Accountant vs Finance

Accountant vs Finance

The Science of Finance

Finance is a science. Like other sciences, it has fundamental concepts, principles, and theories and describe Accountant vs Finance. In another article we describe the principles of finance, which we will apply throughout the finance introduction. A downward sloping demand curve is an example of an economics principle you already know. If you lower a product's price, you'll sell more of it. 

An important tool of science is called modeling. Modeling is a method of describing reality. There are different types of models. Many of our finance models are mathematical models, like a downward sloping demand curve. The primary benefit of using a mathematical model is its precision in specifying relationships. To the extent we can control the inputs, we can use a model to predict outcomes.

The relationships in a model are established by a variety of methods. one method is empirical estimation. For example, often a company will estimate future sales of a new product using observed past sales during marketing research. Other relationships are contractually specified, such as repaying borrowed money according to a loan agreement. Finally, many come from logical, conceptual, or theoretical ideas, as in the case of expecting a downward sloping demand curve.

But models have limitations. a famous marketing example cites a case of an upward sloping demand curve. A company sold more after raising its price. The product was the beach sandal, flip flops. Very few people would buy them at first. Apparently, they thought the sandals could not be worth much if they did not cost very much. When marketers figured out the problem, they raised the price. Sales then increased as people tried the new product. Of course, after flip-flops caught on competition drove the price back down. Today, flip-flops have downward sloping demand curve, as we would expect.

Does this temporary upward sloping demand curve invalidate the principle of a downward sloping demand curve? No. The complication in this case was the initial impression that a low price identified a poorly made product. Once this impression was corrected, flip-flops became extraordinarily popular and cheap. They can be cheap because they are inexpensive to make rather than because they are poorly made.

Despite its problems, an imperfect model can provide useful insights and be the best starting point for solving new and challenging problems.

Finance and Accounting

Finance frequently uses accounting information, as we will in the next section when we use an accounting balance sheet to describe a company. Consequently, people often ask, How is finance different from accounting?

The fundamental difference between finance and accounting is the viewpoint. We already describe Accountant vs Finance in above. Accounting generally has a historical outlook. Its major purpose is to account for past activities. In marked contrast, finance's emphasis on determining value and making decisions focuses solidly on the future. Picking up from an accounting view, which brings us to the current position, finance concentrates on the implications for the future. Finance asks questions like What do we do now? and Where do we go from here?