The Key Difference Between Accounting and Financing
When it comes to managing business finances, it is essential to understand the difference between accounting and financing. Though both disciplines are interrelated, they serve individual roles in managing a company’s financial health.
What is Accounting?
Accounting involves the process of recording, classifying, and summarizing financial transactions of a business. It includes preparing financial statements, such as balance sheets, income statements, and cash flow statements. Accounting tracks the company’s financial activities, including expenses, revenue, and assets, and generates a clear picture of the company’s financial performance.
An accountant’s primary role is to ensure that the company’s books are accurate and everything is accounted for to comply with regulatory requirements. They are an important part of any business, as they keep tabs on the company’s financial health.
What is Financing?
Financing, on the other hand, deals with obtaining and managing funds for the company. It includes activities such as raising capital, analyzing investment opportunities, and managing the company’s debt. Financing also provides the company with the necessary resources to operate and expand the business.
Financing professionals are responsible for identifying and evaluating investment opportunities that provide a return on investment. They play a crucial role in accessing capital for the company and determining the most effective use of that capital.
Their Interrelatedness
Though both are different disciplines, accounting and financing are interrelated. Accurate accounting records are essential to the financing process. For example, financing professionals rely on accounting records to identify the company’s financial position when evaluating investment opportunities.
Moreover, accounting records provide important metrics such as revenue, profitability, and liquidity that are vital in a lender’s decision to provide funding to the business. A company with solid financial records is more likely to secure financing at favorable terms.
The Takeaway
In summary, accounting and financing are two distinct but vital components of managing a business. Accounting is responsible for monitoring and reporting a company’s financial health, while financing deals with obtaining and managing funds to support business activities. While both fields specialize in different areas, their interdependence is crucial in sustaining a healthy business.
Table difference between accounting and financing
| Aspect | Accounting | Financing |
|---|---|---|
| Definition | Accounting is the systematic recording, reporting and analysis of financial transactions of a business. | Financing deals with the management of funds and their sources, and can be used to indicate the monetary aspects of running a business. |
| Focus | Accounting focuses mainly on the past financial transactions of a business, and reporting them in financial statements. | Financing focuses on the future financial needs of a business, and how to obtain the necessary funds to meet those needs. |
| Goal | The goal of accounting is to provide accurate financial information for management decision-making, legal requirements or other purposes. | The goal of financing is to ensure adequate and timely funding to enable a business to meet its obligations and achieve its objectives. |
| Activities | Some of the accounting activities include bookkeeping, financial statement preparation, auditing and taxation. | Some of the financing activities include capital budgeting, financial forecasting, risk management, financial planning and analysis. |
| Key Measures | Some of the key measures used in accounting include revenue, expenses, assets and liabilities, and net income or loss. | Some of the key measures used in financing include the cost of capital, cash flow, return on investment, and debt to equity ratio. |