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Finance and Accounting Concepts Series
By Dr. Pradipta Kumar Sanyal
Chapter-1
Finance Vs Accounting
Finance mainly focuses on how an organization sources funds and allocates them for asset investments. It also includes financial forecasting with models to support strategic decisions. Overall, finance emphasizes a future-oriented perspective.
Whereas Accounting primarily focuses on recording, summarizing, and reporting financial transactions. Accounting mainly emphasizes the historical view of an organization’s financial performance.
However, Financial Statements are an integral part of Finance and Accounting. Financial Statements, which primarily include Balance Sheet, Profit and Loss Accounts, and Cash Flow Statements, portray the essential information about the financial performance of an Organization.
Balance Sheet
Balance Sheet of an Organization showcases the Sources from which a Company raises its Funds and how the funds can be applied for Investment in the Assets of the Company. The major sources of funds for the Indian Company have been Equity and Debt, and a company that has both Equity and Debt in its Balance Sheet is called a levered Company. The process of magnifying shareholders’ returns by the use of debt is called “Financial Gearing” or “Financial leverage” or Trading on Equity. Leverage Ratios play an important role in defining the involvement of debt in the Capital Structure of a Company.
whereas a company with only Equity Financing can be called an unlevered Company. Companies that have both Equity and Debt as major sources of Finance have better flexibility in investments in both Non-Current (Fixed Assets) and Current Assets. However, a company that is not capital-intensive may not require Debt as a Source of funding for its Assets and hence restricts itself only to Equity Financing. Higher Investments in Assets also lead to Higher Assets Turnover.
Asset turnover essentially indicates the performance of a company assets in generating sales. Higher the turnover better is the performance of a company’s assets.
Profit and Loss Accounts
Profit and Loss Accounts indicate the Profit or loss of a company during a financial year. It indicates both Operating profit as well as Net Profit of a Company, which can be further classified as follows
Cash Flow Statement
A cash flow statement indicates the Cash inflows and Cash outflows of a company. Cash flows of a company can be from the following three different activities
