Cost accounting is closely related to financial accounting. It is generally said that the cost accounting system is complementary to the financial accounting system.

According to L.W. Hawkins, an “ordinary trading account is a locked warehouse of the most valuable information, to which the cost system is the key.”

The trading and profit and loss account, or the financial accounts, disclose the overall profit and losses of a business for a certain period. Cost accounts throw light upon the factors that have brought about the profits or losses, as the case may be.

To illustrate this fact, consider the following example.

Trading and Profit and Loss Account
Under a cost accounting system, the company’s cost accountant would present the above data in the following form:
Statement of Cost and Profit
Financial accounting records show overall profitability of 20% on sales, while cost accounting records show a profit of 39.47% and 41.18% on products A and C, respectively. There is also a loss of $14,000 (35%) on product B.

The cost records make it clear that a substantial part of the profits is being eaten away by product B. If management has all the necessary details, it may take the steps required to make product B a profitable one.

If it is not possible, then production for product B may be halted.

Therefore, while financial accounts enable managers to learn about the total profits or losses of a business concern, cost accounts—given their analytical approach—show a detailed analysis of the factors leading to such profits or losses.

Cost accounts, by disclosing the factors that led to a loss, also allow managers to take the necessary steps to eliminate such losses in the future.

Another important difference is that financial accounts present costs and expenses in a summarized form, whereas cost accounts present the information about these expenses in a scientifically analyzed and classified form.

As a result, cost accounts are helpful for management, enabling them to learn about significant costs, areas of profitability, optimal selling prices, and improved procedures for operational planning and cost control.

Therefore, it can rightly be said that the ordinary trading and profit and loss account (i.e., financial accounts) contains useful data. In addition, cost accounts supply useful details concerning the data presented in financial accounts.

True is a Certified Educator in Personal Finance (CEPF®), contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.