What is the difference between accounting and finance (and economics)?

March 21, 2008 Accounting & Finance

I often get asked what is the difference between Finance and Accounting? Well Im going to tell you, and Ill even throw in a 3rd category in for you, Economics. For starters, Accounting dates back centuries, traced as far back as the 12th century to be exact. By the 15th century, it was widely used among merchants. Accounting: Accounting is the preparation of accounting records. This includes measuring, preparation, analyzing, and the interpretation of financial statements. Accounting is also often referred to as the voice of business, the language of business, and the heart of business. Mostly because the financial documents derived from the accounting preparation are widely used among managers, investors, tax authorities, executives, and many others to see how the company is performing. Bookkeeping is the method used to record all the financial transactions, essentially the day to day accounting operations. Luca Pacioli is often referred to as the father of accounting because he was the first to publish a book regarding the double entry method of bookkeeping. If you ever heard of debits and credits, those are bookkeeping terms. There are many governing bodies and organizations. The International Accounting Standards Board (IASB) governs the general globe. Many countries often adhere to their own standards as well. Here in the United States, the Generally Accepted Accounting Principles (GAAP) guides the accounting field and its profession. Some characteristics of GAAP are Relevance, Timeliness, Reliability, Comparability, and Consistency. Accounting can further breakdown in sub-categories like Tax, Corporate, Audit, Management, and even Financial Accounting. Finance: Finance covers a huge array of subjects, but the three main terms when comparing to accounting would be: (1) the study of money and capital markets which deals with many of the topics covered in macro economics (2) management and control of assets and investments, which focuses on the decisions of individual and financial and other institutions as they choose securities for their investments portfolios, and (3) managerial finance (business finance) which involves the actual management of the firm, as well as profiling and managing project risks. Managerial finance is probably the most important to all types of businesses, whether they are public or private, deal with financial services or are manufacturers. Managerial finance also involves analyzing the performance of the firm in order to forecast its future performance. It involves making decisions regarding working capital issues such as level of inventory, cash holding, credit levels, etc.

Economics: Economics has two sections, microeconomics and macroeconomics. Microeconomics is study focusing at the firm level, while macroeconomics focuses more at the policy and regulatory levels. Accounting uses principles to justify many of its actions, while Economics uses assumptions to simplify a situation. Many economics decisions as based on certain assumptions. When the assumptions dont hold then the specific decision may also be affected. The key principles for economics are opportunity cost, diminishing returns, the marginal principle, spillover, and the reality principle.

The Difference Between Finance and Accounting Degrees

Posted by: Julian Hooks Posted date: February 28, 2013 In: Accounting, Education & Degrees While many similarities exist between the financeand accounting career fieldsincluding a fast rate of growth in the coming years, as predicted by the Bureau of Labor Statistics the two are by no means synonymous. A bachelors degree in accounting and a bachelors degree in finance prepare students for distinctly diff erent professions, and prospective students should explore both fields carefully before deciding upon either course of study. Accounting and Finance Defined Accounting can be broadly defined as the preparation, evaluation and management of financial records, while finance is best described as the study and management of investments. Accountants are therefore more concerned with budgets, audits, taxes and business financial operations, while financial analysts are typically experts in stocks, bonds and various other financial products available to corporate or individual investors. Accountants deal with concrete numbers expressing real sums in present time, such as accounts payable and receivable or taxes owed. Financial analysts deal with more ephemeral or uncertain figures, including projected returns on investment (ROI) or stock prices. Accountants manage todays revenue, and financial analysts anticipate tomorrows profits. Degrees in Accounting and Finance Because accountants and financial analysts must both be proficient in basic computational math and quantitative analytics, the core competencies required for either bachelors degree overlap to some extent. Coursework in financial management and/or business administration as well as higher math is usually required for both. Future accountants are also required to take classes in business law, business administration, marketing, accounting ethics, statistics, accounting theory and any number of specialty topics, such as fraud, taxation or cost management. Financial analysis degree programs emphasize international and domestic finance and trade, risk management, corporate finance, financial engineering, and portfolio management, among other specialized topics. Students enrolled in either degree program should consider concentrating their electives on the areas of expertise necessary to one or more of the career options below.

