Introduction
Accounting and finance are two fields of numbers that are often used interchangeably. Although they may seem like similar fields and work well together, they have their own distinctions and do not perform the same activities.
A handful of clients will come and ask us to perform their accounting services and manage their finances. It may all seem like the same thing, but this article will dive deep into why the fields are so different but work so well together.
What is Accounting?
Accounting is the process of recording and categorizing business activities to create financial statements which are used to make business decisions. This activity captures moments in time for a particular business.
Accounting can be further split between managerial and financial accounting.
What is Finance?
Finance is the field of wealth management that explores how an individual or business generates and uses their profits. This field utilizes functions such as borrowing and investing.
Finance can be further broken down into public, corporate and personal finance.
Accountant vs Fianancial Analyst
An accountant will perform the day-to-day tasks required to create company financials. They are focused on balancing the books and following legal regulations to ensure accurate company records. Accountants are also typically responsible for tax preparation and may recommend certain strategies to improve company profitability and strategies to decrease tax liability.
A financial analyst is focused on the company’s overall financial health and is responsible for managing investments and ensuring adequate cash flow. They continue to project outwards and forecast the future to predict a company’s financial standing to meet goals.
A Simple Distinction between Accounting and Finance
Accounting is rooted in the past; finance is rooted in the future.
Accounting focuses on accurate reporting of what has already happened in the past.
Finance focuses on the future and how to grow the pot of money.
Both Fields Help Business "Growth" Differently
When we use the term “grow” specifically for the finance field, it is regarding literally increasing capital that you have with methods that are unrelated to your daily business functions/service/product.
For example: You may utilize a money market account to generate more interest than your bank’s savings account. You are playing with the money at hand, not with your business’s daily functions.
When we use the term “grow” specifically for the accounting field, it is regarding utilizing or changing daily business functions to improve processes within the company itself.
For example: You may discover certain expenses you have could be cut and make strategic decisions to increase your profitability.
Both fields can forecast to help you “grow” with the specialties each field has. The distinction is between the types of strategies used within each field and different methods of growing.
How do Accounting and Finance Work Together?
Accounting will do the daily, detailed grunt work that is needed to make decisions and grow.
Finance takes the end product that accounting creates to determine what is needed to create more capital in the long-term and mitigate losses.
For example: If you are a business owner and made $20,000 in net profit at the end of the year, you may want to put a portion of that profit aside to invest. Your accountant will create the financials needed for you to realize what your bottom line is ($20,000). After that, you may want to consult a financial advisor to determine what kind of investment you may consider such as stocks, bonds, EFTS, money market accounts etc.
Often, business owners may want to invest because they know they may not use the extra funds anytime soon and would rather have the capital grow over time to generate more compared to the minimal interest a bank’s typical savings account may generate.
Although the example detailed above is a specific instance where accounting and finance mesh together, these moments occur frequently and having the knowledge of how the two differ and interact will help when determining what steps you’d like to take within your personal and professional lives.