BUS202: Principles of Finance

Finance, economics, and accounting are business subjects with many similarities and differences; each is a distinct field of study.

Learning Objective

• Recognize how finance, economics, and accounting overlap.

Key Points

• Finance is the study of how to optimally allocate assets. Finance is fundamentally a forward looking field, concerned with what an asset will be worth in the future.
• Economics is the social science that analyzes the production, distribution, and consumption of goods and services.
• Accounting is the process of communicating financial information about a business. Accounting is fundamentally a backward-looking field.

Terms

• return

Gain or loss from an investment.

Finance, economics, and accounting are business subjects with many similarities and differences. While they influence each other, each is a distinct field of study.

Finance

Finance is the study of how to optimally allocate assets – how individuals and organizations should invest assets in order to get the highest possible return given changing conditions over time. Finance is fundamentally a forward looking field, concerned with what an asset will be worth in the future.

Economics

Economics is a social science that analyzes the production, distribution, and consumption of goods and services. It focuses on how economic agents (people, businesses, and government) interact and make decisions. Economics is fundamentally the study of cause and effect. It tries to figure out how one variable affects economic agents or the economy as a whole.

Accounting

Accounting focuses on communicating a businesses' financial information. Accounting is fundamentally a backward-looking field, concerned with what has already happened financially and what position that leaves the company in today.

If accounting is called the language of business, then the financial statements that accountants prepare are the words. Statements are created under a standardized set of accounting laws, which allows one to easily compare and contrast companies. This indicates how financially healthy a company is.

Overlap

Finance, economics, and accounting overlap in a lot of areas. For example, an investor will use accounting to see whether a company has shown past financial success and to predict what the company will look like in the future. Part of that prediction incorporates economics. The investor wants to know what the overall economy will look like in the future and wants to know how the company will interact with its competitors. The investor can use finance to figure out what his or her investment will be worth in the future.

There are few strong delineators between finance, economics, and accounting. All three fields intermingle and influence one another. It is almost impossible to have a strong grasp of one without at least a basic understanding of the other two.