Finance As A Discipline

If you are a business student, the first two years of college for both accounting and finance majors are nearly identical. Each requires the basic English, history, math, and general business studies. By the third year of college, however, the two disciplines begin to chart separate courses. While both subjects deal with numbers and money, they are quite different in the way they do so.

The accounting discipline, for example, centers on principles used primarily for bookkeeping purposes and is based on a body of rules referred to as the generally accepted accounting principles (GAAP). Although there is some disagreement by scholars of many of the more advanced rulings, the principles established in GAAP are nevertheless to be firmly applied and adhered to when recording entries. As a general rule, the accounting principles are rigid rules that must be applied for bookkeeping and tax purposes.

The discipline of finance, on the other hand, centers more on the valuation and use of money than on record keeping. Finance is an exploration into the world of micro- and macroeconomic conditions that impact the value of a business's assets, liabilities, and investments. While there are certainly rules and laws that govern the principles of finance, it is a subject that remains fluid and dynamic. The expansion and contraction of businesses live and die by those who understand these laws and their effect on value.

Professors Lawrence Schall and Charles Haley, authors of Introduction to Financial Management (New York: McGraw-Hill, 1988, p. 10), further expound on the discipline of finance by asserting that "Finance is a body of facts, principles, and theories dealing with the raising (for example, by borrowing) and using of money by individuals, businesses, and governments." In part, finance deals with the raising of funds to be used for investment purposes to help these various types of entities generate a return on their capital. In addition, the authors state (ibid., pp. 10-11):

The individual's financial problem is to maximize his or her well-being by appropriately using the resources available. Finance deals with how individuals divide their income between consumption (food, clothes, etc.) and investment (stocks, bonds, real estate, etc.), how they choose from among available investment opportunities, and how they raise money to provide for increased consumption or investment.

Firms also have the problem of allocating resources and raising money. Management must determine which investments to make and how to finance those investments. Just as the individual seeks to maximize his or her happiness, the firm seeks to maximize the wealth of its owners (stockholders).

Finance also encompasses the study of financial markets and institutions, and the activities of governments, with stress on those aspects relating to the financial decisions of individuals and companies. A familiarity with the limitations and opportunities provided by the institutional environment is crucial to the decision-making process of individuals and firms. In addition, financial institutions and governments have financial problems comparable to those of individuals and firms. The study of these problems is an important part of the field of finance.

There you have it. Professors Schall and Haley have outlined some of the fundamental issues that financial managers in both private and public sectors deal with on an ongoing basis. Raising capital, whether debt or equity, is essential to the successful operation of a firm. What is even more essential is the proper management of that capital.

I recall very distinctly during my sophomore year of college being faced with the decision of choosing the accounting or finance discipline. At the time, I didn't know any accountants and I didn't know any financial analysts, so I wasn't quite sure whom to turn to. What I did know, however, was that most of my colleagues were choosing the accounting route and encouraged me to do so as well. After all, that's where all the jobs were, according to them. I didn't really care if that's where all the jobs were. All I cared about was becoming fully engrossed in a field in which I would be the happiest.

My assessment of accounting was that it was rather dry and boring. Accounting represented mundane and repetitive tasks governed by a rigid set of principles. It was the recording of a company's income and assets that reflected its value at that specific moment in time. This is typically referred to in accounting circles as a "snapshot in time." Quite frankly, snapshots bored me. I was more interested in making movies than in taking pictures. Finance opens up an entire world of possibilities that accounting can't even dream of. It takes the snapshot made by accountants and brings it to life by exploring the vast universe not of what a company is, but rather, that of what it can become. Finance scrutinizes every strength and weakness of the photograph to measure its true potential. It exhausts every possibility to breathe the breath of life into it. Finance is an exciting field that allows individuals to use all of the creative faculties inherent within them to grow in ways limited only by one's imagination.

I can only wonder whether my colleagues who chose the accounting field are happy in their profession. As for me, I chose the road less traveled and haven't looked back since. Some 20 years or so later, I can say with all the sincerity of my heart that for me it was the right choice. I should add that it is not my intent to offend those of you who may be accountants or to demean your role as a professional in any way, as reports generated by accountants provide valuable information for both internal and external users of financial

statements. My assessment of the accounting profession represents exactly that—my assessment.

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  • Thomas
    What is finance as a discipline?
    25 days ago

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