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Differences Between Cost Accounting and Financial Accounting

Updated on January 3, 2016
Cost and financial accounting are both essential to running a successful business
Cost and financial accounting are both essential to running a successful business | Source

Introduction

There are several different types of accounting, but if you're in business, the two that you are most likely to come across are 'Financial Accounting' and "Cost Accounting'. Both of these disciplines are essential, but they have very different approaches and benefits for businesses. In this article we'll explore what each of the does and explain some of the main ways that they differ.

A good combination of cost accounting and financial accounting can increase the health of a business, save money and help to manage risk more effectively. We'll explore:

  • An overview of financial accounting
  • An overview of cost accounting
  • Differences between financial and cost accounting

Never underestimate the power of a calculator nd pen
Never underestimate the power of a calculator nd pen | Source

Financial accounting - Overview

Financial accounting is the most typical type of accounting that individuals and businesses come across. When financial accountants work with individuals they help them to prepare and file returns, reduce their tax burdens and teach good financial management. When financial accountants work with businesses, they use standard rules and processes to perform various functions including:

  • Creating end of year financial reports.
  • Producing balance sheets and profit / loss reports.
  • Providing summaries and details of how the business is performing financially.
  • Reporting the financials of the business to executives.
  • Reporting the financials of the business to external stakeholders such as stock owners, the IRS and other government bodies.

There are some very good reasons for solid financial accounting
There are some very good reasons for solid financial accounting | Source

Cost accounting - Overview

Cost accounting is based on analyzing current and future business processes to work out how much those processes are currently costing or will cost in future. Cost accounting uses specific tools and techniques to analyze business data and provide the following types of information:

  • The cost of employing individuals and teams (i.e. payroll and benefits).
  • The current or potential costs of projects and programmes.
  • The amount of money that individual parts of the business are projected to use.
  • Recommendations for making the business more cost effective.
  • Understanding the end-to-end cost of providing products and services.

Cost accounting can tell you where the money is going in your business
Cost accounting can tell you where the money is going in your business | Source

Differences between financial & cost accounting

Some of the other differences between financial accounting and cost accounting include:

  • Financial accountants generally report their findings to both internal parties (managers and executives) and external parties (stockholders, IRS) whilst cost accountants only report their findings internally.
  • Financial accounting is primarily a reporting and controlling business function whilst cost accounting is a function aimed at making the business more efficient through driving change.
  • Cost accounting is normally used to help the business make tactical decisions to improve business processes whilst financial accounting helps the business to understand its overall financial performance.
  • Financial accounting provides standard reports, normally in a predefined format that can be used by many different areas to understand the financial responsibilities of the business. Reports from cost accounting are normally designed to provide information in very specific areas and to allow managers and executives to make decisions as a result.
  • Cost accountants need to understand the details of business processes including inputs, outputs and resources. Financial accountants need to understand cash flow, tax liabilities, turnover, profit margins and the like.

Understanding the differences between different types of accounting is essential
Understanding the differences between different types of accounting is essential | Source

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In closing

Both cost accountants and financial accountants perform vital functions for a business. Both types of accounting can help to manage risk and increase understanding of the finances of a business and how to improve them. Ultimately, both types of accountant are essential for the ongoing health of an organization.

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