Cost accounts and financial accounts are usually kept independently in organizations. In some respects, these accounts are similar, but they differ in others. The similarities can be summarized as follows: (i) Both cost accounts and financial accounts are maintained using the double entry system of accounting. (ii) Recording of transactions, both under the cost accounting system and financial accounting system, is made on the basis of common vouchers, invoices, and documents. (iii) Both cost accounts and financial accounts disclose the profit or loss of the business. (iv) Both cost accounts and financial accounts involve the process of matching the costs and revenues of the related activity for the current period. (v) Both accounting systems keep records of direct costs and indirect costs. (vi) Both accounting systems enable the business to compare and reconcile trading results. (vii) Both accounting systems assist managers in deciding on business policy and making managerial decisions.
Although both cost accounts and financial accounts are prepared based on common principles and well-known vouchers and documents, they differ from each other on the following points: (i) Financial accounts are very comprehensive in nature and cover all business transactions. By contrast, cost accounts cover only the transactions relating to the manufacturing and sale of products and services. (ii) Financial accounts deal with all items of expenses, losses, income, and gains, but cost accounts only deal with those items of expenses that enter into the cost of production. (iii) Financial accounts do not contain an analysis of expenditure according to elements, functions, behavior, departments, or products. Cost accounts record expenses by elements, functions, variability, departments, and so on, to study them analytically. (iv) Financial accounts do not present accounting information in a well-classified format so as to disclose the cost per unit at all stages. However, cost accounts do this for all expenses to disclose the per-unit cost at all stages of production. (v) Financial accounts disclose the overall profitability of the business, whereas cost accounts deal with product-wise, job-wise, department-wise, and process-wise profitability. (vi) Financial accounts deal with facts or actual figures alone. Dissimilarly, cost accounts deal with facts as well as estimates, as a result of which the data in cost accounts do not always tally with those in financial accounts. (vii) Financial accounts do not disclose information relating to wastage of materials and the loss of man hours and machine hours. Cost accounts, on the other hand, contain full information relating to all types of wastage incurred during production. (viii) The maintenance of financial accounts is compulsory in business. However, cost accounts, despite being important and advantageous, need not be maintained. (ix) Financial accounts cannot be incorporated into cost accounts whereas cost accounts may be incorporated into financial accounts. (x) Financial accounts do not provide any means to measure efficiency and to exercise control over costs. Cost accounts develop standard costs against which actual costs can be compared, and the reasons for variances can be identified to assist corrective action. (xi) Financial accounts fail to guide managers in fixing selling prices and calculating estimates. However, cost accounts provide detailed cost information at different levels of production, which assists in fixing selling prices and calculating the tender price.
Similarities and Differences Between Cost Accounts and Financial Accounts FAQs
Financial accounts are very comprehensive in nature and cover all business transactions. By contrast, cost accounts cover only the transactions relating to the manufacturing and sale of products and services. Financial accounts deal with all items of expenses, losses, income, and gains, but cost accounts only deal with those items of expenses that enter into the cost of production.
Both accounting systems assist managers in deciding on business policy and making managerial decisions. However, financial accounts disclose the overall profitability of the business, whereas cost accounts deal with product-wise, job-wise, department-wise, and process-wise profitability.
Yes, it is compulsory for businesses to maintain financial accounts. However, cost accounts are not compulsory and their maintenance is advantageous to businesses.
Financial accounting provides comprehensive information on a company's revenue, expenses, assets, liabilities, and net worth. It also provides information on the financial position of the company at any point in time.
Cost accounts contain only those items of expenses which enter into the cost of production. Hence, they do not deal with all types of expenses that are incurred by businesses. Moreover, cost accounts do not disclose information relating to losses arising from wastage of materials and loss of man hours and machine hours incurred during the manufacturing process.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.