I often get asked “what is the difference between Finance and Accounting?” Well I’m going to tell you, and I’ll 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 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 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 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 don’t 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.