Accounting vs. Finance is a common confusion in the minds of many. There are many areas where the roles of these two overlap and that creates all the more difficulty in creating a clear demarcation. Some think, accounting as backward-looking while the discipline of finance as futuristic and forward-looking. Other believe that accounting is nothing more than data punching whereas finance is the use of that data and implement many financing and capital budgeting decisions. Let’s check out the differences between the two in the following points.
Table of Contents
Definition / Application
The choice between Accounting Vs Finance has been a long-standing point of contemplation for both students as well as professionals in the field. Before deep diving into the concepts and potential between Accounting Vs finance, it will first help to clarify what the subjects actually stand for.
Accounting is the systematic process of identifying, classifying, summarizing and recording transactions that have a bearing on the day to day operations of an entity to finally reveal a profit or loss for the period.
Finance or Financial Analysis refers to the art of money management and investment for corporations as well as individuals. Therefore, finance Managers are majorly concerned with ensuring that the funds are allocated amongst various asset classes to reap the maximum potential return. The finance professionals must achieve the task adhering to the risk, time period, liquidity and other constraints set by the client.
In a question of Accounting Vs Finance, Accounting may be described to be backward looking while the discipline of finance is futuristic and forward-looking in its outlook. An accountant will be interested in recording transactions and events that have already occurred. On the other hand, finance managers are concerned with setting out future plans of action and targets to be achieved.
Therefore, it can be rightly said that the finance minds constitute the strategic side of operations. They engage in forecasting and predicting the future outcomes enabling the corporation to be well equipped and ready for what the future holds. Conversely, accounting professionals uphold and keep running the executive side of operations. They are constantly ensuring that every single flow of fund is recorded and reflected in the books accounts. Accountants are also responsible for ensuring statutory compliance and determination of correct tax liabilities.
Skill Set Required: Accounting Vs. Finance
Both fields are based on computations of one sort or the another and involve extensive number crunching. However, they significantly vary in their application and the purpose they serve. While accounting is a more disciplined and prescription activity, finance is freer flowing and allows for flexibility and innovations in approach. There does lie some overlap between the subjects in Accounts Vs Finance. However, the core knowledge and concepts lie poles apart. Consequently, both professions call for a different skill set and qualification requirement.
A tabulated summary of the skill set required in Accounting Vs. Finance:
Objective: Accounting Vs. Finance
While the primary goal of accounting is the effective and accurate recording of transactions, its impact travels well beyond the margins of books of accounts.
Check on the State of Affairs
A corporation relies solely on its accountants to inform about the financial health and position of its affairs. Therefore, the management always sits with the accountants to ascertain the assets on hand and the liabilities pending. Any critical decision needs to be first run by an accountant to ascertain whether the company can carry on with any expenditure.
Determination of Profitability
Accountants also remain the single point of contact to ascertain how much in red or green the company is. Their very job is to deal with items of expense and revenue all day. Therefore, there can be no one better equipped in the organization to present the profitability of the company. Being familiar with the patterns of income and expense, an accounting professional’s experience can also be used to identify abnormal or one-off spends to restore profitability.
Shareholder & Creditor Confidence
Annual financial statements are the foremost and fundamental documents referred to while deciding as to whether a company is worthy of parking funds in. Consequently, the financial statements must sell the company to potential investors and financial institutions. Therefore, unless the statements effectively present the successful performance in the past and a promising future, no investor or bank will even touch the company. The credit score, investor perception and the company’s ability to raise funds significantly depend upon its annual statements.
Profit & Wealth Maximization
Maximization of shareholder value is the ultimate objective with which any company operates. The financial managers play a key role in aiding the company to achieve this goal. They are entrusted with the responsibility of effectively allocating the shareholder funds amongst such assets and capital projects so as to reap the maximum possible return.
Reducing Cost of Capital
Another way in which finance managers add value to a company is by reducing its cost of capital. The company relies on the expertise of finance personnel to source funds in the most cost efficient way possible. The finance managers also must ensure that the cost of any project does not outweigh the returns of the project. They must also tailor the right mix of capital to arrive at the minimum cost of capital employed. They resort to various techniques of WACC, leverage analysis and ratio analysis to achieve the said purpose.
Steering Future Action
The financial managers are in a true sense, the captain of the ship. Their decisions have a direct bearing on the fate of the company. They are the strategic decision makers who guide the company to success. They must also devise a plan to keep the company afloat in times of stiff competition and market changes. The financial heads must predict the future and prepare for precautionary measures to survive the changes. To achieve this, they make use of various forecasting, statistical and analytical tools at their disposal.
The finance and accounting team may sit on different floors in your office. However, they will always be sure to meet at a common ground to discuss and carry forward a goal shared by both- increased profits for the corporation.
The debate between Accounting Vs Finance may be ongoing. However, their harmony and synchrony instrumental to company growth and success cannot be denied. Their efforts must be well coordinated and go hand in hand to ensure an overall win-win situation for the company. They may perform tremendously in isolation. However, such success will be futile if it does not accommodate the performance and parameters of its counterpart.
The accounting team actively supports the financial team by supplying them with accurate and relevant stats of the company. It is on this dataset that the financial team carries out its number-crunching by applying various regression, time series and other statistical models.
On the other hand, the finance management sets the pace for operations within an entity. It determines the vigor with which the targets are to be chased. As a result, the accounting team must catch on and be as vigorous and aggressive in its own working as well.
For example, a company aiming at setting low levels of debt expects the accounting team to pay attention to any fixed interest expenses that may be going overboard. Thus, the accounting team must reach out to the finance team to bring such deviation to their attention for corrective action.
CFA L1 Syllabus
salary.com/articles/the-difference-between-finance-and-accounting/Last updated on : August 17th, 2018