Skip to main content

1.1 Financial Accounting & Cost Accounting

1.1 Financial Accounting & Cost Accounting

  • Importance of Financial Reports

  • Investors – To decide if they should invest.

  • Lenders – To judge if they should give a loan.

  • Tax authorities – To calculate taxes.

  • Suppliers – To decide if they should extend credit.

  • Customers – To assess company reliability (sometimes).

  • These people are called external users of financial information.

    • 👔
    • 3. Managers as Internal Users of Accounting Information

    Managers are the biggest users of accounting info.

    • They use it for:

      • Planning
      • Decision Making
      • Controlling

    • Example:

      • Bidding for a project → needs cost data.
      • HR deciding employee incentives → needs financial performance data.

    🧾 4. Two Main Types of Accounting Systems

    Type of Accounting Purpose
    Financial Accounting Records transactions between the company and external parties.
    Cost Accounting Tracks internal costs and inventory for internal use.

    📄 5. What Financial Accounting Does

    • Records transactions with:

      • Suppliers
      • Employees
      • Lenders
      • Investors
      • Customers

    • Prepares 3 main financial statements:

      1. Income Statement – Profit/Loss over a period.
      2. Balance Sheet – Assets, liabilities, and equity at a point in time.
      3. Cash Flow Statement – Cash inflows and outflows.

    🧪 6. Case Study: Alpha Company

    Stage 1: Small Business

    • Simple manufacturing process.

    • Made-to-order production.

    • Easy to calculate profit:

      Example: Sales: ₹8,00,000 Material cost: ₹5,00,000 Other expenses: ₹2,00,000 Profit = ₹1,00,000

    Stage 2: Grown Business

    • Produces multiple products.
    • Stores materials and finished goods.
    • Not all materials are consumed or products sold immediately.

    Problem:

    • Can't match total expenses with only the products sold.
    • Needs to calculate Cost of Sales.

    💰 7. Cost of Sales – Why and How to Calculate

    • You must subtract:

      • Value of materials in stores
      • Value of work in process
      • Value of unsold finished goods

    • This gives the actual cost related to the sold items.

    👨‍💼 8. Role of the Cost Accountant

    • Tracks:

      • Material issued to production.
      • Movement of semi-finished and finished goods.

    • Provides the closing inventory value (materials, work-in-process, finished goods).

    Helps the financial accountant:

    Profit = Sales – Expenses – Closing Stock

    📊 9. Birth and Growth of Cost Accounting

    • Developed as a sub-system of financial accounting.

    • Needed to value closing stock accurately.

    • Now used for more than just stock valuation:

      • Helps in managerial decisions
      • Used for pricing, cost control, efficiency.

    🌍 10. Modern Use of Accounting Information

    • Companies now use accounting info for:

      • Studying competitors
      • Understanding customers
      • Analyzing suppliers

    • Example:

      • A software company identifies firms with high inventory values.
      • Then pitches inventory management software to them.

    ✅ Summary

    • Accountants = Scorekeepers for business.
    • Financial Accounting: For external reporting.
    • Cost Accounting: For internal control and decision making.
    • Managers use accounting info for planning, decision making, and controlling.
    • Cost Accounting helps calculate Cost of Sales, especially when not all goods are sold or materials consumed.
    • Modern businesses use accounting data strategically to understand the market.

    Let me know if you want this as a PDF, mind map, or a presentation!

    Back to top