Accounting
Accounting is often called "the language of business." It involves the detailed
process of tracking and reporting on a company's financial activities. Its
primary goal is to provide reliable financial information to both internal and
external stakeholders.
Main Branches of Accounting
Financial Accounting: This is the most common form of accounting,
focused on preparing financial statements (like the balance sheet,
income statement, and statement of cash flows) for external users
such as investors, creditors, and government regulators. It must
adhere to standardized rules like Generally Accepted Accounting
Principles (GAAP) or International Financial Reporting Standards
(IFRS).
Managerial Accounting: Used internally by managers to make
informed decisions. It involves creating budgets, analyzing costs, and
forecasting future performance. Unlike financial accounting, there are
no strict rules, allowing it to be tailored to a company's specific needs.
Cost Accounting: A subset of managerial accounting that analyzes a
company's costs of production. It helps management control expenses
and determine pricing strategies for products or services.
Tax Accounting: Deals with preparing tax returns and planning for tax
liabilities, ensuring compliance with tax laws and regulations.
Auditing: The independent examination of a company's financial
records to ensure they are accurate and comply with legal
requirements and accounting standards. Auditing provides credibility
and assurance to external stakeholders.
Finance
Finance is the broad field that manages money and other valuable assets. Its
core function is to optimize how an organization acquires and uses its capital
to maximize its value.
Main Functions of Finance
Investment Decisions: This involves allocating a company's funds to
assets that will generate the highest return. It includes decisions like
investing in new equipment, expanding a factory, or acquiring another
company.
Financing Decisions: This function deals with how a company raises
money. It involves choosing the best sources of capital, such as
borrowing from a bank (debt) or selling shares to investors (equity),
and managing the company's capital structure.
Dividend Decisions: This is about deciding what to do with a
company's profits. Management must choose whether to reinvest
profits back into the business for growth or distribute them to
shareholders as dividends.
Liquidity Management: Ensures a company has enough cash on
hand to meet its short-term obligations and operational needs. This
involves managing working capital, such as inventory and accounts
receivable.
Key Concepts & The Difference
Feature Accounting Finance
Recording and reporting past Planning and managing future
Focus
transactions financial decisions
Time
Retrospective (past-oriented) Prospective (future-oriented)
Horizon
To provide an accurate
To make strategic decisions about
Purpose record of financial
a company's capital
performance
"Where should we get money from
Core "What happened to the
and how should we use it to
Questions money?"
grow?"
Export to Sheets
The relationship between accounting and finance is symbiotic: finance relies
on the historical data and reports provided by accounting to make informed
decisions about the future. For example, a financial analyst uses a company's
income statements (prepared by an accountant) to forecast future revenue
and determine if a new investment is worthwhile.
