It is Important to Know the Difference Between Finance and Accounting. Here’s Why…

Both accounting and finance relate to numbers and in terms of a business, they both focus on a company’s performance as is derived by their financial statements and everything that goes into preparing them. But the similarities pretty much end there. The processes involved in accounting are starkly different than those involved in finance, their aims are different, the interpretations of accounts and financial statements are different, and perhaps the most important distinction between them – the qualifications and therefore qualified professionals for both of them are different. Let’s briefly go over their respective definitions first.

Accounting is the process which makes sure that all financial transactions are entered correctly, as per the accounting rules. This involves separating and maintaining accounts payable, accounts receivable, processing payrolls, maintaining balance sheet by tracking assets and liabilities, keeping up Profit & Loss account, and keeping banking relationships in order. Accounting functions are periodic and regular and have to follow legally accepted principles. Mishaps or intentional mistakes can lead to penalties, fines and even shutting down of a company.

Finance, on the other hand, is the procedure of understanding the trends and meanings of data taken from the accounting processes. For the same reports that are prepared according to the accounting standards are used by financial analysts to understand how well or bad a company is doing, what are the problem areas, what are the potential strengths, what are current trends and what they are going to be in the future. Now let’s go over the key differences one by one, and why each of them matters.

Time Perspective

First of all, accounting procedures relate to the past. From documenting the transactions that took place in the past to preparing financial statements that show the past performance of a company, accounting is supposed to shed light on what has already happened. Financial analysis however is the process of planning and predicting the future. Formulae are applied to evaluate past trends and projecting the same into the future. Likewise, the same financial analysis also guide for future business strategies. The reason why this distinction is significant is that these two go hand in hand. You cannot predict the future without having past data and thereby expertise and efficiency is important in both areas.

Recording Money and Making Money

Accounting processes do not help you with how to improve revenues or cut costs, but financial analysis does. Accounting methods are there to keep record of the expenses you have made and money you have earned, any taxes you owe the government and any extra money that you should have in your bank account. Accounting processes only help you with detecting fraud if the numbers don’t add up. Financial analysis on the other hand helps you realize how to tailor your operations in a way that will improve your efficiencies and productivity, thereby improving profitability. Why this is important does not need to be put in words. If you have excellent accounting statements but a loss making business then financial analysis is perhaps the only way you can do the damage control. Alternatively if you are making super profits but it is going into accounts you don’t even recognize then you need to up your accounting game.

Control Over Operations

Accounting processes, however important, do not provide the accounting professionals with any hard power over the company’s operations, except pointing out if there is any discrepancy in numbers that might or might not be indicative of a fraud. Financial analysts on the other hand have a lot of say in how to run a company. The financial analysis has several different interpretations and it is up to these very financial analysts to determine which interpretation best shows the way forward for a company. This distinction is perhaps more important for those who are deliberating a career choice between accounting and finance. Accounting might be more boring but it is likely to pay higher. So there is a sacrifice both ways. For a business, these both hold the same or at least similar importance.

Final Word

Although the detailed study into these two branches of number crunching game can be starkly different, it is not uncommon for people in the industry to use them interchangeable. The key is that you need to be sure and clear about the objectives you are aiming for and then decide which of these two branches are better suited to your needs. In terms of outsourcing as well, it is always better to take on board a company with separate qualified professionals for both accounting and finance, not the same people performing both tasks. We at Intersoft BPO realize the significance of expertise in both processes and can provide you with the best resources you need for your business to grow and expand.