Accounting for Cost vs. Equity

by Matt Petryni

In accounting and business, investors are generally interested in the extent to which a business can control its costs and its ability to grow equity. These concepts are closely related, but the methods used to account for them can be slightly different, depending on the focus and strategy of a company's management. Investors are better able to evaluate a business opportunity if they understand the difference between cost accounting and accounting for equity.

Accounting for Cost

Accounting for cost is a method used by management to help limit, plan for and price in costs. In cost accounting, managers look closely at each of the individual expenses associated with production and add them together as necessary to get an idea of the total expected costs for a company or a project. Using this method of management is useful because it prevents the possibility of underpricing the goods and services a company markets and because it helps identify specific areas where the company might save money.

Accounting for Equity

Equity accounting is a general term for the practices and standards a company employs when keeping track of its contributions from investors. All companies practice equity accounting, though the actual composition of the equity accounts can vary considerably depending a business's size and structure. Equity accounting is essential to keep track of the company's profits and losses as well as the structure of ownership -- investors' claims to assets and dividends.

Basic Differences

Accounting for equity and accounting for cost are two separate, distinct processes. Accounting for cost is primarily a strategic process that is used by management to plan for and deliver company growth. It's a subset of managerial accounting, a more speculative, forward-looking specialty that uses financial data to inform and implement strategic business decisions. By contrast, accounting for equity is a practice of financial accounting, which concerns the reporting and evaluation of a business's performance.

Accounting for Investments

Businesses also account for equity when they keep track of the capital they put into subsidiary companies. In this case, the business is still concerned with the book-keeping of profits, losses and ownership, but are engaged in the practice for the subsidiary rather than the parent business itself. The capital placed in a subsidiary is still considered an asset, rather than equity, on the books of the parent company. This asset is represented by financial instruments called equity securities, or shares of the subsidiary's stock.

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