Many people just getting started on a degree in accounting or finance wonder, “What is the difference between cost accounting and financial accounting?” Knowing the differences between these two methods makes it easier to know when to choose which method. These are a few of the differences between the methods of cost accounting and financial accounting.
Related Resource: 20 Most Affordable Online Bachelor’s in Accounting
Focus of the Financial Method
The focus of the financial method of accounting is on recording, summarizing, and reporting all of the transactions that a business has in a specific period of time. The products of this method of accounting include a balance sheet, financial statement, and income statement for the specified time period. Accountants working for public companies in the United States are obligated to use the generally accepted accounting principles for the financial method of accounting. The generally accepted accounting principles ensures that all information is reported with consistent rules.
Focus of the Cost Method
The cost method of accounting focuses on the costs incurred while doing business. It leaves out the income part of the equation. Some of the costs in the cost method of accounting include raw materials, supplies, electricity, rent, water, employee salaries, and labor. These costs are divided by the number of products in order to get a cost per unit measurement. The cost per unit measurement might be used for negotiations, pricing, and competitor research.
Scope of Work
There are also differences in the scope of work between the cost and financial methods of accounting. In cost accounting, the scope is around making sound decisions and managing costs so that they do not get out of hand for the manufacturer or the client or customers. The costs are more of an internal score than one that would be shared or reported outside of the business. There is no particular time frame for accounting with the cost method. The scope of financial accounting is large. This is because the method requires that the books be in a state that they can be shared with auditors, the Internal Revenue Service, state taxation authorities, members of the small business administration, or other organizations and investors. An accurate picture of the company’s income and expenses must be available for legal reasons, too. The financial method of accounting typically follows the firm’s fiscal year or the tax year.
Use of Estimations
The cost method of accounting allows for the use of estimation. For example, most businesses pay the electricity bill as a whole. There is no easy way to figure out the cost of electricity per unit of item produced. Accountants would estimate the cost of electricity when creating a cost analysis. With the financial method of accounting, there is no room for estimation. Only the actual transactions are recorded in the company’s ledgers, explains the Wall Street Mojo website.
Being familiar with these key differences in accounting methods helps an accountant or other type of financial professional develop a solid footing for their future. Having an in-depth level of understanding of these accounting methods also ensures that an accountant can provide appropriate services and best practices to their clients. Spending some time exploring the answer to “What is the difference between cost accounting and financial accounting?” helps accountants expand their knowledge.