Careers in Accounting Accounting professions fall into two primary categories: accountants and auditors. Accountants generally work within a business or other entity; auditors are often employed by external auditing firms that routinely check other businesses, usually within a certain industry or sector, for financial improprieties or mismanagement. However, some accountants and auditors are employed directly by businesses or individuals (consulting) and internally monitor financial documentation. Accountancy itself can be subdivided into public, management and government specializations. Public accountants are responsible for recording and managing all the financial documents their clients, usually corporations, individuals or government entities, are required by law to disclose; many focus exclusively on tax law and preparation. Forensic accountants work within the subcategory of public accountants and investigate or analyze financial crimes such as embezzlement, contract violation and securities fraud. Certified Public Accountants (CPAs) are masters of the accounting trade, having received extensive training in financial and tax reporting. CPAs must pass one of the most rigorous post-graduate examinations in the world, which has a less than 50% first-time pass rate, and typically command top employment and salary prospects within their field. Unlike public accountants, management accountants work for private companies and oversee internal financial documentation, including budgets and cost analytics. Their duties overlap with those of financial analysts in that management accountants may also advise on investment opportunities and asset management. Government accountants specialize in financial operations subject to government oversight or conducted by government itself, and their employers are both private and public, from the municipal to the federal level. Careers in Finance Some financial analysts can be categorized according to their expertise in popular investment products. For instance, fund managers buy, sell and project the future value of hedge or mutual funds; portfolio managers oversee their clients entire investment portfolios, which may include stocks, bonds and real estate. Other financial analysts are adept at certain analytical or financial activities, such as ratings analysis, the study of a business or governments ability to repay its debts and risk analysis, which involves projecting ROI on various investments and advising clients accordingly. Another way of dividing financial analysts is buy-side versus sell-side. Buy-side financial analysts provide investment procurement and management strategy for their clients; sell-side financial analysts advise sales teams disbursing stocks, bonds and other financial products. The Bottom Line Perhaps the most important consideration when differentiating between careers in accounting and financial analysis is personality. Accountants must have a high tolerance for detail and strong organizational, quantitative and analytical skills, as well as the ability to self-manage and work independently. Their duties are processoriented and require both concentration and precision. Although financial analysts share accountants need for strong mathematical and analytical skills, they are uniquely required to make good decisions quickly, often under tremendous pressure. Their work is resultsoriented and requires confidence and strong communication skills.

Given these important distinctions, a wide variety of personalities can be well-served by a bachelors degree in accounting or financial analysis.

Accounting is basically the system of making records, verifications and reporting of value of assets, liabilities, expenses and income in the accounts books. The transactions are posted chronologically to record changes in value of assets and liabilities. On the other hand, Finance refers to the time, money and risk associated with a specific business. Finance is different because it works on the accounting information to predict future trends or to make decisions about the future. Accounting relates to preparation of accounting records, preparation, analysing and interpretation of financial statements. The study of finance consists of the study of money and capital markets (macroeconomics), investments (management of personal and business portfolios), and managerial finance, the actual management of the firm. Accounting is the methodical or precise recording, reporting, and assessment of financial deals and transactions of a business. Accounting also involves the preparation of statements or declarations concerning assets, liabilities, and outcomes of operations of a business. Personal finance is a management of assets and liabilities in an efficient way. In a way, they are related to each other and yet they also have differences between each other. The concept of the matter is accounting is an essential part of finance. It is a sub-function of finance. Accounting produces information about the operations of a business. The end-product of accounting is composed of financial declarations such as balance sheets, income declarations which include the profit and loss accounts, and the declaration of changes in financial position which includes sources and uses of funds declaration. The data kept in these declarations and reports aids financial directors in analyzing the previous performance and future inclinations of the company and in satisfying certain legal duties and responsibilities, such as payment of taxes and many more. Therefore, accounting and finance are practically closely connected. One difference is associated with the treatment of funds and the other is associated with decision making. In accounting, the system of determination of funds; that is, income and expenditures, is based on the accrual system. Revenue is acknowledged at the point of sale and not when it was collected. Expenses are acknowledged when they are incurred than when they are paid. However, in finance, the system of determination of funds is based on cash flows. The revenues

are acknowledged during the actual receipt in cash as in cash flow and the expenses are acknowledged when the actual payment is made as in cash outflow. Another difference between accounting and finance is with respect to their purposes. With accounting, it aims to collect and present financial information. It furnishes constantly improved and easily interpreted previous data, present and future inclinations of the company. Meanwhile, financial director's prime duty and responsibility associates to financial strategy, managing and controlling, and decision making. Therefore, in a sense, finance starts where accounting ends.

Difference between Accounting and Finance

Key difference: Accounting is the process of creating and managing financial statements which record the day to day transactions of the business. Finance has a broader scope and is responsible for initiating transactions to aid in cash, investment and other working capital management.

Accounting and finance are both forms of managing the money of the business, but they are used for two very different purposes. One of the ways to distinguish between the two is to realize that accounting is part of finance, and that finance has a much broader scope than accounting. Accounting is the practice of preparing accounting records, including measuring, preparation, analyzing, and the interpretation of financial statements. These records are used to develop and provide data measuring the performance of the firm, assessing its financial position, and paying taxes. Finance, on the other hand, is the efficient and productive management of assets and liabilities based on existing information. Finance is the study of money and capital markets which deals with many of the topics covered in macro economics. It is the management and control of assets and investments, which focuses on the decisions of individual, financial and other institutions as they choose securities for their investments portfolios. Also, managerial finance involves the actual management of the firm, as well as profiling and managing project risks. Another way to look at it is that, accounting analyzes the past expenses and performance of the business. This information is then used by the finance department to make decisions about the future.

Accounting Definition Preparation of accounting records

Finance Efficient and productive management of assets and liabilities based on existing information Decision making regarding working capital issues such as level of inventory, cash holding, credit levels, financial strategy, managing and controlling cash flow. To forecast the future performance of the business.

