FINANCIAL ACCOUNTING AND COST ACCOUNTNG

FINANCIAL ACCOUNTING & COST ACCOUNTING

>Concept

>Objectives

>Difference

FINANCIAL ACCOUNTING

Meaning :

Financial accounting field of accounting concerned with the summary, analysis and reporting financial transactions pertaining to a business.

Financial accounting involves preparation financial statements available for public consumption.

Financial accounting may be defined art of recording, classifying and consolidating business transactions financial in nature for audit and tax purposes.

OBJECTIVES :

To provide information about business activities owner, stake holders or investors and creditors facilitating them take decision on investment and lending.

To effectively manage the material resources available.

To facilitate social functions and control.

To help ascertaining net profit earned or loss suffered on account of carrying the business. This is done by keeping a proper record of revenues and expense of particular period.

To serves as barometer for ascertaining the financial health of the business. This objective is served by Balance Sheet or Position Statement.

Going Concern Concept :- People may come and go but the business remains forever. Until and unless the business dies by itself. Money Measurement Concept :- Business transactions can only be recorded in terms of their monetary value. Depreciation, rent etc. can only be added up if expressed in terms of money.

Cost Concept :- The transactions are recorded keeping in mind actual cost involved. This concept does not consider appreciation.

Realisation Concept :- Unless money has been realised, no transaction can said to have been take place.

CONCEPTS :

Accounting Period Concept :- In order to ascertain state of business affairs at regular intervals, usually a period of 365 days is considered as accounting period.

Dual Aspect Concept :- Each transaction has two aspects :

When a business purchases an asset, If asset is acquired through it has to pay money. credit, there will be an increase in asset and simultaneously in liability also.

Thus, Assets = Liabilities + Capital or Capital = Assets - Liabilities

FINANCIAL ACCOUNTINGIN NUTSHELL :

Main purpose is to prepare profit & loss account and balance sheet.

Accounts are prepared according to legal requirements of Companies Act.

Reveals profit and loss of the business as a whole for a particular period .

Financial reports are prepared periodically , usually on as annual basis.

Provides for recording of financial transactions.

Records external transactions.

Deals with monetary transactions.

COST ACCOUNTING

Meaning :

Cost means price paid for something It is formal system of accounting for costs in the books of accounts by means of which costs of products and services are ascertained and controlled.

Cost estimation is a process of predetermining costs of goods and services.

Cost accounting provides information for management and financial accounting.

Cost management describes approaches and activities of managers in short-run and long-run planning and control decisions.

It measures reports from financial and non-financial data.

OBJECTIVES :

To ascertain cost per unit of products manufactured by a business concern.

To provide correct analysis of cost both by operations & different element of cost.

To supply useful data to management for taking financial decisions like introduction of new product, replacement of labour by machine.

To present and interpret data for management planning, control and evaluation of performance.

To organise cost reduction programmes with the help of different departments.

Ascertainment and analysis of cost and income by product, function and responsibility.

To help in preparation and implementation of budgetary control.

COST SHEET

It is a statement designed to show output of a particular accounting period along with breakup of cost.

It is a memorandum statement or written statement.

It does not form part of double entry cost accounting records.

It discloses total cost and cost per unit.

It helps – To fix selling price. To submit quotation price. To control cost.

COST SHEET

Particulars Total cost Cost per unit Direct materials Direct labour Prime Cost Add: Works overheads Works cost Add: Administration overheads Cost of production

Add: Selling & Distribution overheads Cost of Sales

ELEMENTS OF COST

Cost of production consists of various expenses incurred on production of goods or services. These are the elements of cost divided into three groups : Material, Labour and Expenses.

Elements of cost

Material Labour Expenses

Material

The substance from which product is made is known as material. It may be in a raw or manufactured state. Material is classified into two categories:

> Direct Material: It is that material which can be easily identified & related with specific product, job, and process. Cloth for making garments is an examples of direct material.

> Indirect Material: It is that material which cannot be easily identified & related with a particular product, job, process, and activity. Printing and stationery etc, are some examples of indirect material

Labour

Labour is main factor of production. For conversion of raw material into finished goods human resource is needed termed as labour. Labour can be classified into two categories:

> Direct Labour: Labour which takes active & direct part in the production of a commodity, & can be easily identified and related with specific product, job, and activity. eg. : Cost of wages paid to carpenter for making furniture. > Indirect Labour: Labour which can not be easily identified & related with specific product, job, process, and activity & includes all labour not directly engaged in converting raw material into finished product. eg. :Salary of works manager, salary of salesmen, etc

Expenses

It includes all cost incurred in production of finished goods other than material cost & labour cost. Expenses are classified into two categories: > Direct Expenses: These are expenses which are directly allocated to specific cost units. All direct cost other than direct material and direct labour are direct expenses. eg. : Hire of special machinery, cost of special designs.

> Indirect Expenses: These expenses cannot be directly allocated to specific cost units. All indirect costs other than indirect material and indirect labour are indirect expenses. eg. : Rent, rates and taxes of building etc.

COST ACCOUNTINGIN NUTSHELL :

Main purpose is to provide detailed cost information to management.

Accounts are prepared either voluntarily or under Companies Act.

Reveals detailed cost and profit data for each unit.

Cost report is a continuous process and may be daily ,weekly ,monthly etc.

Provides for a detailed system of control.

Records external as well as internal transactions.

Deals with monetary as well as non-monetary transactions.

DIFFERENCE BETWEENFINANCIAL ACCOUNTING &

COST ACCOUNTING

On the basis of : PURPOSE

FINANCIAL ACCOUNTING COST ACCOUNTING

It’s main purpose is to prepare profit & It’s main purpose is to provide detailed loss account and balance sheet for cost information to management.reporting to owners and shareholders &Other outside agencies.

On the basis of : STATUTORY REQUIREMENTS


Accounts are prepared according to legal Accounts are prepared voluntarily requirements of Companies Act & except in certain industries where it isIncome Tax Act. obligatory to keep cost records under Companies Act.

On the basis of : ANALYSIS OF COST & PROFIT


It reveals profit and loss of the business It reveals detailed cost and profit data as a whole for a particular period and for each product line , process andnot for individual products, process & department etc.departments.

On the basis of : PERIODICITY OF REPORTING


Financial reports are prepared Cost report is a continuous process andperiodically , usually on as annual basis. may be daily ,weekly ,monthly etc.

On the basis of : CONTROL ASPECT


It provides for recording of financial It provides for a detailed system of transactions and does not attach any control with the help of certain specialimportance to control aspect. techniques like standard costing and budgetary control.

On the basis of : TYPES OF TRANSACTIONS RECORDED


It records only external transactions like It records external as well as internal sales, purchases, receipts etc. with transactions like of issue of materialsoutside parties. by store keeper to production department.

On the basis of : INFORMATION


It only uses monetary information i.e Non-monetary information like unitsonly monetary transactions are recorded. is also used i.e it deals with monetary as well as non-monetary transactions.

CREATOR & DESIGNER :

MANIK DUTT