Most of the students mingle with the concepts of accounting and finance. Patently, these two concepts hail from the commerce field, but they both have their characteristics in the world of commerce. Here, you will learn the core differences between accounting and finance: the most important concepts of commerce with some unique examples. Let’s move forward to visit the depths of accounting and finance.

Accounting: The past of the business

As you know, any activity we do in order to earn a profit is called business. In order to run that business, we purchase some products and services in that business with the help of money, called financial or monetary transactions.

Accounting is nothing other than the recording and summarizing of monetary transactions of a business. In accounting, several terms are used to show the specific activities of the business. The accounting cycle is a step-by-step process used by businesses to record, process, and report the financial transactions of an accounting period (normally twelve months).

The accounting cycle consists of the following procedures in order to get an accurate picture of the financial transactions of the business at the end of each accounting period.

Accounting Cycle:

Identifying and analyzing transactions 

Every financial transaction must be identified and analyzed, and the impact of that transaction on the accounting equation must be determined. For example, if a business purchases inventory on credit, it increases inventory, which is an asset, and also increases accounts payable, which is a liability of that business. This transaction will change the position of the accounting equation.

Recording transactions in the general journal (journalizing)

All financial/monetary transactions are recorded in a general journal (it is also called the book of original entries, in which the bookkeepers/accountants record financial transactions in date order) in chronological order. A general journal is the first place in the accounting cycle where the data is recorded.

Posting to the ledger 

The general ledger is the book that records the financial transactions of a specific account: assets, liabilities, owner equity, revenue, and expenses. The transactions that are first recorded in a general journal are posted to relevant ledger accounts in order to be summarized in the right place.

Preparing an unadjusted trial balance

It is a snapshot of the balances of all the ledger accounts at the end of the accounting period before the preparation of financial statements. The purpose of an unadjusted trial balance is to check the accuracy of double-entry bookkeeping by matching the total balance of the debit side with the total balance of the credit side.

Adjusting entries 

Recording of unrecognized transactions is made through adjusting entries for a specific accounting period. These entries help in the proper reflection of revenue for the period in which it was earned, not just when it was collected. Adjusting entries also ensure the appearance of expenses in the period in which they were incurred.

Preparing to adjust trial balances

As before, we studied an unadjusted trial balance before making adjusting entries. Preparing an adjusted trial balance is the next step in accounting after making adjusting entries. An adjusted trial balance can be defined as “the summary of all business accounts and their balances after making adjusting entries and ensuring that the debit side of balances matches all credit side of balances in a specific accounting period. Here, we can say that an adjusted trial balance is the sum of an unadjusted trial balance and adjusting entries.

Preparing financial statements

Financial statements are the final reports that show the position and performance of the business on a specific date. They convey a true picture of the business to investors, creditors, and stakeholders. There are four main types of financial statements:

• Balance sheet
• Income statement
• Cash flow statement
• Statement of shareholders’ equity

What is Finance? 

Finance: The future of the business

Finance is the field that deals with the management of money and other potential assets. It involves the study of money and oversight to make good financial decisions and investments. It is all about how individuals, business, or government allocate their resources over time despite the challenges they face.

Finance is basically divided into three main categories:

Personal Finance

Personal finance is the management of an individual’s or a household’s financial resources and money decisions. It involves the activities of budgeting, saving, investing, debt management, retirement planning, and buying insurance. Short and sweet, it’s about how you make, spend, save, and invest your money in order to achieve your objectives, such as purchasing a residence, paying for education, or accumulating for retirement. 

The following are the key areas of personal finance:

Income

Income refers to the money that you earn from various sources, like salary, business, or investments.

Budgeting

Budgeting is all about the planning of your income and how to invest wisely, ensuring that expenses do not exceed earnings.

Saving

Saving is an act of setting aside a portion of your income rather than spending it, usually for future use. It involves reducing current consumption in order to build financial security, gain specific goals, or get ready for unexpected expenses.

Investing

Using capital to buy assets like stocks, mutual bonds, or real estate in order to grow capital over time.

Insurance

Protecting yourself and your assets from unexpected financial risks. It helps individuals and businesses manage financial risk by mitigating the financial crisis of certain events, such as accidents, illnesses, natural disasters, or in the case of death.

Retirement Planning

Preparing financial planning for life after retirement and securing the future with predetermined goals.

Tax Planning

Tax planning is all about managing your capital in a way that reduces your tax burden allowably. 

Personal finance is about managing your capital carefully to achieve financial security and targets, such as buying a home, saving for a better education, or enjoying a comfortable life after retirement.

Corporate Finance

Corporate finance is the branch of finance that deals with how firms allocate their capital, make sound financial choices, and create value for their shareholders as well as the business.

Below are the principal elements of corporate finance:

Capital Budgeting (Investment Decisions)

These are the business decisions that determine which investments the firm should make. These decisions aim to invest in projects yielding returns above the cost of capital.

Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and Profitability Index (PI) are the primary techniques utilized in capital budgeting.

Capital Structure (Financing Decisions)

This is the division of a company’s capital and debt, which way how a company funds its growth and operations with loans and bonds (the company’s debt), equity (shareholders’ capital of the company), or both.

It aims to determine an optimum capital structure that stabilizes risk and returns and minimizes the company’s cost of capital.

Working Capital Management

These are decisions by businesses to manage the company’s short-term liabilities and assets so that it has adequate liquidity to perform day-to-day operations.

It is managing cash and cash equivalents, inventories, accounts receivable, and accounts payable effectively.

Financial Risk Management

It is a process of minimizing the potential losses faced by a business or an individual because of different forms of market or financial risks. These risks can emerge from movements in markets, interest rates, a lack of liquidity, or some operational breakdowns in the business.

These are the mechanisms and instruments employed by an enterprise or individual to cope with possible financial risks, with the aim of minimizing the adverse effect on earnings, cash flow, or firm and shareholders’ value.

Dividend policy

It is a practice of distribution of firm’s earnings to its owners in the form of dividends and retaining some amount of earnings for the sake of reinvestment in the business.

Public Finance

Typically, Public finance is the branch of economics that deals with the income and expenditure of the government, so activities like managing and allocating public resources to achieve economic stability somehow relate public finance to the field of finance.

It shows how governments collect funds through taxation and other legally fees and how they spend these collections to provide social facilities to the general public.

The following are the main objectives of public finance:

Efficient Allocation of Resources

The government collects revenue through taxes paid by the general public and spends that revenue on public goods (e.g., education, defense systems, roads, and bridges).

Also, ensure the proper utilization of resources in sectors, such as infrastructure and healthcare, where private markets may fail.

Equitable Distribution of Income and Wealth

The main purpose of public finance is to reduce income inequality through:

• Progressive taxation (higher taxes for higher income).
• Transfer payments (unemployment benefits, pensions, subsidies).

Economic Stability

Controlling inflation, deflation, and economic fluctuations through fiscal policy, such as adjusting taxes and expenditures in every fiscal period.

Ensure the availability of full employment and stable prices.

Promotion of Economic Growth

For long-term economic growth, the government also invests in development projects to increase productivity and growth.

Provision of Public Goods and Services

Provision of goods and services to the general public that the private sector can not provide effectively (national defense, law enforcement, public parks).

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