Purpose

Measuring, preparation, analyzing, and interpretation of financial statements. To collect and present financial information. To see how the company is performing, to monitor day to day accounting operations, and for taxing. Balance sheets, profit and loss ledgers, positional declarations, and cash flow statements. Revenue is acknowledged at the point of sale and not when it was collected. Expenses are acknowledged when they are incurred than when they are paid.

Goal

Tools

Performance reports, ratio analysis, risk analysis, estimating break evens, returns on investment, etc. Revenues are acknowledged during the actual receipt in cash as in cash flow and the expenses are acknowledged when the actual payment is made as in cash outflow.

Determination of funds

Financial Accounting vs Management Accounting

Diffen Economics Business Business Finance Accounting Management accounting is a field of accounting that analyzes and provides cost information to the internal management for the purposes of planning, controlling and decision making. Management accounting refers to accounting information developed for managers within an organization. CIMA (Chartered Institute of Management Accountants) defines Management

accounting as Management Accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of information that used by management to plan, evaluate, and control within an entity and to assure appropriate use of an accountability for its resources. This is the phase of accounting concerned with providing information to managers for use in planning and controlling operations and in decision making. Managerial accounting is concerned with providing information to managers i.e. people inside an organization who direct and control its operations. In contrast, financial accounting is concerned with providing information to stockholders, creditors, and others who are outside an organization. Managerial accounting provides the essential data with which organizations are actually run. Financial accounting provides the scorecard by which a companys past per formance is judged. Because it is manager oriented, any study of managerial accounting must be preceded by some understanding of what managers do, the information managers need, and the general business environment.

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Financial Accounting
Financial accounts are supposed to be in accordance with a specific format by IAS so that financial accounts of different organizations can be easily compared.

Management Accounting
No specific format is designed for management accounting systems.

Format:

Planning and control:

Financial accounting helps in making investment decision, in credit rating.

Management Accounting helps management to record, plan and control activities to aid decisionmaking process.

External Vs. Internal:

A financial accounting system produces information that is used by parties external to the organization, such as shareholders, bank and creditors.

A management accounting system produces information that is used within an organization, by managers and employees.

Focus:

Financial accounting focuses on history.

Management accounting focuses on future & Present.

Users:

Financial accounting reports are primarily used by external users, such as shareholders, bank and creditors.

Management accounting reports are exclusively used by internal users viz. managers and employees.

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Financial Accounting
Well-defined - annually, semiannually, quarterly

Management Accounting
As needed - daily, weekly, monthly.

Reporting frequency and duration:

Optional?:

Preparing financial accounting reports are mandatory especially for limited companies.

There are no legal requirements to prepare reports on managementaccounting.

Objectives:

The main objectives of financial accounting are :i) to disclose the end results of the business, and ii) to depict the financial condition of the business on a particular date.

The main objectives of Management Accounting are to help management by providing information that used by management to plan, evaluate, and control.

Legal/rules:

Drafted according to GAAP - General Accepted Accounting Procedure.

Drafted according to management suitability.

Accounting process:

Follows a full process of recording, classifying, and summmarising for the purpose of analysis and interpretation of the finnancial information.

Cost accounts are not preserved under Management Accounting. The necessary data from financial statements and cost ledgers are analyzed.

Segment reporting:

Pertains to the entire organization or materially significant businessunits.

May pertain to smaller businessunits or individual departments, in addition to the entire organization.

Nature of information:

Focus on quantitative information

Focus on both qualitative andquantitative information

The Difference Between Finance and Accounting

Finance and Accounting are two separate disciples that often are lumped together (as we obviously have done). At a high level, Finance is the science of planning the distribution of a business

assets. Accounting is the art of the recording and reporting financial transactions. People tend to group Finance and Accounting because both functions deal with the administration of a business assets. Those who work in the financial department of a business are concerned with planning the distribution of the business assets. This includes the coordination of capital investments and debt backed investments for the purpose of improving the value of the business. Those in Finance also plan the exit strategy for the investors of the business, which is the way in which those that invest in the business receive their financial reward. The financial goals and objectives of the business are designed by the business Chief Financial Officer, who is supported by people focused on Financial Analysis, Financial Management, Budgeting, Purchasing, and Accounting. Those who work in the Accounting function of a business are concerned with tracking and reporting the financial transactions of a business. Those in the Accounting field are responsible for managing the general ledger, cash flow management, collections, recognizing revenue, analyzing profitability, reporting earnings, managing debt, andof coursepaying taxes. Accountants research and report the financial transactions and health of the business using a standard set of rules and principles, known as the Generally Accepted Accounting Principles (GAAP), as well as Section 446 of the Internal Revenue Code. Jobs in the Accounting function include Financial Reporting Accountants, Auditors, Bookkeepers, Accounts Receivable Clerks, Accounts Payable Clerks, Controllers, Treasurers, and Tax Accountants. Typically, the entire Accounting organization will report into the Chief Financial Officer. Broadly speaking, Finance revolves around planning future financial transactions while Accounting revolves around reporting past financial transactions. While these are two separate functions that require different skill sets, they do both revolve around the management of assets; therefore, they are grouped together more often than not.