Accounting is generally divided into two main types: financial accounting and cost accounting, a part of managerial accounting. Financial accounting is designed for external purposes and consists of recording financial transactions according to generally accepted accounting principles, or GAAP. Cost accounting is used internally and is more focused on improving the company's performance. While these two types of accounting are different in many aspects, they share several similarities. Cost and financial accounting have similar terminology and both use information provided through financial reports.
Cost and financial accounting both use the same basic accounting terminology. For example, both types of accounting base information on debits and credits. Both also refer to a general ledger; which is a book that tracks all financial transactions in various accounts. The same accounts and types of accounts are also used cost and financial accounting. Both types of accounting separate accounts into categories consisting of assets, liabilities, equities, revenues and expenses. Within each category, one or more accounts exist that are used to track specific financial transactions.
Financial accounting is used to produce reports that include financial statements, including the balance sheet, income statement and statement of cash flows. This information is given to external parties, such as stockholders, investors and lending institutions. With cost accounting, the documents produced through financial accounting are used by people within the company to make internal decisions. The use of financial statements is vital to both types of accounting. The difference lies in the groups of people that use the information.
Cost accountants and financial accountants both are interested in historical information about a company. This information is provided through financial statements. A primary reason that this information is important is to make future decisions for the company. With both types of accounting, future plans are created based on historical information. This includes forecasting, creating budgets and planning future projects.
Both financial accounting and cost accounting focus on ways to improve company performance. Financial accounting, however, concentrates on an entire company, while cost accounting generally divides performance by division, location or region. Financial accounting focuses on company performance by closely monitoring accounts payables and accounts receivables. Cost accounting also monitors performance issues by viewing these accounts and other data such as the cost of goods sold.