Differences Between Financial Accounting and Cost Accounting
Business owners should be quite familiar with the term financial accounting, but some of them may wonder what cost accounting means. Financial accounting refers to the process of recording and grouping financial transactions to generate financial statements for a company (Also see The Difference between Financial and Managerial Accounting). On the contrary, cost accounting refers to the documentation, evaluation as well as the reporting of cost to the company’s management. Both of them are crucial for the development and growth of a company.
Let us look at the differences between financial accounting and cost accounting listed below:
In financial accounting, the reports need to be highly specific in terms of content and format since they need to comply with the requirements stated in the IFRS or GAAP. Hence, if you are not familiar with accounting, you should hire an in-house accountant or engage an accounting firm in Singapore to ensure that the financial statements of your company are correctly prepared. On the other hand, cost accounting is used in generating reports according to the format set by the management, and the staff will only include information that the management need for a particular situation or decision making.
Content of the reports
Financial reports contain financial information that the company has recorded in its accounting system. Contrarily, the reports for cost accounting may include operational information as well as financial information. When preparing the report, the staff may obtain the company’s operational information from various sources which may not be under the accounting department’s control.
In financial accounting, the company needs to prepare standard reports for those outside users such as creditors, investors, regulatory agencies and so on. Conversely, cost accounting is about the preparation of various reports that the company’s management requires to keep the daily operations smooth.
The accountants who are responsible for financial accounting will only issue reports when a reporting period has come to an end (Also see Accounting – FRS 10: Events After the Reporting Period). On the other hand, there is no specific timing for the cost accounting staff to issue the reports. They may do so any time at any frequency according to the needs of the company’s management.
Methods of recording costs
In financial accounting, the accountant needs to include information about the costs into the company’s financial reports, particularly the balance sheet (Also see How Do Accountants Carry Out the Accounting Process?). On the contrary, cost accounting involves the aggregation of the costs of finished goods, raw materials as well as work-in-process.
Financial accounting would prioritise the reporting of the financial position and outcomes of the company as a whole. Contrarily, cost accounting would result in the reports which are more detailed about the internal information of the company, for example, the clients, different products and their respective production lines and others.