What Is Accounting and Finance?
Accounting consists of a series of chronological steps performed by the accountant or the person keeping the knowledge of such aspects, and the steps are recording, classifying, summarising, analysing, interpreting, and communicating with the person concerned.
Management Accounting
In order to fund an enterprise, there is a need for finance. So, finance is termed as raising funds from various sources available to determine the formulation of the best capital structure to maximise the wealth of the shareholders.
What Is Financial Accounting?
Financial accounting is the process of preparing, summarising and interpreting accounting records. After analysing the accounting, the information analyser communicates such information to the users and stakeholders of the financial statements. Records are mostly framed on the accrual basis of accounting unless otherwise stated. In order to determine the profitability of a business as the net result of the accounting period, the profit and loss account is prepared at the end of the year. For the evaluation of assets and liability on the given date, the position statement, called a balance sheet, is prepared at the specified date. The accounting period usually begins on 1st April and ends on 31st March.
Taking into consideration the provisions of the Companies Act 2013, the balance sheet and profit and loss account have their different formats as specified in Schedule III of the Companies Act 2013, and the companies governed by the special acts have their formats as specified under their acts covered. For example, the format of banking companies, financial statements are given under the Banking Regulations Act 1949.
Accounting
Difference between Accounts and Finance
Users of the Accounting Information
Financial statements are prepared for the users in order to generate value for them. The analysis part of financial statements is used by various users to cater for their different requirements, and hence the users are listed below:
1. Investors
In order to ensure that their money is properly managed and not being misused, the investors are interested in the information on the financial statements.
2. Employees
The growth of employees is directly related to the growth of the company, and hence the employees are also concerned about the true and fair view of financial statements.
3. Lenders
To secure their amount, the lenders are interested in whether their principal and loan amount will be refunded or not.
4. Government
The companies are the major sources of revenue for the treasury of the government. So, to regulate the formulated taxation policy in India, the government is interested in the financial statements.
Stakeholders Analysing Results
Conclusion
Accountants are trusted as the most trusted persons by the people to know and analyse financial information. Accounting requires knowledge of the various other disciplines such as law, economics, taxation and many more. Hence, accountants serve as 360-degree viewers of the economy. Financial statements must be accurate in order to arrive at the correct profits so that the best decisions can be taken by the stakeholders and capital structure must be in such a manner that it reduces the cost of capital.
FAQs on Accounting and Finance: Company Backbone Explained
1. What is the main difference between accounting and finance?
Accounting focuses on recording, summarising, and reporting past financial transactions to show a company's performance. Finance, on the other hand, uses this accounting data to make future-oriented decisions about managing money, investments, and raising capital to maximise shareholder wealth. In short, accounting looks back, while finance looks forward.
2. Why is accounting often called the backbone of a business?
Accounting is called the backbone because it provides the essential structure for all financial reporting and decision-making. Without a reliable accounting system, a business cannot:
- Track its income and expenses accurately.
- Understand its profitability and financial position.
- Comply with legal and tax obligations.
- Provide reliable information to investors, lenders, and management.
Just as a backbone supports the entire body, accounting supports all business operations by providing a clear and systematic financial record.
3. Who are the primary users of accounting information?
The primary users of accounting information are divided into two main groups:
- Internal Users: This includes the company's management, who use the information for planning, controlling, and making strategic decisions.
- External Users: This group includes investors (to assess risk and return), creditors and lenders (to evaluate creditworthiness), government agencies (for tax compliance), and employees (to check the company's stability and profitability).
4. What are the main objectives of financial accounting?
The primary objectives of financial accounting are:
- To maintain systematic records of all financial transactions chronologically.
- To ascertain the profitability of the business by preparing a Trading and Profit & Loss Account.
- To determine the financial position of the enterprise on a specific date by preparing a Balance Sheet.
- To provide crucial financial information to various users like investors, creditors, and management to aid in their decision-making processes.
5. How do the Balance Sheet and Profit & Loss Account show a company's health?
These two financial statements provide a snapshot of a company's health from different angles. The Profit & Loss (P&L) Account summarises revenues, costs, and expenses over a period (like a year) to show whether the company made a profit or a loss. The Balance Sheet, on the other hand, presents a picture at a single point in time, showing what the company owns (Assets) and what it owes (Liabilities and Equity). Together, they reveal both operational efficiency and financial stability.
6. What is the key difference between Financial Accounting and Management Accounting?
The key difference lies in their primary audience and purpose. Financial Accounting is focused on preparing standardised financial statements for external users such as investors and creditors, following rules like the Companies Act. Management Accounting, however, creates detailed, customised reports for internal management to use for strategic planning, cost control, and performance evaluation. It is not bound by external reporting standards.
7. What fundamental principle forms the backbone of the modern accounting system?
The fundamental principle that forms the backbone of modern accounting is the double-entry system. This system mandates that every financial transaction has an equal and opposite effect in at least two different accounts. It is based on the accounting equation: Assets = Liabilities + Equity. This ensures that the accounts are always in balance and provides a self-checking mechanism to maintain accuracy in financial records.
8. What are some key roles and responsibilities of a finance executive in a company?
A finance executive plays a critical strategic role in a company. Their key responsibilities include:
- Financial Planning: Forecasting future financial needs and creating budgets.
- Fund Allocation: Deciding where to invest the company's capital for the best returns.
- Capital Structuring: Determining the best mix of debt and equity to fund operations.
- Risk Management: Identifying and mitigating financial risks.
- Regulatory Compliance: Ensuring the company adheres to all financial laws and regulations.
