Accounting Vs Finance is a topic of great interest and debate among the students of accounting and finance. As both accounting and finance are closely related, so it’s very hard to draw an absolute line between these two. From the broader perspective, accounting is the recording and reporting of financial transactions whilst finance deals with the assets and liability management according to the current and future status of the business. Sacred Accounting will first explain the difference from an abstract perspective and then from a practical perspective.
Accounting Vs Finance from an Abstract Perspective
- Finance asks the question whilst accounting prepares and report financial statements.
- Finance directs the movement of money whilst accounting records dollars and cents.
- Finance oversees the forecasts future performance; accounting oversee actual performance of the business.
Accounting Vs Finance from A Practical Perspective
- Finance is responsible for making decisions regarding where to invest the money i.e. in stocks, mutual funds or real estate while Accounting records the gain or loss on these investments.
- Finance decides and approves the purchase of property, plant and equipment and intangible assets whilst accounting records the depreciation or amortization on these assets.
- Accounting prepare statements like Profit or loss statement, balance sheet, Cash Flow Statement etc. whilst Finance reviews these statements and make future decisions based on these financial statements.
The interrelation of Accounting and Finance
As stated earlier, there is a lot of interrelation in accounting and finance. Finance authorize transactions whilst accounting records and reports these transactions back to the finance. Finance must forecast future performance, for that they need current actual performance report which is in turn provided by accounting. In fact, there is no finance without accounting. Accounting tells us to record every transaction in a monetary unit. This is called monetary unit assumption.
How to Define Accounting?
There are several ways to define accounting:
- The systematic process of recording, summarizing, analyzing and reporting financial transactions of a business.
- A systematic process of identifying financial information of a business and then recording, measuring, summarizing, analyzing and reporting or communicating financial information.
- A systematic process of identifying financial information of a business and then recording, measuring, summarizing, analyzing and reporting or communicating economic information so that user may take informed decisions.
What are the main purposes of accounting?
Accounting is a vast field carrying many purposes. We can summarize all these purposes as follows:
- One of the key purposes of accounting is to provide a documentation of the financial value of business transactions.
- By providing a documentation of financial value of the business, the business can efficiently and effectively establish financial controls. This will lead to a reduction in the risks of fraud.
- One of the major purposes of accounting is to assist the management in order to run the run the company.
- Other purposes include providing information of a financial nature. These information are used by auditors to assess audit assertions.
To whom Financial information is provided?
Financial information is provided to both internal and external users of financial information. Two main users of financial information are:
- Managers need information because they need it to run the company.
- Other users of information, Other user are external. They do not have to run the company. But they need financial information because they must take investment decisions. Financial information is also used by tax authorities, investors, trade union representatives and others.
How To define Finance?
Finance is the management of large sum of money. Companies have finance department to manage money for them and take future decisions. Similarly, governments have finance ministry to tackle the financial and economic condition of the country.
Accounting and Finance are two halves of the financial book, accounting is more focused on the past while finance investigates the future.