Accounting and Finance are two different disciplines but commonly confused by people because both of them deal with business money and assets.
Accounting vs Finance
The main difference between Accounting and Finance is that Accounting refers to maintaining the daily financial transactions of business while finance refers to the management and investment of money in business properly. Accounting deals with balance sheets and trial balance, finance deals with risk analysis and capital budgeting.
Accounting involves the recording, creation, summation, management, and reporting of day-to-day financial transactions of the business, which ultimately leads to the preparation of business financial statements. Accountants or bookkeepers are responsible for managing the organization’s accounting activities and need to ensure that all monetary transactions are correctly captured into the ledger book and balance of accounts are correct, thus financial statements are reliable and accurate.
Finance refers to the science of logical planning and distributing the business assets whereas Accounting is an art of classifying, recording, and reporting the financial figures or transactions of the business.
Finance has a wider scope where management of money and investments are done for public/private corporations, governments, or individuals. Finance supports the integral and crucial decision-making process related to cash management, financial analysis & planning, investments, divestments, working capital management, etc.
Finance professionals are responsible to ensure that adequate capital (funds) is optimally allocated as per the need of a particular segment or situation.
Accounting is used to manage books of accounts and finance is used to manage the funds of the business.
Comparison Table Between Accounting and Finance
| Parameter of Comparison | Accounting | Finance |
|---|---|---|
| Definition | Accounting involves the management of day-to-day financial transactions and the flow of money and then preparing the financial statements. | Finance is a wider and broader term that involves the effective management of business assets and liabilities, and further planning for positive future growth. |
| Activity Type | It is a kind of post-mortem activity that records what has already happened. | It is a pre-term activity where the comprehensive study is done to realize the funds or assets requirements of an organization or business. |
| Aim | The main aim of Accounting is to collect, classify, and present the current financial information about the business that can be used internally as well as externally. | The main aim of Finance is to manage, control, strategize, and make decisions about business finances. It involves the view-point of futuristic benefits. |
| Scope | Current: The scope of work involves the formulation of the financial statements of the current year. | Future: The scope of work involves assessing financial statements or analyzing and planning for future financial transactions. |
| Attention to Detail | High | High |
| Focus | On Reliability & Accuracy. | On Analysis & formulating Insights. |
| Purpose | Communicating the health of the business financial position i.e. whether incurring profits or loss. | Finding the ways & means on how more value in terms of financial position can be added. |
| Driven By | Accounting activity is carried by the specific rules that are defined for them i.e. what, when, and how. | Finance is driven by Analysis that is based on the expertise and capabilities of the person or agency in charge. |
| Used In | Public/private accounting firms, corporations. | Banks, Consultancy, Corporations, |
| Fund Realization | The determination of funds in Accounting is based on cash flow and receipts & payments that are realized for revenue and returns. | Determination of funds in Finance is based on the accrual system, i.e. revenue is recognized at the time when the sale is done not when it is collected. Expenses are also realized when they are incurred. |
What is Accounting?
In Accounting, anything that has financial character associated with it in monetary terms is recorded, classified, summarized and then interpreted in a significant manner.
The financial statements prepared by the respective professional are used to understand the financial health of the business i.e. whether a business is making profits or losses. The human competence and aptitude define the reliability and accuracy of financial statements.
This seeks to record and collect all financial transactions of the organization to be used internally and externally. Financial Reports may be read by investors, lenders, or creditors and these reports must portrait fair and accurate information.
The various types of accounting are Financial, Public, Government, Management, and Internal Auditing.
What is Finance?
Finance is a wider and broad term that closely describes the two activities i.e. to assess how the finances or money will be managed and how required funds will be acquired. Money, Credit, Banking, Capital markets, Leverage, Investments, Dis-investments are few concepts that are included in finance.
The finance holds its roots in Microeconomics and Macroeconomics means assessing every aspect of the finances from “how-to”, “what to”, “where to” and “when to” manage.
