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Finance, Accounting and Economics

So many people confuse themselves with these terms that I thought of explaining them.

A: What Is Accounting?
The accounting/ book keeping is the oldest field amongst the 3 profession. Accounting relates to preparation of accounting records, preparation, analyzing and interpretation of financial statements.

Preparation of all financial statements, financial data (through income statements, balance sheet and the statement of cash flow) and ensuring compliance with GAAP (Generally Accepted Accounting Principles) is the work of an accountant.

B: What Is Economics?
Economics is a study of choices made by people who are faced with scarcity. Economics has two divisions, microeconomics and macroeconomics. Microeconomics is study focusing at the firm level, while macroeconomics focuses more at the policy and regulatory levels. While Accounting uses principles and conventions to justify many of its actions, Economics uses assumptions to simplify a situation; the ceteris paribus i.e. Other things remain constant assumption.
Economics provides a structure from decision making in such areas as risk analysis, pricing theory through supply and demand relationships, comparative return analysis, and other important issues. While the micro economic part will assist in explaining the economic theory behind what happens at the firm level, the macroeconomics part provides explanations relating to the industry and the economy at large. Economics provides a broad picture of the economic environment in which corporations must continuously make decisions.

C: What Is Finance?
The study of finance consists of three interrelated areas
(i) money and capital markets which deals with many of the topics covered in macro economics
(ii) investments, which focuses on the decisions of individual and financial and other institutions as they choose securities for their investments portfolios, and
(iii) managerial finance (business finance) which involves the actual management of the firm. In general the three areas are interrelated.

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3 replies on “Finance, Accounting and Economics”

these definitions were directed towards novices… for guys like you I will someday pick up GAAP, or how the value of stock options are calculated… and the back dating scandal.

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