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The Financial Warfare - Accounting vs. Finance?

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Accounting versus Finance

(a)    The Misunderstanding

To the laypeople, there is a perception that accounting and finance are synonymous. Although this is a general misunderstanding, it is not hard to understand why it exists in the first place. Well, both involve dealing with calculations and numbers, thus, implying that individuals must have the mathematical eye i.e. the passion for numbers. Secondly, accountants and financiers play an important role in modern civilization. As much as we may think that the great leaders developed the country, it was the accountants and financiers who searched for the funds and gave financial advice. Accounting and finance are also inter-related with one another. All organizations depend on these two to achieve their objectives. And of course, if you choose to major in either of these professions, you are in for many prosperous paydays!

(b)    The Accountants Launch the First Attack

Nevertheless, this misunderstanding needs accurate clarification as individuals/organizations requiring specific services will be able to solicit the correct assistance. Let’s start off with the accounting profession. Accountants have long been stigmatized as robots, ‘nerds’ and even human calculators. It cannot be denied that there was once upon a time that accountants WERE like that. This profession now has a completely new image and more and more young individuals are aspiring to be a member of either ACCA, ICAEW, CIMA, CPA Australia etc. Accountants will see eye to eye that this may be the only profession that will never be short of jobs. When times are good, accountants are required to calculate profits. When times are bad, accountants are required to advise on how to manage risks and cut losses. If you plan to be an accountant, you’ve pretty much covered yourself for all economic conditions!

(c) Fighter #1-The Financial Accountant

At this point of time, you may be wondering of the precise function of an accountant. Count money? Well, you’ve got a good start there! Accounting is the art of making sense of numbers so that they can be simplified and communicated in an appropriate form to relevant parties. An example to illustrate this typical function would be as follows: The accountant of Always Profit Co. will calculate the amount for sales revenue, purchases as well as other income and expenses so that the net profit for the year can be calculated. He/She will also record the organization’s assets and liabilities to prepare the Statement of Financial Position. In general, you are responsible for reporting the performance of the organization as well as its financial position to the stakeholders. Who are the stakeholders? These are the people who have an interest in the organization and are directly affected by its decisions and performance, such as shareholders, banks, suppliers etc. They rely on the financial information provided by you to make decisions. Hence, this particular branch of accounting is known as financial accounting.

(d) Fighter #2-The Management Accountant

Similarly, accountants also provide information of a different type to the business management team in an organization who are responsible for the operations of the entity. This branch of accounting is referred to as management accounting Management accountants navigate the organization towards its objectives through the information they provide because it assists management in planning, controlling and making decisions. Firstly, management information is used to set standards of performance or yardsticks. For example, factory managers work with sales managers to budget production volumes to meet forecasted demands. Hence, managerial accountants can use them to analyze actual results and explain variances that occur from the budgeted results so that managers can make decisions to tackle those variances. In general, management accounting involves setting budgets/targets and analyzing actual results to determine appropriate reasons for any variances.

(e) The Big Four Send Reinforcement

However, for those aspiring to be accountants, the list doesn’t end here as the job opportunities available are never-ending. Most accounting graduates begin their journey in auditing firms such as the Big Four i.e. PwC, E&Y, KPMG and Deloitte. As an auditor, your responsibility will be to examine the annual statutory financial statements prepared by a public listed company. Based on your evaluation, you will then express a professional opinion as to whether the audited financial statements project a true and fair view of the organization’s performance and financial position. Lately, the role and responsibilities of the auditor have been profoundly questioned and reexamined following high profile scandals such as Enron and WorldCom.

(f) Fighter #4-The Corporate Accountant

Alternatively, an accountant could also choose to be in the corporate sector such as banks and financial institutions. You might be interested in holding the position of Chief Financial Officer (CFO) in a multinational organization and later be promoted to Chief Executive Officer. Interestingly, most CEOs are individuals with accounting backgrounds, such as the CEO of AirAsia, Datuk Tony Fernandes. Accountants are like doctors in the sense that some specialize in a specific expertise such as tax, audit etc. Such professionals are highly sought after and paid well for their expert services. Most importantly, accountants should keep abreast with the latest information and knowledge related to their profession

(g) The Financiers Retaliate

Now let us move on to the cousin of accounting, which is finance. Both are in the same family because to understand finance, you need to have an accounting background. Before we explore deeper into the wonders of finance, it would be wise for us to clarify two issues. Firstly, accounting involves providing information about the performance and financial position of an organization to its stakeholders. However, finance involves managing an organization’s funds to ensure that they are being used properly to achieve its objectives. Through financial analysis, companies and businesses can take decisions and corrective actions towards the sources of income and the expenses and investments that need to be made in order to stay competitive. As you can see, there is a difference between the formal roles and responsibilities of an accountant and financier. However, there is a symbiotic relationship as they cannot exist without one another and are the backbone of the organization.

(h) The Financial Propaganda
“I want to be an investment banker. If you had 10,000 shares I sell them for you. I make a lot of money. I will like my job very, very much. I will help people. I will be a millionaire. I will have a big house. It will be fun for me.”
(Seven -year-old schoolboy, “What I Want to Be When I Grow Up,” March 1985. From Michael Lewis’s Liar’s Poker, 1989.)

(i)    Fighter #1-The Financial Manager

So what can you do? Firstly, you could hold the position of financial manager in an organization. You will be responsible for giving financial advice to the organization regarding decisions that are about to be made. Clear budgetary planning is essential for future planning, both short and long term, and companies need to know the financial implications of any decision before proceeding. For example, the organization has a choice of investment opportunities for the next five years. Which investment gives the highest return? What are the risk factors for each investment? Which investment will return my capital within the shortest period of time? The answers to these questions will be delivered by the financial manager through methods such as Net Present Value (NPV) and Payback Period. Other than that, financial managers also play a part in other organizational activities such as arranging new sources of finance for a company’s debt facilities, analyzing competitor and market trends, researching and reporting on factors influencing business performance etc.

(j) The Investment Banks Send Their Troops

Apart from that, you could also specialize in areas such as security analysis and portfolio management as well as financial planning. Your expertise will be highly sought after by stock brokerages, commercial banks and investment banks (mutual funds). By being in an investment bank, you role will require you to raise capital, trade securities as well as manage corporate mergers and acquisitions. There is hardly any accounting knowledge applied in this area as you will be largely dealing with management of securities such as shares and bonds to meet the specified investment goals of the investors. Other than that, being in an investment bank gives you the opportunity to understand its other functions such as merchant banking, risk management, strategy etc.

(k) The Result of the Fight

The conclusion is that accounting and finance are different in many ways but closely related to one another. Hence, for those of you intending to pursue a financial career, an accounting background is important because it is the foundation to many opportunities. If you later discover that the accounting practice is not your cup of tea, it’s never too late to switch to finance. Your accounting knowledge will not be a waste but instead help you understand the principles of finance better. In fact, the world is at your feet if you are able to conquer and be an expert at both accounting and finance simultaneously! However, as the saying goes, “Jack of all trades but master of none”, not every individual is like that, As a result, we have both an accountant and a financier!


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