Chapter No.
01
Concepts of Accounting
The Field of Accounting
Accounting
Accounting is a specialized
information system that provides
economic information to different
groups of people.
Branches of Accounting
Financial Accounting
Cost Accounting
Management Accounting
The Field of Accounting (Cont…..)
Financial Accounting:-
It is the process of recording, summarizing,
analyzing, and reporting financial transactions
and information related to an individual,
business, or organization.
Its primary purpose is to provide a systematic
and accurate representation of a company's
financial activities, allowing stakeholders to
make informed decisions..
It gives information about the financial nature of
transactions.
It showing only historical data in books of
accounts.
The Field of Accounting (Cont…..)
Cost Accounting
Cost accounting is a branch of accounting that
focuses on tracking, analyzing, and controlling the
costs associated with producing goods or services.
It provides insights into cost efficiency, helps set
prices, and aids in making informed business
decisions.
Cost accounting is collection, processing and
evaluation of operating data.
eg. Costs of products, processes, jobs, quantities of
materials consumed, labor time used etc. for internal
planning and control as well as for external
Purpose of Cost Accounting
Cost Control: Cost accounting helps monitor and control
expenses, enabling businesses to identify areas of cost
overruns and take corrective actions to reduce costs.
Profitability Analysis: It aids in assessing the profitability
of products, services, or projects by allocating costs
accurately and identifying high-margin areas.
Decision Support: Cost accounting provides data for
informed decision-making, such as pricing strategies,
make-or-buy decisions, and resource allocation.
The Field of Accounting (Cont…..)
Management Accounting:
Management accounting uses cost data and
expertise to provide accounting information that
helps organizations formulate policies, plan,
control, and make informed decisions.
Limitations of Financial Accounting
1. The Financial Accounting will show the total
cost incurred, and will not reveal the costs
which were necessary to manufacture each of
the different products or render to each service.
2. Financial accounting is historical (data are
summarized at the end of the accounting
period). Therefore, day-to-day cost information
are not available, thus cost cannot be
controlled.
Advantages of Cost Accounting
1. Classification and subdivision of Costs:
In contrast to a single profit or loss figure
supplied by general accounting, the cost accounting
classifies cost and income by every imaginable
subdivision of the business enterprise.
In a good costing system data regarding costs by
departments, processes, functions, products, jobs
contracts and services can be easily computed.
2. Adequacy or Inadequacy of Selling Prices:
Units of production, administration and sale is made
possible by cost accounting which aids management in
deciding the adequacy or inadequacy of selling prices.
Advantages of Cost Accounting (Cont…)
3. Disclosure of Profitable Products, Territories
and output:
Cost Accounting will disclose activities, departments,
products and territories which bring profit and those
that result in losses.
4. Control of Materials and supplies:
In a good costing system materials and supplies must
be accounted for in terms of departments, jobs, units of
production or service.
This will eliminate altogether or reduce to the minimum
misuses, thefts, deterioration, obsolescence, and losses
from defective, spoiled, scrap etc.
Advantages of Cost Accounting (Cont…)
5. Correct Valuation of Inventories:
Cost Accounting plays a basic role in the correct
valuation of inventories of finished goods, work in
process, materials and supplies.
6. Whether to Manufacture or Purchase from
outsiders:
Cost records furnish information regarding the cost
of manufacturing of different finished parts, which
assist management in making a decision whether to
purchase these parts from outside manufacturers or
manufacture them in the factory.
Advantages of Cost Accounting (Cont…)
7. Control of Labor Costs:
Cost of labor is recorded by orders, jobs, contracts, departments,
processes, or services.
In many manufacturing enterprises daily time reports are
prepared showing the number of hours and minutes spent and the
wage rates for each worker per job or operation.
8. Cost Accounting- A Reliable Check on General
Accounting:
Finally an efficient and proper system of cost accounting is a most
reliable and independent check on the accuracy of the financial
accounts.
This check is made effective through reconciliation of the balance
of profit or loss shown by the costing profit and loss account and
the balance of profit or loss revealed by the general accounting
profit and loss account.
Difference between financial accounting
and cost accounting
Financial Accounting Cost Accounting
1. Provide information to 1. Provide information to
external users. internal users.
2. Produces general purpose 2. Produces special purpose
financial statements. statements and reports.
3. Must conform to generally 3. Must conform to information
accepted accounting needs of management.
principles 4. Provides accounting data in
4. Provides accounting data in monetary and non-monetary
monetary terms. terms.
5. Cost statements and reports
are prepared more
5. Financial statements are
frequently i.e weekly and
prepared on yearly or half
daily basis.
yearly basis