Finance and Accounting

The relationship between finance and accounting, conceptually speaking, has two dimensions: (i) they are closely related to the extent that accounting is an important input in financial decision making; and (ii) there are key differences in viewpoints between them.

Accounting function is a necessary input into the finance function. That is, accounting is a sub-function of finance. Accounting generates information/data relating to operations/activities of the firm. The end-product of accounting constitutes financial statements such as the balance sheet, the income statement (profit and loss account) and the statement of changes in financial position sources and uses of funds statement/cash flow statement. The information contained in these statements and reports assists financial managers in assessing the past performance and future directions of the firm and in meeting legal obligations, such as payment of taxes and so on. Thus, accounting and finance are functionally closely related. Moreover, the finance (treasurer) and accounting (controller) activities are typically within the control of the vice-president director (finance)/chief financial officer (CFO). These functions are closely related and generally overlap indeed, financial management and accounting are often not easily distinguishable. In small firms the controller often carries out the finance function and in large firms many accountants are intimately involved in various finance activities.

But there are two key differences between finance and accounting. The first difference relates to the treatment of funds, while the second relates to decision making.

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