Table of Contents
What is Accounting?
Accounting is defined as the process of collecting, classifying, summarizing, and reporting financial business transactions to establish whether a profit or loss was made. Financial statements are summaries of the day-to-day transactions used by accountants to compile the final accounting reports.
Accounting is a backward-looking discipline. It analyzes historical financial information and uses it to prepare reports. These reports are used by the decision-makers of a business entity to analyze the performance of the business in comparison to the previous years, forecasted performance, and its competitors.
Accountants have to follow a particular set of regulations knows as the Generally Acceptable Accounting Principles (GAAP). Accounting is a rule-based, detail-oriented, and procedural career that requires a high level of integrity and accuracy.
Accounting is important because; it maintains records of transactions, helps the management in decision-making, communicates results to the different users, and ensures that a business meets the legal requirements of the government such as accurate reporting and tax compliance.
The main reports prepared in accounting are income statements, balance sheets, and cash flow statements. These reports are prepared within given periods which could be monthly, quarterly, or yearly.
The main users of these accounting reports are the management, employees, government agencies, suppliers, competitors, the public, creditors, potential investors, and shareholders.
What is Finance?
Finance is the art of managing money through activities such as raising capital, budgeting, forecasting revenues, managing debts, and making investment decisions.
Finance is a futuristic field even though it uses backward-looking tools such as financial accounting reports to create strategies and make informed decisions.
Finance requires problem-solving skills, research and analysis skills, a risk-taking mindset, an understanding of the company’s vision as well as current market trends, and an out-of-the-box thinking mindset.
Finance is important because it helps the company attain profit maximization and wealth creation. It also helps in reducing unwanted expenses and the cost of production. Finance is also important as it helps steer the company in the direction of its desired outcome.
The process that the finance department follows involves the collection of data from the accounting department and other departments such as HR, manufacturing and sales and marketing. This information does not always have to be monetary. It could be for instance, that a particular production process is no longer necessary and a newer technology would save the company money.
Other elements of the finance process are budgeting, planning forecasting, and reporting.
The main users of the finance department reports are internal, i.e. the management and the owners of the business.
Difference Between Accounting and Finance
- Accounting is backward looking. It takes into account historical financial transactions and compiles them for the relevant users. Finance on the other hand is forward-looking. It plans, budgets, and informs on the best financial steps for the business to take.
- Accounting follows the set GAAP guidelines, whereas finance takes into consideration the performance of different financial periods, competitor performance, and the goals of the particular business entity.
- In accounting, audits are mandatory while in finance they are not.
- Accounting information is prepared for both internal and external users while finance department reports are made for internal users only.
- Accounting only measures financial data but finance measures financial and operational data.
Comparison Between Accounting and Finance
|Parameters of Comparison
|Follows GAAP guidelines
|Does not follow GAAP guidelines
|Audits are mandatory
|Audits are not mandatory
|Prepared for both internal and external users
|Prepared for internal users only
|Measures financial data only
|Measures both financial and operational data