When it comes to running a business, two of the most common types of accounting you must deal with are cost accounting and financial accounting.
In this article, we’ll explore both types of accounting. If you are a small business owner in Southeast Wisconsin, contact Nolan Accounting to handle your finances. They specialize in accounting, bookkeeping, payroll, and tax prep services.
Defining Cost Accounting & Financial Accounting
The differences between cost accounting and financial accounting are closely related to their names:
Cost Accounting
This type of accounting is responsible for recording, summarizing, and reporting cost information on a product/process. The primary function is to determine costs and keep them under control. This information provides information necessary to determine the selling price of products/services, keep costs under control, projection of plans/actions, efficiently manage labor costs, etc.
It increases the effectiveness of financial accounting by offering information that leads to making good decisions within the organization. It follows the costs incurred at each production level. There are 2 types:
- Integrated accounting system: both cost and financial accounting data kept in one set of books
- Non-integrated accounting system: cost and financial accounting data are kept in separate books
Financial Accounting
On the other hand, financial accounting is the area of accounting in which a complete record of monetary transactions are kept and reported on at the end of the financial period. This information is used by a variety of parties, including internal management and outside parties.
The primary objective of financial accounting is the preparation of the financial statements, such as Income Statement, Cash Flow Statement, and Balance Sheet. This traces out the overall financial status of your business as well as the performance and profitability.
Key Differences
There are several key differences between these two forms of accounting that you need to keep in mind:
Cost accounting…
- Maintains cost records of your business, while financial accounting maintains all financial data of your business
- Records historical and pre-determined costs, while financial accounting only records historical costs
- Is only used by internal management of the business, while financial accounting is used by internal and external parties
- Values stock at cost, while financial accounting values it either at cost or net value- depending on which is lower
- Is used by businesses engaging in manufacturing/production activities, while financial accounting is used by all businesses to comply with the Income Tax Act
- Is reported frequently, while financial accounting is reported at the close of the fiscal year
- Determines profit for a particular product/process, while financial accounting determines profit for the whole business
- Is used to control costs, while the purpose of financial accounting is to keep complete financial records of the business
Conclusion
Understanding the differences between these two types of accounting helps with managing your small business’s finances. Let Nolan Accounting handle your small business finances in Southeast Wisconsin. They specialize in handling accounting, bookkeeping, payroll, and tax prep services.