People often use the terms finance and accounting interchangeably, but there are key differences between both.
Both finance and accounting are related to the management and administration of a company’s assets. However, both have different focuses. Keep reading this blog to learn the key differences between finance and accounting.
Finance is essentially how a business generates and utilizes its capital. This includes activities like budgeting, lending, borrowing, forecasting, etc.
Finance can also be broken down into further categories, for example, corporate, public, and personal finance, etc. Every category requires its own approach and style, but the final goal remains the same.
Accounting is a way to report and communicate the financial information of a company. Instead of making strategic decisions, accounting focuses on depicting the financial situation.
Activities involved in accounting include collecting financial info, recording transactions, compiling reports, and analyzing financial statements like balance sheets, income statements, cash flow reports, etc.
The Key Differences Between Finance and Accounting
1. Focus and Scope
The main objective of both accounting and finance is different. Accounting analyzes the current financial situation of a business with the help of past financial statements and numbers. Finance allows you to forecast the future financials of the company and make strategic decisions based on it.
2. Measuring Performance
The accrual method is among the most common accounting methods businesses follow. It records transactions they’re agreed upon instead of when they’re completed. This helps deferred payments and credit transactions. Over time, costs and revenue illustrate the real economic condition of the company and annual growth/losses can be compared.
Finance doesn’t operate like that. It instead calculates the cash the business can generate and leverage. This is dependent on when the transaction happens, instead of when it’s agreed upon.
3. Assessing Value
Finance and accounting differ when it comes to assessing the value of business assets. Accounting’s conservative principles suggest recording lower projected values of the company’s assets while recording higher estimates for its liabilities.
Finance employs a more analytical approach to determine a company’s worth, called valuation. It includes applying discounted rates when analyzing cash flows. Discounted rates represent inflation, risk, and opportunity cost. This helps a company determine the current value of a future stream of cash.
Finance and accounting both play a major role in the success and growth of a business, but accounting is the backbone of the business. It’s critical for a business to perfect its accounting-related functions to survive.
Nidhi Jain is a certified public accountant in USA that can help you with your accounting and tax needs. She runs her own firm based in Dublin, California, and provides services across the Bay Area, San Francisco, San Jose, and more. Our services include bookkeeping, taxes, financial statements, payroll management, cash flow analysis, business tax filing in Bay Area and more. Get in touch with us now!