FINANCIAL ACCOUNTING AND COST ACCOUNTING

In financial accounts, the monetary transactions of the business are recorded, classified
and analysed in an orderly manner, so as to prepare periodic results in the form of profit
and loss account or income statement and balance sheet, indicating the financial position
of the business at the end of that period. The financial accounting is guided by various
rules and regulations,some of which are mandatory. The system cannot normally deviate
from the accepted accounting practices.
The object of financial accounting is to provide information mainly to outsiders such as
shareholders, investors, government authorities, financial institutions, etc. The analysis
and interpretation of financial data contained in the income statement and the balance
sheet enable persons interested in the business to make meaningful judgement about the
profitability, liquidity and solvency of the enterprise. Besides, income-tax, central excise,
banks and insurance companies rely on the data contained in the financial statements.Cost
accounting, on the other hand, deals with the ascertainment of the cost of product or
service. It is a tool of management that provides detailed records and reports on the costs
and expenses associated with the operations, mainly for internal control and decision
making. Cost accounting basically relates
to the utilisation of resources, such as material, labour, machines, etc. and provides
information like products cost, process cost, service or utility cost, inventory value, etc.so
as to enable management taking important decisions like fixing price, choosing products,
preparing quotations, releasing or withholding inventory, etc.
The objective of cost accounting is to provide information to internal managers for better
planning and control of operations and taking timely decisions. In the early stages, cost
accounting was considered as an extension of financial accounting. Cost records were
maintained separately. Cost information and data were collected from financial books,
since all monetary transactions are entered in the financial accounts only. After
developing product cost or service cost and valuation of inventory, the costing profit and
loss account is prepared. The profit and loss figures so derived by the two sets of books
i.e. financial accounts and cost accounts, would have to be reconciled, since some of the
income and expenditure recorded in financial books do not enter into product cost, while
some of the expenses are included in cost
accounts on notional basis i.e. without having incurred actual expense. However, a system
of integrated account has been developed subsequently, wherein cost and financial
accounts are integrated avoiding maintaining two sets of books. The basic difference
between financial and cost accounting may be summarized as follows:
 Financial Accounting
1. Accounting of monetary transactions of the business.
2. Consists of recording, classification and analysis of financial transactions..
3. Leads to preparation of income statement and balance sheet at periodic interval.
4. Aims at external reporting to the shareholders, investors, Government special
authorities and other outside parties.
5. The accounting systems are mandatory and structured as per legal and other
requirements.
6. Subject to verification by external auditor.

Cost Accounting:
1. Accounting of product cost or service cost.

2. Consists of developing product or service cost with elementwise cost breakdown.

3. Leads to development of product or service cost, indicating profitability of each product or

service as and when required.
4. Aims at internal reporting both routine as well as reporting to managers for internal control
and decision making.

5. The system is much less structured and is not mandatory, except those covered by cost
audit Required u/s 233-B of the Companies Act, 1956.

6. Cost audit is not compulsory but . selective to some specific industries/products.

MANAGEMENT ACCOUNTING
Management accounting is not a specific system of accounts, but could be any form of
accounting which enables a business to be conducted more effectively and efficiently.
Management accounting in the words of Robert S. Kaplan, is a system that collects,
classifies, summaries, analyses and reports information that will assist managers in
their decision making and control activities. Unlike financial accounting, where the
primary emphasis is on reporting outsiders, management accounting focuses on
 internal planning and control activities. Therefore management accounting requires the
collection, analysis and interpretation not only financial or cost data, but also other data
such as sales, price, product demands and measures of physical quantities and
capacities. In the process, the system utilises all techniques of financial and cost
accounting including marginal or direct costing, standard costing, budgetary control,
etc. Management accounting therefore appears as the extension of the horizon of cost
accounting towards newer areas of management. Management accounting is largely
concerned with providing economic information to managers for achieving
organisational goals. The information flow system is, therefore, extremely important
while designing the system. Managers at each level must have a clear understanding
about the objectives and goals assigned and receiving flow of relevant information. It
is important to note that overabundance of irrelevant information is as bad as lack of
relevant information.

