The Differences Between Accounting and Finance
If you’re a numbers whiz, you might be thinking about pursuing a career in accounting or finance. But there are some major differences between these two fields, and it may not be the right choice for you.
The main difference between these two disciplines is that accounting examines past fiscal transactions, while finance looks at how money flows through a business to achieve growth.
Accounting is an all-important business process that steers a company toward financial success. All businesses need to keep accurate accounting records so they can monitor everything from costs to revenue and taxes.
The Internal Revenue Service (IRS) also uses accounting records to verify that taxpayers have properly paid their taxes. The IRS requires taxpayers to use an accounting method that accurately reflects their income and be consistent in their choice of accounting method from year to year.
Accrual accounting matches revenues and expenses to the same time period, allowing for a more accurate assessment of a company’s profitability and financial performance. The accrual method is more complex than cash-basis accounting and generally requires that a company keep accounting records for all sales and purchases, including accounts receivable, payables and inventories.
The simplest accounting method, cash basis, records revenues when they’re received and expenses when they’re paid. This accounting method is easier to implement, but may not provide as accurate long-term projections. It’s a good choice for small businesses that prefer the simplicity of cash accounting.
Taxes are payments that governments collect from their residents for a variety of social security, health, and infrastructure purposes. Some taxes are applied to transactions (such as sales tax or tariffs), while others are based on net financial results (such as capital gains or estate tax).
Accounting for taxes is the process of keeping a company’s financial records for use in tax preparation. Businesses and individuals must adhere to specific standards outlined in the Internal Revenue Code when completing their tax returns.
A popular tax accounting method for companies is the accrual basis. This method allows companies to record revenues and expenses when they happen rather than when they are received, which saves time.
Another popular tax accounting method is future year liabilities, also known as deferred liabilities. These are a company’s long-term financial commitments, which are typically taxes they aren’t yet due to pay.
Tax accounting is an important tool for business planning and compliance with federal and local taxation policies. It also streamlines deferred tax assets and liabilities to help businesses gain better control of their pro forma financial statements.
Financial statements are a series of reports that summarize the financial performance and position of a business over a period of time. They contain information about the assets, liabilities and shareholders’ equity of an entity.
A balance sheet is a snapshot of a company’s assets, liabilities and owners’ equity on a specific date. It shows a picture of a company’s financial position at that point in time and helps investors and creditors analyze the company’s finances.
Inventory is the goods a company keeps on hand that are intended to be sold during a particular accounting period. It may include raw materials, finished products, work in progress and goods that are on order or that the company expects to receive before its next reporting date.
Revenues are the income a company earns from selling goods and services. Expenses are the costs incurred in producing those goods and services. These expenses include the cost of goods sold (COGS), selling, general and administrative expenses (SG&A) and depreciation or amortization.
Investments are a common way for people to put money to work. They may include buying stocks, bonds, or real estate property, among other things.
When you hear the term “investments,” you probably picture stocks, bonds, and mutual funds. However, accounting and finance professionals view investments as much more than just these assets.
Stocks are equity investments, which means investors buy some residual claim to a company’s future profit flows. They also gain voting rights based on the number of shares owned, which gives them a voice in how the company is run.
Bonds are debt investments, which mean they pay back an amount of money to the investor over time. They are used by governments and companies to raise capital.
In 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10). This standard changed the accounting treatment for equity securities. The new standard required substantially all equity securities to be carried at fair value with changes in fair value included as a component of earnings.