Differences between Cost Accounting and Financial Accounting
Financial accounting is the preparation and communication of financial information to owners to provide information about how management of the enterprise has discharged its stewardship and custodial responsibilities for the use of resources entrusted to it. Cost accounting can be distinguished from financial accounting in various perspectives as considered below:
a) Legal requirements
There is a statutory requirement for public limited companies (Company’s Act Cap. 486 of the laws of Kenya) to provide annual financial accounting reports regardless of whether or not the management of the company regard this information as important. The reports are usually in the form of a balance sheet, an income statement, a cash flow statement and a statement of changes in equity position of the enterprise. However, cost accounting information is entirely optional and information should only be produced if it is considered to be cost beneficial to the organization, that is, the benefits to be derived from such information should exceed the cost of providing the information.
b) The role of the GAAPs
Financial accounting statements must be prepared and published in conformity with the legal requirements and the generally accepted accounting principles (GAAPs) established by the regulatory bodies such as FASB and IASC. Cost accountants are not required to adhere to the GAAPs when providing managerial information for internal purposes. The focus is on servicing management needs and providing information useful to managers relating to their decision making, planning and controlling functions.
c) Time dimension
Financial accounting incorporates historical cost accounting. It reports what has already happened in the past in an organization. Cost accounting is both historical and futuristic. It is concerned with future events and therefore the management requires details of expected future costs and revenues.
d) Report frequency
Financial accounting requires that a detailed set of financial accounts is published annually. Less detailed accounts can be obtained on a semiannual or quarterly basis. On the other hand, cost accounting information reports are prepared on a daily, weekly or other more frequent basis than the financial accounting reports depending on the management needs for such reports in order to trigger decision making processes.
e) Focus of individual parts or segments of the business
Financial accounting reports describe the entire business whereas cost accounting focuses on small parts of the organization such as cost and profitability of products, services, customers and activities. This shifts the focus on analysis of segments of the business in order to allow examination by job, process, product or service.
f) Outward versus inward focus
Cost accounting is inwardly focused because it aims at providing information to internal users, the managers and employees. Financial accounting on the other hand is mostly outward focused as it aims at providing information mostly to outside users including shareholders, the government and competitors.
g) Incorporation of non-monetary measures
In financial accounting the monetary base is predominant. However, non-monetary measures are used in the interpretation of cost accounting statements. For example, the act expressing net profit as a percentage of sales revenue. In cost accounting there is greater use of non-monetary measures. Quantitative information may be useful in areas such as material losses (kilos or as a percentage input), machine efficiency (as a percentage of a predetermined standard).
