Accounting and finance are integrally related for each business firm, actually. Accounting is the study of how information is gathered and distributed in and out. Finance, broadly, is the study of how firms make the investment and financing decisions they have to make in order to operate their business.
Finance needs accounting information in order to operate and accounting must have financial experts in order to translate accounting information for the general use. There are three major areas of accounting as mentioned here:
- Financial Accounting:
Financial accounting is the area of accounting concerned with external parties interested in the business firm. According to the Financial Accounting Standards Board (FASB), it provides you the most important financial collecting and reporting functions for business firms.
Financial statements are produced for the benefits of your external investors. Investors need to be able to get the review of financial statements such as the income statement, the balance sheet, and the statement of cash flows in order to determine that they should or not to invest in this business firm or remain invested in the company.
Financial statements are also the ways of interest to another group of external individuals and those are the creditors of the firm. Those creditors are the bondholders of the firm or they could be the debtholders of the firm. Creditors are individuals who have loaned money to the firm and are interested in receiving a return on their investment and, eventually, a return of their principal.
- Managerial Accounting:
Managerial accounting is the area of accounting associated with gathering and preparing the financial information for inside business organizations such as managers and staff.
It can be compared to the financial accounting which is concerned with information for external individuals. Managerial accounting is the field where the gathering and preparation of financial information are for the insiders of the firm. The Institute of Certified Management Accountants states that management accountants are the ‘value creators’ among accountants, thereby taking their place between the finance people and the financial accountants in the business organization.
Managers use financial information to make better business decisions for their managerial and control roles. They use a variety of forecasting techniques such as variance analysis, risk management, and cost-volume-profit analysis to predict the best forward-looking information as possible.
- Cost Accounting:
Some business professionals take cost accounting as a part of managerial accounting and some think that cost accounting is a different functional area of accounting. Whatever the case is, cost accounting and managerial accounting surely overlap.
Cost accounting looks at the costs of production for a business firm by looking at the fixed costs of the products and services, they sell and their input costs. Input costs are compared to output cost for the measurement of the financial performance of firm with directly regards to the production costs. Cost elements often used are indirect costs or overhead, raw materials, and labor. Managers often use the information from cost accounting to establish the cost control programs for their business firms.