignment is made. Accounting for these value deviations at the time the assignment is made. Accounting for these value deviations and the related repercussions can play a very important part in hospital finance and budgeting.

Importance and applications of cost accounting

4. Challenges and Limitations in Cost Accounting and Financial Accounting

Both cost accounting and financial accounting have several serious limitations. The unethical behavior of many big companies also illustrates that the actual model of traditional accounting urgently needs to be corrected and improved. The suggested assumptions and key items of our generalized theory of accounting describe the necessary changes that have to be introduced. In fact, we suggest that the cost accounting assumptions and key items be improved to give the cost accounting (and a company) objective buildings and even more useful intuitions. The same concept applies to financial accounting, the other branch of traditional accounting.

This paper discusses the limits reached by this model and offers a generalized approach to cost accounting. The main limits of cost accounting and financial accounting, also called traditional accounting, are explained. The necessary methodological improvements for these two branches of accounting are studied and discussed. In fact, we show how these branches are linked and derive from integrated accounting, optimization accounting, meaningful accounting, transversal accounting, complex accounting, generalized theory of accounting, global accounting, and pioneering tasks of a general theory of accounting.

Cost accounting is a critical business function used to examine and analyze the cost of products in a company. When a company manufactures products, a cost accounting system often has to be created, which is complex and time-consuming. The main conceptual rule of cost accounting says that one has to first gather all the costs of a company, calculate a full cost, and then split these costs between the different products or services.

5. Emerging Trends and Future Directions in Cost Accounting and Financial Accounting

– Real options: Instead of treating capital investment decisions as if they were binary, there is a need to incorporate the underlying flexibility into financial statements. This could help in achieving valuable new information, eliminate biases, and improve policy conclusions about the key accounting parameters.

– Things-based cost accounting: There is a shift to analyzing the cost structures of complex things, which is aimed at developing rational expectations about future costs of producing such things without any detailed historical information.

– Enterprise relationship statement of cash flow (ERSOC): This could analyze the flow of cash specifically as it relates to a manufacturing facility. It can be particularly helpful to plant finance managers.

Some of the emerging trends and future directions in the area of cost accounting and financial accounting are the following: