Finance and accounting are difficult to differentiate for common people. They sound similar, that both of them are talking about money and business. In many offices too, finance and accounting are handled by same manager or person. Usually, there is F&A manager position in many companies who handles finance and accounting at the same times.
Actually, finance and accounting are very different subjects to each other. In formal education, accounting is a subject in economy, while finance is a part management studies. As a specialization, accounting can be divided into financial accounting, management accounting, audit accounting, tax accounting, even forensic accounting which focused in detecting fraud. In management studies, beside finance, there is also some specialization, such as operation management, marketing management, HR management, and so on.
In practice, accounting is mainly about recording historical events that happened in company. These events could be transactions or other kind of events that need to be recorded. So, accounting has more focus on past times. In contrary, finance is mainly about future prediction and decisions of a company in response of its limited resources, such as money.
As a mindset, accounting emphasizes in margin or bottom line based on accrual basis, which happened because of the nature of recording historical events. Accrual basis means that revenue is recognized on the delivery of products or service to customer and at the same times, expense is matched with revenue. The recording is not only done in events of cash payment received in revenue or bill paid in expense. Accrual basis will make better picture of historical events as a basis for future decision. On the other hand, in finance, cash is king. This means every prediction and decision in finance is based on cash. We call this as cash basis.
In the job description, accounting, especially financial accounting, the job starts from transaction documents and ends in financial statements as its main product. Finance job will use accounting products as basis for forecast and decision. Asset allocation and how to finance business are decided by finance. In asset allocation, finance needs to decide what the ratio between current assets and non-current assets is or how much cash needed in financing company operations, etc. In how to finance business, finance needs to decide whether using owners’ equity of or find debts to do the business.
So, as a summary, we can see the differences between accounting and finance in many aspecs, such as in formal education, in practice, from their different mindsets, and in their job description.
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