Cost Accounting vs. Financial Accounting? Which One to Choose?

Illumeo Customer Success's Profile

When a company needs to evaluate its financial standing, examine its cash flow, establish the health of its operations, or understand its competitors, it usually looks towards certain accounting offshoots. Small and medium-sized organizations may hire a single specialist accountant, but large corporations and governments may hire an accounting company with various financial divisions to handle certain aspects of accounting.

If you've decided to consider a career in accounting, you'll quickly realize that the industry is much wider and more diverse than you would have imagined, with possibilities to use your abilities in a variety of areas. Accounting careers may be pursued in a variety of ways, each with its own specialty and expertise. While practically all accounting occupations will need a foundation of essential technical accounting skills and competencies, you can branch out in a variety of paths based on your interests.

Accounting uses numerous sorts of analysis and data to enlighten management and assist in making informed, beneficial decisions for the present and future of the company. In the article, we will describe two forms of accounting and explore their roles.

Cost Accounting Definition

Cost accounting is a type of managerial accounting that tries to capture a company's entire production cost by evaluating the variable costs of each production step as well as fixed expenses such as a leasing charge.

Job order costing and Process Costing are the two basic types of cost accounting systems. These costing systems are used by corporations to determine product costs. Job order costing is a cost-assignment method for a given unit or product. Process costing is a costing approach commonly used in manufacturing where units are continually mass-produced through one or more processes. Manufacturing of erasers, chemicals, or processed food are examples of this.

Cost accounting is a business activity in which we record, evaluate, summarize, and study the costs incurred by the firm on any process, service, product, or other entity inside the organization. This assists the company in cost control and strategic cost-cutting planning and decision-making to enhance cost efficiency. These financial accounts and ledgers provide managers with visibility into their cost data. Management gains an understanding of where they need to cut costs and where they need to boost spending, which aids in the creation of a vision and future strategy. Cost accounting is classified into several forms, including marginal costing, activity-based costing, standard cost accounting, and lean accounting.

A cost accountant might imply different things to different firms, but they often facilitate budgets, operational expenses, and purchasing. Depending on the employer, cost accounting professionals may have a variety of responsibilities and job titles. Cost accountants frequently require a varied skillset and knowledge base to excel in the field, satisfying the flexible and variable nature of the career and its daily demands.

Financial Accounting Definition

Financial accounting is a branch of accounting that comprises a way of documenting, summarizing, and reporting the transactions resulting from company operations during a period of time. Such transactions are documented in the creation of accounts, such as the balance sheet, income statement, and cash flow statement, which reflect the company's financial results over a specific time period.

In financial reports, financial statements describe the five key financial data classifications: income, expenditures, assets, liabilities, and equity. The income statement includes a breakdown of revenues and costs. Everything from research and development to payroll will be covered.

The primary difference between financial and management accounting is that financial accounting is meant to offer information to those outside the organization. Managerial accounting information, on the other hand, is intended to assist managers in making decisions inside the organization.

The preparation of financial accounts in accordance with accounting standards is critical for public organizations and financial firms. Various accounting rules do not integrate well into business activity management. As a result, for internal business assessment, management employs particular accounting standards and processes.

Cost Accounting vs Financial Accounting

  1. Cost accounting is concerned with determining the per-unit cost of producing and selling a product so that it may be sold at the correct price, whereas financial accounting is concerned with all financial transactions in order to establish a firm's profitability and financial standing.

  2. Cost accounting is an internal tool used by management to assess efficiency and make decisions about a company's operations. Financial accounting creates financial statements to indicate performance to external stakeholders such as investors and creditors, among others.

  3. Cost accounting may be assigned and documented in many categories such as direct cost, indirect cost, fixed cost, variable cost, operational and non-operating cost, and so on. On the other hand, financial accounting records components depending on the nature of the transaction, including income and expenditure, cash inflow and outflow, assets and liabilities. These items are recorded under three statements profit and loss account, cash flow statement, and balance sheet.

  4. In cost accounting, there is no set format; the goal is to record all pertinent information. Whereas, financial accounting has established principles, like GAAP and IFRS, that are developed and supervised by independent organizations.

