How Financial and Cost Accounting Are Different
- Intended Users
- Timing
- Focus
- Objectives
- Regulatory Differences
By now, you most likely had a chance to hear terms like financial accounting and cost accounting. Although most people group these two together, they are actually quite different. In fact, other than the basics of accounting systems that they rely on, they are quite the opposite from one another. Here are some of those differences highlighted.
1. Intended Users
The first difference between financial and cost reporting are the intended users of each. In the case of financial accounting, the goal is to present the company’s financial statements so that the parties who rely on them are not misguided. Well, these parties tend to be the investors who are materially involved with the organizations.
For cost accountants, the main goal is to help the internal managers and decision makers come up with strategies that can help with cost reduction and profit maximization. That means that the intended users of their data will be working inside of the same company.
2. Timing
The next difference is the timing of reports created by financial or cost accountants. The first group has a very clear-cut deadline that falls towards the end of the fiscal year of an entity. This is when the annual report is created and the corresponding temporary accounts have to be closed out to retained earnings. With cost reporting, however, there is no need to focus on a single deadline for any particular year. Instead, these professionals can report whenever they are expected to analyze the business’ performance and provide guidance to those above them.
3. Focus
Obviously, the primary focus of these two accounting disciplines will vary. This is because they serve different users. So, financial accountants will focus on reporting the company’s operating results through:
- the income statement
- statement of cash flows
- statement of retained earnings
They will also make a snapshot of the company’s financial position through a balance sheet. Cost accountants will not have to do any of the aforementioned. Their goal will revolve reports that analyze the entity’s ventures, including:
- efficiency
- variance
- cost-to-benefit
4. Objectives
Another very obvious distinction between the two sub-areas of accounting boils down to their respective objectives. For example, financial reporting is focused on creating error-free financial statements. The statements fairly represent the company’s position and have no material misstatements. Cost reporting, however, has the objective of helping managers make the best decisions when it comes to the entity’s long-term profitability. So, it is fair to say that while the purpose of one style of reporting is to satisfy the external parties (financial), the other side prioritizes the internal events and betterment (cost).
5. Regulatory Differences
Finally, a mention-worthy difference between cost and financial accountancy revolves around the regulatory aspects. For example, all companies are required to have a financial representation of their performance. Cost reporting, on the other hand, is voluntary and depends on the business in question. After all, many small ventures do not hire cost accountants as they cannot afford or do not need their expertise.
Additionally, according to Forbes, financial CPAs report in accordance with the Generally Accepted Accounting Principles in the United States. Although cost accounting’s objectives still have to adhere to certain rules, they are much more loosely defined and enforced.
The list of differences continues as there are many more that have not been mentioned. Regardless, getting a firm grasp of these five will help you better decipher what exactly financial accounting and cost accounting are made for.
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