Accounting is a broad course. Several branches of this noble subject exist. Four of which are financial accounting, cost accounting, taxation, and financial management. In this lesson, the focus is on the differences between financial accounting and cost accounting. Let us begin.
Differences between cost accounting and financial accounting
Below are six (6) differences between cost accounting and financial accounting.
Point One: Users
The users of cost accounting are singular in nature. Only the management of an entity requires the information provided from it.
Financial accounting is of a totally different ball game. The information provided here is needed by all users of accounting information, not excluding management.
Point two: Standard Compliance
There is no standard requirement for costing. Every cost accountant can decide it’s own way of presenting cost accounting information. Insofar, management can understand it.
Financial accounting on its own must comply with standards set up by the professional accounting body. The International Financial Reporting Standard (IFRS) must be applied when preparing and presenting accounting information. In the United States, the US-GAAP is applied without retardation.
Point three: Type of cost and revenue
Costing focus more on future cost and revenue. The big question is, at what future cost will yield a particular amount of revenue.
Financial accounting, however, focused on historical cost or past cost. The important question is, what past event drives costs and revenue to the firm.
Point four: Format of presentation and disclosure
The format for presentation and disclosure of cost accounting information is determined by management. The cost accountant presents it’s information to suite what management wants to know about a product or service.
Financial accounting information is presented and disclosed in accordance with International Accounting Standards (IAS) 1. As well as in compliance with Other accounting standards. This is so, in the Nigerian context.
Point five: The use of Estimate
Both financial accounting and cost accounting makes use of estimates. However, the scope of use is totally different. Cost accounting uses estimates in a broader range. In almost all aspects of the profession, estimates are used.
Financial accounting, on its own use, estimates sparingly. You can find the use of estimates when calculating depreciation, or loss allowances, aside from this, it is rare to see financial accountants using estimates.
Point six: Its objectives
The objective of cost accounting is to provide information that is useful for management in planning and making informed economic decisions.
Financial accounting on its part provides information that is useful for all users. However, investors and lenders are the most users of financial information.
In the next lesson, the principles of a good cost accounting system will be explained.