Qualifications

A Bachelor's degree in accounting or a closely related field is necessary for an entry-level job as a Cost Accountant, and a Master's degree with a specialty in accounting is needed for advanced roles. These degrees focus on gaining a thorough understanding of theoretical and conceptual knowledge pertaining to cost accounting basics and financial principles such as corporate body, financial analysis, economic principles, money and banking, corporate law, and IT.

While certification is not required for the position, many cost accountants do become certified management accountants (CMA). A cost accountant is not required to have a certified public accountant (CPA) credential, many businesses prefer to hire candidates who are members of the AICPA, particularly if they work in a big firm.

A bachelor's degree in accounting, finance, or a related discipline is usually required to become a financial accountant. Internships or working as a junior accountant can provide valuable business experience and provide a thorough grasp of generally accepted accounting principles (GAAP). Many firms prefer candidates who have earned a Certified Public Accountant (CPA) license, which requires completion of college coursework and passing an exam.

Skills & Abilities

If you work as an accountant, you must have specific talents and attributes in order to perform well on the job. 

  • Accountants must be experienced in dealing with numbers and computations in order to manage organizational budgets and operational expenditures.

  • Accountants with critical thinking abilities may solve complicated issues using reasoning, logic, and imagination.

  • Accountants must have great communication abilities in order to grasp their jobs and communicate their identified solutions to management as well as external stakeholders.

  • Because technology is used in many facets of the accounting profession, the ability to use and master new technologies is critical.

  • Deductive reasoning enables accountants to look at a situation logically and arrive at solutions by using universal norms and best practices.

  • Number Facility: An accountant's profession requires the ability to perform rapid and accurate mathematical computations.

Job Responsibilities

Cost accountants research strategies to improve organizational budgets. They may examine existing expenses and look for ways to save money or increase efficiency. Accountants can also create and manage their own budgets, for which they give reports that show how close actual operations were to the intended budgets.

Cost accountants are frequently the financial gurus in their firms, and this allows them to comprehend financial data. Employers may rely on their accounting expertise, assigning them to review financial documents for correctness and legal compliance. This may entail reviewing orders, payments, tax information, and investment data.

A cost accountant may be required to submit their suggestions to management after examining an organization's operating expenses and budgets. Creating and delivering written or spoken reports is one example. They must communicate their answers in a way that others can comprehend and value.

Cost accountants may oversee investment planning for their companies if their firms do not hire independent financial managers or consultants. This might range from simple communication with an investment firm to actively selecting investments and presenting them to management.

Cost accountants are frequently required to create, or at the very least analyze, all financial documentation for firms. This ensures that all policies, rules, and laws are followed, allowing the accountant to find any faults and possibilities for savings or enhancing efficiency.

Financial accounting specialists are in charge of publicizing a company's or organization's financial situation. This job entails gathering and storing data, recognizing patterns, and projecting future requirements. Furthermore, financial accountants generate thorough statements and explain financial information to firm executives and non-accounting audiences.

Financial accountants are responsible for the preparation of monthly profit and loss reports as well as balance sheet reports. They also collect and analyze data, that is used later in preparing estimates (weekly/monthly). Tax reporting, advising on project funding estimates, creating KPI reports, examining financial records for authenticity and correctness, and conducting internal audits of the company's financial statements are some of the major tasks performed by financial accountants.

Cost Accounting Careers

We will now have a look at some of the functions of cost accounting professionals at various levels within an organization.

Entry Level

An entry-level position is one for which a candidate must have fewer than three years of previous experience in the specified field or profession. In other words, such professions are specifically developed for fresh graduates who are expected to work at the organization's lowest level.

At this level, the most likely position is Cost Accountant. The minimum qualification required for this post is generally a bachelor's degree in finance or accounting.

Their functions include:

  • Working under the directions and guidance of a senior accountant

  • Analyzing the company's financial situation and creating management reports

  • Keeping track of and reconciling all corporate accounts.

Mid Level

A mid-level position is one for which a candidate typically needs 3-15 years of experience in the specified industry or profession. In other words, such jobs are intended for professionals with team management expertise and are expected to function under the senior level within the company.

Internal Auditing Managers, Budget Directors, and Accounting Managers are all potential jobs at this level.

The functions at this level include:

  • Keeping track of and assessing the company's operating costs

  • Supervising the junior accounting team's work

  • Providing management with recommendations for different cost-cutting initiatives.

