Accounting Vs Finance

In this post, we shall discuss difference between knowledge streams of Accounting and Finance. A vast majority of students/ youngsters/ aspirants cannot distinguish between the two or do not appreciate difference between the two streams leading to confusion about skill acquisition and career options.

Although both Accounting and Finance deal with administration of business, but their objectives are entirely different. While Accounting has more to do with historical data, its validation and analysis; Finance is the art and science of building up on that historical data to plan and project for future. Simply put, if we see a business Balance sheet, then Accounting ends with signatures on Balance sheet while Finance starts after Balance sheet has been signed. So Accounting deals with past while Finance deals with Future.

Accounting is related to creation of financial statements while Finance covers interpretation and analysis of past statements to draw out future strategy.

It may be important for the uninitiated or the beginner to understand the difference between Accounting and Finance, because it will help them in understanding their own inclinations, choose a particular professional path and develop the skill sets accordingly.

Accounting involves accurate recording of each and every financial transaction in a business and generation of reports or statements based on aggregation of recorded transactions. These statements commonly known as Profit & Loss statements (Record of Income and Expenses during a certain period)  and Balance sheet (Record of ledger balances on a particular day) can be accessed on any day of the year, but for analysis, the same are generated at the end of every month or quarter or year. Thus P & L statements is a record of Income /Expenses during a month or quarter or a year while Balance sheet is a record of ledger balances on that date of the month or quarter or year. Accounting also involves analyzing nature of these transactions ie whether they affect business unit’s revenue or capital structure. Going forward, an accountant’s job also includes analyzing and classification of various assets and liabilities into short term and long term ie. how they impact financial health of  business. A short term classification connotes that the respective asset or liability shall have a life cycle of one working capital cycle which is generally considered to be one year and asset or liability which may outlive one WC cycle is considered as long term. An accountant also draws a cash flow statement to show from where the funds have come and how they have been deployed.

Finance takes off where accounting leaves. So the Finance professional collates the structured information provided by the Accountant, dissects it, analyses it and uses it to prepare future projections for business and taking budgetary decisions. As Finance deals with future, it involves projection of a business model to take care of business’s future liquidity requirements. This business model, while being built on existing assets and liabilities, should ensure future efficient use of these assets and liabilities. As Finance deals with future it has to deal with uncertainties, multiple options, risk scenarios associated with every option and then final projection of the best option for stability and prosperity of business. Study of Finance also involves development of skills to estimate and anticipate future cash generations and how to deploy the surpluses to maintain financial stability as well as ensure growth. Thus Risk management becomes an integral part of Finance.

In India, study of Accounting primarily offers career as a Chartered Accountant, where one can specialize in Auditing ( both as a Public Auditor or Statutory Auditor) and /or taxation. Accounting also offers career paths in Corporate Finance departments of Banks or businesses, Management Consulting Services, Financial Planning etc. Persons with accounting skills also tend to delve into areas meant for those specializing in Finance eg investment banking, on the basis of their comfort with number crunching.

On the other hand study of Finance offers careers in Investment Banking which entails structuring and forecasting of an entity’s financial requirements, may be long term debt, short term working capital or equity capital. Related fields are capital risk management , Mergers, Acquisitions and Amalgamations, Financial Planning, Corporate Finance departments of Banks or businesses etc. 

It may be observed that some of the above specializations overlap and can be taken up by both accounting or finance students, depending on their inclination and skills for numbers or analytics. There is also a scope for setting up private practice both in Accounting or Finance, although there are infrastructural costs involved and there is very stiff competition.

Before we wrap up, let’s talk a bit more about Investment Banking or Corporate finance in simpler terms, as this is one of the most sought after career paths. An investment banking career can be in Banks or Corporates or Consultancies. To a limited extent it offers scope for setting up a boutique consultancy also. Investment Bankers are basically advisors who help Companies in raising resources either through Capital or Debt. Job involves extensive modelling to study various scenarios, critical evaluation of all scenarios, inter twinning them with the current state of affairs or environment and finally arriving at a conclusion. But this is the job only half done. The conclusion shall be saleable to the investor. If you are in a Bank then the conclusion shall be acceptable to your decision making authorities and if you are outside the Bank then the conclusion shall be attractive to the Bank (as an investor) or equity participant. For an investment Banking career, one requires superior number crunching abilities, eye for detail, focus, ability to work for  long hours and finally excellent networking skills. Naturally, it’s a must to have superior communication skills, whether written or spoken.    

Last but not the least, for a successful career in accounting or finance, some more attributes are required in addition to attitude, inclination and development of proper skill sets. These attributes are -

(i) General knowledge about events past and present in all fields whether politics, economics, history, geography, technology, culture, music or sports. The list is endless. In short, one should keep on scanning and analyzing the environment. Be inquisitive and try to understand and learn about everything around us. This will help in development of a confident personality and a good network. This shall also help in growth as a knowledgeable mature professional.

(ii) Good communication skills are imperative, especially where numbers have to be discussed, or various scenarios have to be evaluated. Good command over words and language always shows confidence and its an essential asset for a professional.  

(iii) Transparency, honesty of purpose  and ethics should be adopted as one’s DNA. In most cases, colleagues or clients are able to make out whether a person is being truthful or trying to short change them. And this one attribute may make or mar a deal.

So although Accounting or Finance are two different streams requiring specific skill sets, but both streams require some generic attributes to ensure a successful professional career.