The Relationship Between Business Finance and Accounting

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Defining Business Finance and Accounting.

Eddie McLaney (2005) pitches business finance as the process of making financial decisions in business, with particular reference to suggested investments for a business and how these should be funded. The aim of business finance is to allow an organisation to run by ensuring economic stability at the very least or business growth at most by identifying possible sources of financial income and allocating these accordingly. This is not aimed solely at stock market investment, but also in investing in the right client or choosing the right project for the benefit of the organisation.

The definition of accounting, as provided by John Dyson in Accounting for non-accounting students (2010) is “…a service provided for those who need information about an entity’s financial performance, its assets and its liabilities.”

Dyson (2010) goes on to describe the restrictions that this definition imposes upon accounting information as; timely, relating to only one organisation (or entity); the necessity that the information is quantifiable and able to be read financially; and that the fiscal benefits of past, present and future are distinct from each other. Accounting is an aspect of financial management that is essential to any functioning business and because of the reliance placed upon the results, they must be precise and honest about an organisation’s financial position.



 

The Business Finance and Accounting Process

For business finance to be correctly managed it requires a foundation of dependable information obtained early in the process. An organisation can get this information from a number of sources, of which accounting is one (others include legislation and the volatility of the environment in which the organisation operates).

Kajanová (2006) states that in the pursuit of business finances

a very narrow connection can be observed between business finances and accounting. The information provided just by the accounting is necessary for the correct and valuable decisions.

She further describes the connection in terms of the aspects of accounting as being the financial statements. Financial statements comprise three primary documents namely:

  • balance sheet stating the division of wealth within a company, the commitments of certain resources and the organisation’s net wealth;
  • profit and loss account detailing the income, costs and value (profit or loss), and;
  • cash flow statement simply showing the income and outgoings of the organisation.

The financial statements are an invaluable resource for the deduction required in order to make the best judged business finance decisions. They allow the potential risks of different investment opportunities to be accurately calculated, rather than business financing decisions being made rather recklessly based on assumptions or, worse still being left entirely to chance.

Therefore the results of business financing will be recorded in the process of accounting, which will then go on to form the foundations of decisions made regarding business finance for the next financial period and so on. Both are essential and separate aspects in the running of an organisation which wishes to place its economic performance on historical performance data and educated assessments of the future rather than luck.

One might say that the most important outcome of accounting is business financing because business financing allows the company to thrive and without a business there would be no entity upon which the accounting process could be performed.

 

Resources

Dyson, J. R. (2010) Accounting for non-accounting students. 8th ed. Essex, Pearson Education Limited.

Hannagan, T. (2008) Management Concepts and Practices. 5th ed. Essex, Pearson Education Limited.

Kajanová, J. (2006) ‘The Relationship Between Business Finance and Accounting’. Vadyba/Accounting, 2(11), pp. 58 – 64.

Kirkham, R. (2007) Ferry and Brandon’s Cost Planning of Buildings. 8th ed. Oxford, Blackwell Publishing Limited.

McLaney, E. (2005) Business Finance: Theory and Practice. 7th ed. Essex, Pearson Education Limited.

Smith, C. (2003) ‘Corporate social responsibility: whether or how?’. California Management Review, 45 (4).

Torrington, D. Hall, L. & Taylor, S. (2008) Human Resource Management. 7th ed. Essex, Pearson Education Limited.

Anon. (No date) ‘About Us’. Public Concern At Work, [online]. Available from: Link [Accessed 1 November 2010].
 

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Managing Director at Tier Once Commercial Management

Daniel is a Commercial Manager with an MSc in Commercial Management and Quantity Surveying and several years experience, primarily in Rail and Civil Engineering. A keen advocate of commercial procedure development and implementation and commercial involvement in full project life-cycle from tender to close-out.