Finance and accounting are terms we often use synonymously. While both involve the administration and management of assets, they differ significantly in scope and focus.
As you evaluate the monetary health of your organization or your own personal finances, it is helpful to have a solid grasp of both disciplines, understanding the similarities and distinctions.
This article will cover the topics of finance and accounting in-depth, offering a solid base of knowledge.
We’ll discuss different organizational job roles within each field, and explain different software applications and tools that accountants and financial professionals use. We’ll also go over some different types of accounting–like production accounting, project accounting, and retail accounting–and cover some common FAQs.
Finance refers to how an individual or organization generates and utilizes capital. This typically includes borrowing, investing, financing, budgeting, and forecasting.
Finance is categorized into personal finance, public finance, and corporate finance.
Accounting, on the other hand, is the act of reporting and compiling financial information about an individual, business, or organization.
Accounting gives a clear picture of a party's financial state at a certain point in time. Recording transactions, gathering financial information, producing reports, and analyzing financial performance are common accounting activities. Financial artifacts that accountants rely upon include balance sheets, income statements, and cash flow statements.
Accounting is frequently divided into two categories: managerial accounting and financial accounting. The main distinction between the two is how data is structured and displayed.
Managerial accounting mainly focuses on internal accounting processes and generating reports for executive leadership.
A controller is one example of a managerial accountant. A controller is responsible for the overall financial health of a company and work alongside the executive leadership team to develop and then implement financial strategies to meet budgetary goals. They also oversee the creation of financial statements and are responsible for internal controls and risk management.
Financial accounting, however, aims to aggregate financial records that can be used by both internal and external stakeholders.
Commonly, financial accountants provide information for investors, creditors, or outside evaluators. A company’s financial activity being audited is one example of financial accounting in action.
Production accounting is a specific area of accounting that focuses on the financial aspects of manufacturing and distribution.
Production accountants are in charge of tracking costs related to the production and distribution of goods, from unprocessed materials (raw goods) to the end product. Production accountants prepare reports, budgets, and other detailed financial documents for investors, project managers, leadership, and other stakeholders.
Production accountants possess a deep understanding of the manufacturing and distribution industries, as well as expertise in general accounting principles and procedures. They are able to work in a variety of job settings, satisfy the demands of diverse stakeholders, protect the financial interests of a company, and ensure compliance with government regulations.
Some other key responsibilities include:
Production accounting occurs in a variety of settings, with these accountants working at manufacturing plants, warehouses, distribution hubs, or corporate offices. Commonly, many production accountants work on a consultant basis.
Retail accounting is a form of accounting used by retailers or businesses that sell goods to consumers. This specialized form of accounting monitors the costs of inventory, sales, overhead, and any other related expenses.
This form of accounting is vital for retail businesses as it enables them to track their profitability (revenue against business and inventory costs) amid changing sales figures, and identify and cull underperforming products (not delivering optimal profit margins). Inversely, this enables businesses to identify high-profit products and increase their purchase orders, promotions, and/or marketing for those goods.
There are two primary types of retail accounting: perpetual inventory system or periodic inventory system.
The perpetual system is more accurate but also more complex as you are constantly counting and updating inventory. The periodic inventory system is easier to manage, but it’s also less accurate. This periodic system can it make it more difficult for your business to (quickly) identify items that are not selling well or at margins that are less than optimal.
The retail accounting method used by a business will vary based on the the business size and complexity, including the number of product SKUs in circulation. Smaller businesses more commonly rely on the periodic system, whereas larger businesses generally use the perpetual method. Specially designed retail accounting software can help manage the complexities.
Logistics king, Walmart, is an example of a larger company that uses the perpetual inventory system. This enables the retail giant to maintain their famously thin margins, continually track sales and inventory costs, and make immediate, accurate decisions with real-time data.
In a very general sense, distribution refers to the act of delivering money, goods, or services to consumers.
Within accounting specifically, distribution means the transfer of assets or debts from one account to another. This can be done for any number of reasons, including the sale of goods, a business closing, or to record a payment of dividends (sharing a portion of the company’s earnings with its shareholders).
There are two primary types of distribution: cash or non-cash.
Cash distributions are made, as the name implies, via cash through vehicles such as a check or wire transfer. In some instances, cash distributions can include stocks and bonds.
Non-cash distributions are made in the form of illiquid assets, like inventory, property (tranfer of title), share repurchases, Scrip dividends, or service dividends. Non-cash dividends may be awarded when companies lack cash, or it can be a way for a business to reduce its debt and increase its earnings per share.
All distributions are logged in accounting records, carefully noting the account(s) debited and the account(s) credited. If a company pays dividends to shareholders, then it would debit its “dividends payable” account and move the funds (as a credit) to its “cash” account.
Distributions are a central part of accounting and getting it all right–ensuring accuracy–has major tax and regulatory implications. Distributions must be tracked scrupulously to accurately reflect a business’ financial position.
Accounting and finance are closely related, making it difficult to determine which degree will best align with your career goals. But certain degree types are more closely linked to specific career paths and job titles.
Finance could be for you if you’re interested in managing a company's financial strategy at a high level. Here, you have a unique range of options. You could pursue a career as a financial analyst, investment banker, financial advisor, personal financial counsel, or money manager. In school, finance majors study macroeconomics, international finance, financial planning, financial engineering, and corporate finance.
If you decide on accounting, you can look at future job titles such as controller, tax manager, fund accountant, valuation analyst, Chief Financial Officer (CFO), or certified public accountant (CPA). You can specialize further, working in retail accounting or production accounting.
Working within this field, you monitor cash flow, distributions and ensure compliance with industry standards. Accounting majors commonly study risk management, accounting practices and ethics, cost accounting, corporate accounting, quantitative analysis, business law, and tax law.
Here’s a breakdown of some of the differing key job functions for accounting versus finance.
Accounting
Finance
The days of managing complex figures with pen and paper, or via abacus, are long gone for modern-day accountants and number-crunchers.
Some of the most commonly employed tools include:
Accounting software is a computer program that assists businesses in keeping track of their revenues and expenditures.
Additionally, this software can be used to generate reports like profit and loss (P&L) statements and balance sheets. Most financial software programs come standard with features for invoicing, tracking payments, and managing inventory.
Small Businesses
Large Businesses
Large businesses may use any of the accounting software applications listed above, but increasingly large businesses use ERP financial software as it encompasses accounting and other business activities within one package.
Enterprise resource planning (ERP) financial software is a type of software that companies use to handle day-to-day business tasks like accounting, purchasing, project management, risk management and compliance, and supply chain operations.
A comprehensive ERP software package also includes enterprise performance management software, which aids in financial planning, budgeting, forecasting, and reporting. ERP financial software guides an organizations' major financial decisions.
Accounting looks at how money comes into and goes out of a business on a daily basis. Finance, on the other hand, is a broader term that includes managing assets and liabilities and planning for future growth.
Both disciplines have many similarities, as they paint a picture of business financial outlook for distributors, manufacturers, retailers, and other sectors.
Modern-day tools, like ERP software, spreadsheets, and small business apps, can make it easy for businesses of all sizes to manage their accounting and finances with world-class smarts and sophistication.
