Understanding the Differences Between Accounting and Finance

If you’ve studied a finance-related subject in university, you probably already know the difference between accounting and finance. However, if like most of us, you come from a different background or aren’t that financially savvy, the distinction can be quite challenging. Let’s delve into the differences.

The Core Distinction

While accounting focuses on the day-to-day flow of money, reporting what has already happened, and ensuring that flow of money abides by laws and regulations, finance looks at what will be spent. Unlike accounting, which concentrates on recording and reporting transactions and ensuring compliance with laws, finance focuses on planning and directing the financial transactions of organizations. Finance asks questions such as; How, What, Why, and When?

Accounting: The Backbone of Financial Reporting

Accounting involves identifying, communicating, and recording the economic results of a company to be reported to business decision-makers and, in some cases, governmental parties. It is a vital function for every business.

• Financial Accounting: This involves creating statements like balance sheets, income statements, and cash flow statements used by external decision-makers, such as investors, government, and creditors.

• Managerial Accounting: Similar to financial accounting but used by internal stakeholders for decision-making. It often includes financial analysis tools such as forecasting and budgeting.

• Cost Accounting: This focuses on determining production costs for goods or services, aiding businesses in setting prices.

The skills required for accounting include communication and leadership skills, attention to detail, and proficiency in tools like Excel, SQL, and BI software.

Finance: Planning and Strategy

Finance is a broader discipline that involves looking at global financial markets, competing businesses, and more to forecast the future performance of a company. It encompasses learning about stock markets, financial analytics, portfolio management, and more. Individuals studying finance typically gain a broader and more extensive understanding compared to accountants.

Finance professionals are tasked with:

• Strategic Planning: Developing long-term financial strategies for the organization.

• Investment Management: Analyzing and managing investment portfolios to maximize returns.

• Risk Management: Identifying and mitigating financial risks to ensure stability and growth.

  
  

Skill Sets and Career Paths

Both accounting and finance require distinct skill sets and offer different career paths. Accountants often pursue certifications like CPA (Certified Public Accountant) and focus on roles in auditing, tax preparation, and financial reporting. Finance professionals might aim for certifications like CFA (Chartered Financial Analyst) and find careers in investment banking, financial planning, and corporate finance.

Conclusion

While accounting and finance are closely related, they serve different purposes within the financial ecosystem of a business. Accounting is primarily about tracking and reporting past financial activities, ensuring compliance, and aiding in internal decision-making. Finance, on the other hand, is forward-looking, focusing on strategic planning, investment, and managing financial resources to drive future growth. Understanding the distinctions and the unique contributions of each can help individuals and businesses effectively manage their financial health and achieve their economic goals.

Financial modelling is one of the most effective business planning tools, on which you can read more about here. You can also book a free financial modelling consultation, or attend one of our monthly workshops.