Senior Level

A senior-level position is one for which a candidate typically requires more than 15 years of experience in the industry or profession. To put it another way, such jobs are created for professionals who have led departments and are expected to operate at the top levels of the company.

Treasurer, Controller, and Chief Financial Officer (CFO) are all the likely positions at this level.

Functions at this level include:

  • Overseeing the company's entire financial operations

  • Putting together and delivering all high-level reports to the business's senior management.

  • Recruiting, training, and overseeing the accounting team's junior members

  • Taking a variety of cost-cutting strategies in order to improve operational efficiency

Cost accountants are usually entry-level accounting management roles. Cost accountants can rise to become budget directors, internal auditing managers, accounting managers, and eventually controllers, treasurers, or CFOs, based on their professional experience and education. It's not uncommon for someone who started in cost accounting to rise to the position of corporation president, however advanced accounting positions may require a postgraduate degree in accounting.

Financial Accounting Careers

Financial accounting careers entail public reporting of an organization for the benefit of numerous stakeholders who require financial information. Internal management and leaders, as well as external shareholders, creditors, debt holders, and government agencies, are examples of stakeholders.

Financial accounting roles are represented in the following professional profiles at all levels of employment.

Financial Accountant

Financial accountants are in charge of keeping meticulous records and preparing monthly, quarterly, and yearly financial statements. These records and statements aid in future sales and expense budgeting, internal and external audits for sound financial practices, data analysis for management's consideration, and final account preparation for reporting to external stakeholders.

A bachelor's or master's degree in accounting, finance, business, statistics, or a related discipline is required of financial accountants. For this position, most large corporations employ chartered accountants.

Auditors

This position in financial accounting entails examining a company's financial statements to guarantee their fairness and materiality in accordance with relevant financial reporting standards. Auditors may be independent businesses that provide an impartial judgment on the correctness of financial accounts in order to provide lenders and investors trust in the company's financial statements. Auditors may also function as internal control agents within a corporation to ensure that accounting systems are fair. Government authorities may also hire auditors to examine the accounts of government agencies, as well as private sector enterprises and people that must adhere to government rules in order to pay taxes.

Auditors must have accounting certification, CPA, CIA or CFA in the United States, in addition to bachelor's degrees in accounting, finance, or similar subjects.

Financial Analyst

Financial analysts examine bond and stock performance in order to make financial advice to businesses and individuals. Financial Analysts also stay informed on the company's or client's industry's economic, social, and political aspects that influence financial decisions. A senior accountant or finance manager is usually in charge of this post. Investment analyst, portfolio manager, securities analyst, and risk analyst are all similar professional titles.

A bachelor's degree in accounting, finance, economics, statistics, or related fields along with three or more years of experience is required for this position.

Finance Manager

This financial accounting job combines an organization's different financial activities. This might include accounting and include satisfying the organization's finance needs, monitoring short- and long-term investments, negotiating financial arrangements with other institutions, designing securities issues, mergers, and acquisitions, and so on. Financial managers supervise a team of accountants and associates who prepare financial reports, statements, and forecasts. They present the financial analysis and estimates to senior management and external stakeholders, as well as valuable suggestions on how to achieve the company's financial objectives.

Besides technical skills, financial managers typically require five to 10 years of experience as financial accountants, with a preference for CPAs or MBAs in finance.

Which One to Choose?

Cost accounting may be a good fit for persons who enjoy logic games, as it requires strong arithmetic and reasoning abilities to assess, compare, and understand expenses. broad knowledge of cost accounting software applications and strong technical abilities is also beneficial in this industry. Cost accountants must be extremely organized since they must keep track of a variety of resources. Cost accountants must also be adaptable since they may be requested to examine data from a variety of business areas.

Financial accounting is ideal for those who prefer working within a set of norms but occasionally functioning in grey areas. Regulatory reporting, account reconciliation, GAAP, and financial report preparation should all be second nature to financial accountants. This may be the career path for someone who likes and prefers a more organized work environment.

Conclusion

As a result, it can be argued that a profession in accounting has the potential to provide advancement both inside and across enterprises. The form of one's growth or professional path, on the other hand, is heavily influenced by educational credentials, certifications, and specialization. Nonetheless, a job in accounting is unquestionably a rewarding one that not only allows one to further one's professional career but also aids in the shaping of a company's future.

In the end, it's all about recognizing your abilities and figuring out how to put them to work in a successful professional career.