Financial and Cost Accounting Differences
- Period in Focus
- Intended Users of Reporting
- Leniency in Estimations
- Common Reporting Devices
When it comes to cost and financial accounting practices, most business-savvy professionals will be aware of the basic dissimilarities. After all, it is clear that one aims to decipher the costs for business while the other pertains to external financial concerns that the company will showcase to the market. But what exactly are the differences here?
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1. Period in Focus
The first significant difference is related to the time period in focus. When it comes to cost accountancy, the time period includes both the past and future operations. For instance, running profitability or cost-per-volume analyses will take historical prices in the account. If, however, one decides to make prospective financial statements such as projections or forecasts, they will be focused on the future. With financial accountancy, there are no ties to the future as everything is based on prior performance and analysis of pre-existing numbers.
2. Intended Users of Reporting
Next, cost and financial reporting have an obvious difference when it comes to the intended users of the deliverables. In the case of the financial side, the users will be investors looking to gain an understanding of the organization’s thus-far performance. With cost, however, the target audience is the internal management that will use the numbers to figure out more efficient ways to perform and save money. So, one side will do everything to satisfy external parties while the other is dedicated to internal individuals in power to make important decisions.
Obviously, these two types of accounting practices have very different scope. Financial accounting, for instance, is ultimately always trying to paint an accurate picture of the company to the stockholders. That way, they can make informed and sound decisions that are not skewed by inaccuracies or inconsistencies. In cost spheres, on the other hand, the scope revolves around making the job of senior managers and those charged with governance easier. How? By offering them excellent data needed to choose between alternative operating strategies.
4. Leniency in Estimations
A lot of people fail to realize that there is a major difference between the two styles of accounting when it comes to leniency in estimation. In cost or managerial accounting, a lot of the reporting revolves around budgets that are pure estimates. While these reports are built on historical data, they are still essentially a compilation of estimated figures. On the financial side, the only estimates allowed are those for very specific accounts such as the allowance for receivables. Even then, the level of scrutiny that such estimates are exposed to before being accepted as reasonable is incredibly high.
5. Common Reporting Devices
In the end, there is a contrast in the basic reporting devices used by the two alternative accounting styles. For financial reporting, CPAs mostly rely on journal entries, subsidiary ledgers, trial balances, and, as the SEC states, four major financial statements. For managerial reporting, however, CMAs (Certified Management Accountants) use variance reports, industry principles, hands-on inspections, and so on. Thus, those who are working in these roles will have to understand a completely different set of tools utilized to achieve the proper objective.
While the list goes on to include dozens of other subtle similarities and material inconsistencies in these accounting practices, these five offer a great glance into the discussion. After all, both cost accounting and financial accounting fulfill crucial roles within business entities that would not be operational absent proper reporting.