Difference Between Finance and Accounting

Finance and accounting are two important domains. Without their existence, our economies would collapse.

In this article on difference between finance and accounting, we will be discussing the factors that distinguish these two. 

Table of Contents

• Difference between Finance and Accounting 
• What is finance?
• What is accounting?
• Where do we use Finance and Accounting?
• Similarities between Finance and Accounting

Difference between Finance and Accounting

The following table lists the difference between finance and accounting.

What is finance?

Finance is a huge domain that deals with areas of money, investment, loans, savings and budgeting. It is segregated mainly into three branches with two newly identified branches. This domain has real-life impacts that are visible in nature. Accounting and Economics are closely linked to finance. 

Impact of Finance

Finance has a significant impact on the modern human lifestyle. It is impossible to live a comfortable life without properly managing finances. In present times, financial literacy is one of the most important skills that one should learn for earning, managing, investing and compounding money.

Branches in Finance

There are primarily the following five branches in finance: 

1. Public finance

This branch of finance deals with the roles played by the government in improving and sustaining a healthy economy. Government revenue and government expenditure of public authorities are assessed. It also involves the management of the revenue, expenditure and debt load of the company. Anyone who wants to learn about the management of public funds, currency value and price stability must delve into public finance.

2. Personal Finance

When finance is applied on an individual level, it becomes personal finance. Through this branch of finance, one learns to manage own finances This involves learning budgeting, investing and saving money. After learning personal finance, one can plan a career as a personal banker, tax advisor, estate planner, investment advisor and insurance advisor.

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3. Corporate Finance

Corporate finance is essential for every business for financing operations for wealth distribution and return generation. Through this branch, one learns to plan finances, raise funds, invest and monitor financial activities. It directly impacts company decisions that lead to financial and monetary impacts.

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4. Social Finance

Also known as impact financing, social finance is an approach for generating positive social and environmental outcomes with expected returns. This involves a direct investment of capital towards projects, businesses and organizations. Socially responsible investing principles are used while making investment decisions to align it with personal values and sustainability goals.

5. Behavorial finance

It is a branch where psychological influences that impact market outcomes are studied. This helps in understanding different outcomes across different industries and sectors. Behavorial finance discusses how instead of rational calculation, people are inclined towards making financial decisions based on their emotions and cognitive bias.

What is Accounting?

Accounting is a branch which measures, processes and shares financial and business-related information. It involves maintaining records of financial transactions of business entities. This includes the process of summarizing, analyzing and reporting these transactions. It is a mandatory financial practice that every business needs to follow.

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Significance of Accounting 

Through accounting, organizations keep a systematic record of financial information. This helps in maintaining the historical data of the organization’s financial history. With the help of the information collected, organizations can make decisions that help in boosting business. Organizations can also prepare accurate reporting of assets and liabilities. 

Types of Accounting 

The following are three main types of accounting:

1. Financial Accounting

It is a branch of accounting which involves recording, summarizing and reporting business-related transactions. These transactions are recorded in financial statements such as cash flow statements, balance sheet and income statements. Various principles of accounting are used depending on the reporting and regulatory requirements of the business. 

2. Management Accounting

Management accounting is also known as managerial accounting, this branch is for internal purposes. A management accountant creates financial statements, reports and documents for management to make better business-related decisions. Through this branch, one can plan, organize, direct and control the management of the company. Functions of management accounting include forcasting and planning, variance analyses, etc.

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3. Cost Accounting 

It is that branch of accounting where company’s cost structure is reported and analysed. It is a process of assigning costs to cost objects that involve the company’s products, services and other activities. Through cost accounting, companies can assess how much they are earning, spending and the areas where they are losing money.

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Where do we use Finance and Accounting?

Finance:

• Strategic Planning: Finance is used in strategic planning to determine the overall financial direction of a company, including long-term goals and objectives.
• Investment Decisions: It is crucial for evaluating investment opportunities, such as whether to invest in new projects, acquisitions, or financial instruments.
• Capital Budgeting: Finance is involved in capital budgeting, helping decide which projects or assets to invest in based on their potential returns.
• Risk Management: Finance assesses and manages financial risks, including market, credit, and operational risks.
• Asset Management: Finance professionals manage and optimize the allocation of a company’s financial resources and assets.
• Financial Markets: Finance plays a role in financial markets by analyzing market conditions, trading securities, and managing investment portfolios.
• Funding Strategies: Finance experts decide how a company should raise capital, whether through debt financing, equity financing, or other means.
• Valuation: Finance is used to determine the value of assets, companies, and investment opportunities.

Accounting:

• Recording Transactions: Accounting involves recording financial transactions in a systematic and organized manner.
• Financial Statements: Accountants prepare financial statements, including income statements, balance sheets and cash flow statement, to communicate a company’s financial performance.
• Compliance and Reporting: Accounting ensures compliance with financial regulations and standards, including Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).
• Taxation: Accountants calculate, report, and optimize tax liabilities, ensuring the company complies with tax laws.
• Audit and Assurance: Accountants perform audits to verify the accuracy of financial records and statements, providing assurance to stakeholders.
• Budgeting: Accounting contributes to the budgeting process by creating budgets and comparing actual results to budgeted figures.
• Costing: It helps determine the cost of goods or services, which is essential for pricing decisions.
• Internal Controls: Accounting establishes and monitors internal controls to prevent fraud and errors in financial transactions.
• Financial Analysis: Accountants analyze financial data to determine the financial health of the company, identify trends, and make informed decisions.

Finance vs Accounting: Similarities

Finance and accounting are closely related as both:

• Deal with financial data and information. 
• Help in decision-making within the organization.
• Facilitate risk management processes within the organization.
• Used in financial planning and budgeting process.
• Subject to financial reporting standards such as GAAP and IFRS.