Accounting and Finance form two significant parts of the financial spectrum.
One way to differentiate the two is to consider Accounting as a discipline that focuses more on the past events, occurrences and proper recording & reporting of the same. Finance on the other hand is a future or forward looking science that focuses planning and allocation of assets. One might want to evaluate both Accounting and Finance as two complimentary financial processes within which the information and facts gathered during the â€œaccountingâ€ stage is analyzed in the â€œfinanceâ€ phase and planning basis the analysis is done.
Accounting involves the tracking and reporting the financial transactions of a business. The management of the GL or General Ledger of a business is done by the accounting team. Recording and managing the Cash flows, Profits and Loss statements and declarations, Revenue recognition, Profitability analysis, Debt management and handling taxation are some of the broad areas of work for an accounting team within an organization. There are certain set principles and rules applied for accounting and generating financial reports, known as Generally Accepted Accounting Principles (GAAP). These standards are usually adhered to while presenting company or business related information to the general public. The nature of jobs in accounting are typically accountants, Auditors, bookkeepers, Controllers, Tax accountants etc. The accounting team typically reports to the Chief Financial Officer of an organization.
Incomes and expenditures of a business commonly referred to as funds is treated on an accrual basis according to the accounting standards. What this means is that as soon as an expenditure is incurred it is treated as an expense, not when the actual payment is made. Similarly any revenue is recognized as soon as the sale happens not when the monies are actually collected.
Accounting thus, is an attempt to collect and correctly represent the financial status or the financial past of the company or business. The representation of such facts and figures is done in a manner that facilitates decision taking and forecasting the financial health and trends of the company.
Finance, majorly deals with strategically channelizing the investments made in the business into various functions and departments that not only improves performance and efficiency of the process but also in turn maximizes the profitability. Finance takes care of the investor’s point of view in the business and plans for the return on investments and the exit strategy as well. The functional breakdown of the finance department of any business would include the following key functions: Financial Analysis, Financial Management, Purchasing and Budgeting.
In Finance, the revenues are recognized when the actual receipt in cash happens, similarly when an actual payment is made against a purchase, the expenditures are acknowledged.
In a way Finance builds upon the reports provided by accounting to determine the financial health of a company. It evaluates whether the business would have enough funds to run the operations as per plan and whether the projected flow of funds would be adequate enough to ensure the attainment of overall business goals and objectives.
As finance is that aspect of business that deals with the future, it must take into cognizance the risks and threats associated with the uncertainty. Envisaging the future scenarios where such risks might actually materialize and planning for such situations is also a key part of the financial planning process.
A Financial planner also has to take into account the future sources for acquiring funds according to the expansion plans of a business. In the true sense, The CFO(Chief Financial Officer) of an organization designs the financial strategy of an organization and with the help of accounting manages and controls the allocation of funds to realize the business objectives.