Commonly confused, accounting and finance exist as two related but distinct fields in business. Understanding the difference between these disciplines can help those considering a business education choose the career path best suited to their interests. Here is a brief overview of accounting and finance.
What Is Accounting?
Accounting is “the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of financial character, and interpreting the results thereof,” according to the American Institute of Certified Public Accountants. In emphasizing the “art” and “interpretation” aspects of accounting, this definition highlights the importance of human aptitude and competency within the field.
Types of Accounting
Accounting expert Steven Bragg identifies several distinct types of accounting:
Financial accounting seeks to record and collect all financial transactions of a company for outsider use. Because reports may be read by creditors, lenders or investors, it is crucial that those in this area can represent their companies’ financial portraits accurately and fairly.
Those in public accounting provide accounting services to outside firms. Their responsibilities may include helping with financial statement preparation, auditing, preparing tax returns and other consulting services. Like financial accounting, presenting a client’s financial portrait fairly is a priority.
Government accounting helps government entities control and maintain resources at the federal, state and local levels. Those who work in this area sort government money into funds to better understand how resources are used and directed. They must also adhere to a set of accounting standards that are unique to this field.
Management accounting focuses on understanding the financial workings of a business. Accountants in this field help businesses understand their spending and income by looking at areas like revenue, expenses, project profitability and the accuracy of inventory records.
Internal auditors examine company systems to help improve financial efficiency. They may examine items such as transactions, fraud, risk assessments, compliance and processes. Ultimately, internal auditing roots out waste, mismanagement and flaws in process structure.
What Is Finance?
According to Investopedia, finance is “a broad term that describes two related activities: the study of how money is managed and the actual process of acquiring needed funds.” Finance includes concepts like:
- Capital markets
The basis of finance is rooted in macroeconomics and microeconomics.
Types of Finance
Finance can be divided into three main categories:
Personal finance refers to how an individual or a family manages wealth. This may mean identifying short-term and long-term needs, assessing taxes and following through on financial goals, such as saving for retirement.
Corporate finance is concerned with the financial workings of corporations, including how they start, grow and are sustained over time. This is done by way of investors and other means.
Public finance is concerned with government policies that affect taxes, spending, budgeting and debt issuance. Its purpose is to understand and manage how governments pay for public services.
Accounting vs. Finance
Accounting and finance share certain fundamental characteristics, Smart Asset explains. Both fields are obviously concerned with money management. Both also require employees to possess a certain level of advanced education and quantitative analysis skills. Beyond this, accounting and finance are distinctly different.
- Focuses on daily movement of money within companies or institutions
- Emphasizes the reporting of past financial events, as well as compliance
- Requires workers in the field to be fastidious with details
- Has a basis of study in subjects like accounting practices, accounting ethics, business and tax law, and accounting theory
- Focuses on the broad management of money and assets, and planning for financial growth
- Emphasizes increasing money and decreasing or preventing losses
- Requires workers to be long-term thinkers
- Has a basis of study in subjects like macroeconomics, microeconomics and financial engineering
No matter what field prospective business students choose to enter, success ultimately requires earning the right degree.