Cost accounting is very 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—”the ordinary trading account is a locked warehouse of 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 specified period. Cost accounts throw light upon the particular factors which have brought about the profits or losses, as the case may be. This fact can be understood with the help of the following illustration:
The cost accountant of the company (under the cost accounting system, will present the above data in the following form:
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 while there is a loss of $14,000 (35%) on product ‘B’. The cost records make it clear that a big part of the profits is being eaten away by product ‘B’. If complete details are known to the management, it may take necessary steps to make the product ‘B’ a profitable one.
If it is not possible, the production of product ‘B’ may be stopped. Thus, while financial accounts enable the businessman to ascertain the total profits or losses of the business concern, cost accounts with their analytical approach, disclose the detailed analysis of the factors leading to such profits or losses. Cost accounts, by disclosing the factors which have led to a loss to the business concern, also enable the businessman or management to take steps necessary for eliminating such loss in the future.
Further, financial accounts consist of the figures of costs and expenses in a summarised form whereas the cost accounts present the information about these expenses in a scientifically analyzed and classified form for assisting the management in the ascertainment of costs, ascertainment of profitability, fixation of selling price, operational planning and cost control.
Therefore, it can rightly be said that the ordinary Trading and Profit and Loss Account (Financial accounts) contain very useful data and the cost accounts supply useful details of the data contained in the financial accounts.