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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.

  • Managers as Internal Users of Accounting Information

Managers are the biggest users of accounting info.

  • They use it for:

      1. Planning
      2. Decision Making
      3. Controlling

  • Example:

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

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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.

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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.

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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.

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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

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9. Birth and Growth of Cost Accounting

    1. Developed as a sub-system of financial accounting.

    2. Needed to value closing stock accurately.

    3. Now used for more than just stock valuation:

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

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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.

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