What is the difference between accounting and finance (and economics)?

March 21, 2008

Accounting & Finance

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:

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:

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:

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.

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35 Comments on “What is the difference between accounting and finance (and economics)?”

  1. wendy B Paisley Says:

    I found the content to be extremely informative.

    Reply

  2. Hadiza abubakar Says:

    Tanks so much,u realy gave me wat am looking for,realy appreciat dis.

    Reply

  3. Winfred kwaku Dansu. Says:

    Well done! U explained to my understanding.

    Reply

  4. Daniel Says:

    Can I say Accounting is part of Finance, or Finance is part of Accounting?

    Reply

  5. love Says:

    Thank you so much

    Reply

  6. Heena Says:

    Thank u very much u gave me wonderful explaination

    Reply

  7. jameswaugh123 Says:

    Finance is the term used for planning the distribution of business assets while Accounting is the art of the recording and reporting financial transactions. People tend to group Finance and Accounting because both functions deal with the administration of a business’ assets.

    Expert Edmonton accountants

    Reply

  8. Ganesh Says:

    Thank you
    I am satisfis from this explanation

    Reply

  9. shanthi Says:

    Thank you very much………..

    Reply

  10. Izzy Says:

    Great post, very in-depth. We recently posted a blog post on the same subject but asked 9 professional UK accountants to answer for us, i’d love to hear your thoughts on it. You can have a read here.

    Reply

  11. Chidinma Ayo Says:

    That is to say, accounting is the recording of finicial transactions in monetary terms while banking, is d management nd distribution of business assests. Am i right?

    Reply

    • Jason Sanchez Says:

      I think banking has become more diverse then that in the last 20 years. Between credit, loans, investments, debt, etc., banking is it’s own industry and treasury is the business side of dealing with banking.

      Reply

  12. junaid khan Says:

    accounting is an book keeping or finance is allocation of capital in a batter way

    Reply

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  14. Bala Says:

    What type of accounting sector are highly demanding in future in australia ?

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  15. dhara Says:

    thanks for the info !! pretty helpful

    Reply

  16. asma Says:

    Economis is allocation of capital in a batter way for human wantes

    Reply

  17. Augustus Says:

    i am very good in mathematics.I want to know,accounting and finance which one is best for me?

    Reply

  18. femi friday Says:

    i quite appretiate

    Reply

  19. OLAIDE Says:

    My own observation about the accountancy & book keeping is Accounting is the process of recoding, selecting, interpriting and communicating of finance in an organisation to ensure the owner make decision while book keeping is a systematic recording of all transaction in a daily basic approciation.

    Reply

  20. Mohamed Hassan Ahmed Says:

    can i say finance i bigger then Accountant when we look the position of the Company

    Reply

  21. Netsanet Says:

    thank you
    I am satisfied with the answer

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  24. gopal Says:

    if a companys was in early stage that time invtser invset 25% investment is called angel capital and expected more returns and they were excute from investment
    ventuer capital are invest only in middle stage company they invest 50% fund in company

    Reply

  25. lara Says:

    couldn’t be more happy to come acros short but so informative article.

    Thank you to the poster

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