Considering the connection between accounting and finance, it must be noted that accounting is an essential part of finance. Accounting is regarded as a sub-function of finance. In this way, both accounting and fiancé are related to each other. Let’s discuss about them briefly.
Accounting is the process of recording, classifying and summarizing the information that is of financial character. It’s a systematic and scientific recording system. It is double entry recording system, which is totally based on basic accounting equation, that is, Asset = Liabilities + Capital.
Being derived from the same accounting equation,split into four elements, owner’s capital, owner’s withdrawals, revenues and expenses, establishing the relationship between the income statement and the balance sheet and showing the economic events leading to increase or decrease in the owners’ equity, it forms the expanded accounting equation.
In this way, when applied to sole proprietorship, the expanded accounting equation goes: Assets = liabilities + capital + revenues – expenses – owners drawings,whereas the expanded accounting equation for a corporation is: Assets = liabilities + paid in capital + revenues – expenses – dividends or treasury stock.
All the business transactions having been recorded methodically, are classified in relation to various accounting ledgers or books. Then, the accounting process leads to summarizing them accordingly. Subsequently, accounting, through its function of communicating involves preparation of Financial Statements: Income Statement and Balance sheet which in turn leads to presenting them to the intended users.
As regards Finance, it refers to the effective and efficient management of money or funds in a manner that the business objectives may be accomplished successfully. The basic objective of finance is to maximize the wealth of the owners as well as the value of the business firm. It’s of great help to the management of a business house to provide financial advice while it supports effectively in making sound business decisions.
Managing working capital effectively and efficiently, the finance function aims at effective utilization of funds. In this way, providing the required funds to a business as and when needed is a necessary task associated with finance function. The finance function further involves managing assets and liabilities in an effective and efficient manner while directing the investment activities of a business.
Establishing the relationship between the elements of financial statements, such as, income statement and balance sheet and the information being derived from them, the analysis and interpretation is made which is one of the most important tasks of finance function through which financial strength, weakness, liquidity and solvency position, the profitability and the performance of a business is to be ascertained.
It is on the basis of profit and loss statement and balance sheet, finance function is enabled to prepare the statement of sources and uses of cash. The end-product of accounting in the form of profit and loss statement or Income Statement and Balance sheets also aids in preparing cash flow statement (using direct or indirect method), which is regarded as one of the most important statements to provide the related information about cash inflows and cash outflows, while it helps in analyzing the current and previous performance of a business entity.
Since finance function necessitates various tasks to be performed, such as,financial analysis: preparing comparative statements, preparing common size statements ratio analysis, trend analysis, statement of changes in working capital and cash flow statement, All these activities are carried out on the basis of the main financial statements: income statement, balance sheets, working capital statement, statement of retained earnings. to provide the related information which will be of great help in managing and controlling and decision making process
In this way, it may be rightly said that finance starts after the accounting process ends, while it is true also that both are connected with each other and both accounting and finance are essential for a business entity to run successfully.
K. A. Fareed (Fareed Siddiqui)
Writer, Trainer, Author, Blogger, Software Developer
BBA, MBA-Finance, MPhil-Financial Management, (MSc-Software Engineering)
Post Graduate Diploma in Computer Applications and Programming
Certificate course in English language proficiency
Level 1 – Leadership and Management ILM – UK
Individual Member of Institute of Management Consultants of India