What Is the Role of Management

Accounting?
By Osmond Vitez, eHow Contributor
updated: October 13, 2009

Management accounting is an internal business function that includes the

recording and reporting of a company's financial transactions. The accounting
department also supports management in different business operations,
providing analysis and support for different decisions and investments.

Financial Reporting
1. Management accountants work at the beginning of the accounting cycle,
recording the financial transactions of a company as they occur. This business
role ensures that companies have a good understanding of their financial
health, giving executive management the ability to make informed decisions.
Financial reporting also allows external stakeholders to review the company
based on financial information and deciding whether to invest money into the
company. Financial reporting leads to other business roles for management
accountants, including budgeting, forecasting and internal controls.
Budgets
2. Companies use budgets to ensure that they do not spend more money
on business operations than is necessary to generate profits. Management
accountants will prepare budgets for each department and then add them
 together to create one companywide budget. The accounting department is
responsible for managing the budget and tracking expenses that are higher
than the budgeted expense. Most budgets are created on an annual basis;
capital improvements are also included in the budgeting process so
businesses can plan on improving current facilities.
Forecasting
3. Forecasting is the crucial part of determining the amount of sales a
business can generate from current operations and production facilities.
Management accountants will conduct a market analysis and determine where
the industry is in the business cycle. If the current industry is in a declining
stage, then management accountants will help produce information for
executive managers to use when finding new consumer markets. Forecasting
also includes reviewing current competitors and finding ways to take market
share from those companies through improved products and services.
Internal Controls
4. Most private accounting departments create and implement the internal
controls needed to protect a company's financial information. Internal controls
protect cash, fixed assets and the integrity of financial statements. While most
companies have existing internal controls, publicly held companies are
required to meet the standards of the Sarbanes-Oxley Act of 2002 (SOX). SOX
requires companies to prepare financial statements under tight preparation and
review functions; after the statements are prepared, executive management
must sign off on the financials to declare the statements are a true and
accurate representation of the company.
Management Support
5. Accountants support management decisions by evaluating the
company's investment decisions. Businesses choose investments based on
the future profitability of cash flows; these calculations are prepared by the
accounting department and submitted to executive management. Most
investment decisions require large amounts of financial information so the best
decisions can be made. Most businesses accept investments with low risk and
moderate reward, although a high-risk/high-reward investment may be
considered.

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The Importance of Cost Accounting 

Managers rely on cost accounting to provide an idea of the actual cost of

processes, departments, operations or product which is the foundation of their
budget, allowing them to analyze fluctuation and the way funds are used socially
for profit. Cost accounting is used in management accounting, where managers
justify the ability to cut costs for a company in order to increase that company's
profit. As a tool for internal use, versus a tool for external users like financial
accounting, cost accounting does not need to follow the GAAP standards
(Generally Accepted Accounting Principles) because its use is more pragmatic. 

Cost accounting creates a financial value out of the production of a product,

measuring currency that is nominal into units that are measured by convention.
By taking recorded historic costs a bit further, cost accounting allocates a
company's fixed costs over a specific time period to what items are actually
produced during that period of time, creating a totalcost of product production.
Products that were not sold during that period of time produced a “full cost” of
those products, recording them in a complex inventory system that uses
accounting methods of its own that are in compliance with the GAAP standards.
Managers are then able to focus on each period's results as it relates to the
“standard cost” of any product. 

Any distortions in cost that were caused by calculating what the overhead of a
product is versus what a unit cost is for companies that specialize in only one
specific product are very minor in industries that mass produce that product
with a low fixed cost. Understanding why costs vary compared to what was
actually planned helps a manager to save a company money by taking actions
that are appropriate to correct that variation in the future. Variance analysis is a
very important part of cost accounting because it breaks down each variances
into many different components of standard cost and actual cost. Some of these
components are material cost variation, volume variation and labor cost
variation. 

Cost accounting is a very important part of the management accounting

process. In order for managers to determine the best methods to increase a
company's profitability, as well as saving a company money in the future, cost
accounting is a necessary system in the management of a company's budget,
providing important data to analyze fluctuation in company production costs.

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