Finance is categorized as:
- Personal Finance – How a family or individual manages their money or assets like setting financial goals for marriage, education, savings for retirement, assessing taxes, and identifying all short-term or long-term needs.
- Public Finance – It is related to the government policies that influence spending, taxes, debt issuance, and budgeting. Its main objective is to know how the government will pay for public services.
- Corporate Finance – It takes into account the financial workings of individual corporates or corporations i.e. how they started, grown, and sustained over a period of time.
Main Differences Between Accounting and Finance
No doubt Accounting and Finance share a few fundamental characteristics as both fields are concerned with proper money management and both need the advanced level of education to perform the required task with quantitative & analytical skills but still, both are different.
- Accounting works on what is happening whereas Finance sees what we can do for a better future. Accounting has a set of rules and guidelines whereas Finance is purely based on the analytical skills, aptitude, acumen, and expertise of the person.
- Accounting focuses more on the daily movement of money within the purview of organizations i.e. what comes in and what goes out. Whereas in Finance focus is on the broad management of organizations’ assets and money, and to plan how financial growth can be sustained or made in positive terms.
- In Accounting, the emphasis is more on reporting the financial events that happened in the past and to ensure compliance with accounting norms. But in Finance, the emphasis is more on identifying ways to increase funds or money and prevent any losses.
- Accounting professionals need to be fastidious with concrete attention to details, whereas in Finance professional needs to be long-term visionary and thinkers.
- Subjects like accounting theory, accounting practices, business and tax law, and accounting ethics make the base of study for Accounting. And in Finance, financial engineering, microeconomics, and macroeconomics subjects make the study base.
Frequently Asked Questions (FAQ) About Accounting and Finance
What are the two main finance activities?
The term finance is generally used as a synonym for funding or management of funds. In this context, the two main types of financial activities are:
- Securing a loan or raising capital through issuing bonds, debentures, or equity shares these kinds of activities to help an individual or business owner in receiving money. In other words, these finance activities lead to cash inflow.
- Investing in a business organization or a company through direct lending or purchase of shares these are finance activities that lead to cash outflow.
Can I be an accountant with a finance degree?
Yes, you can be an accountant if you have a finance degree. This is because accounting is a major subject covered under most of the finance courses.
A bachelor’s or master’s degree in finance requires the candidates to study subjects like fundamental and advanced accounting. Since accounting deals with the recording of financial activities undertaken by a business firm, it is one of the main aspects of a full-fledged finance course or degree.
Although securing higher positions in the accounts department may require a degree in accounting, a finance degree holder is considered eligible for posts such as a personal accountant, bookkeeper, accounting coordinator, junior accountant, or account assistant.
What do you study in finance?
The major subjects covered under finance are corporate finance, advanced accounting, economics, entrepreneurial finance, business law, investment management, portfolio management, corporate taxation, security analysis, financial services management, advanced financial research, international financial management, financial reporting, risk management, financial derivatives, and project planning.
When it comes to financing, several comprehensive topics are involved.
The subjects covered may vary based on the nature of the finance course pursued by a student.
What is a career in finance?
A career in finance relates to the scope of securing a wide range of finance jobs across diverse industrial sectors.
Securing a Bachelor’s or Master’s degree in finance can help a candidate in pursuing a promising career in diverse fields like commercial banking, asset management, risk management, insurance, credit finance, equity research, corporate banking, public accounting, finance consulting, tax consulting, investment banking, business auditing, commercial lending, and financial planning.
Conclusion
Accounting and finance both are critical and vital for every business organization as they both decide the present and future of organizations’ success.
Both are challenging fields as a minor mistake at any point will lead to catastrophe business failure. The two fields are not a world apart but it is essential to know the important differences between them to make informed decisions.
References
- https://onlinelibrary.wiley.com/doi/pdf/10.1002/1099-1174(200006)9:2%3C119::AID-ISAF182%3E3.0.CO;2-Y