Accounting and Finance as a Matter of Perspective

Some people just intuitively ‘get’ accounting and finance, while the rest of us have to struggle along with it. (Or, in the case of my roommate, struggle against it.) It took a few semesters, but it finally dawned on me what the key is to putting accounting and finance in their place.

The main difference between accounting and finance is a matter of perspective. Finance looks ahead, while accounting tells us where we have been. (Of course, then there’s managerial accounting which looks forward — I never could tell it apart from finance.) Since I never could steer a car by watching the rearview mirror, I took all the finance and managerial accounting that my business school had and only the financial accounting that they absolutely required.

Perspective also filters down to many of the individual concepts with accounting and finance. Consider, for example, the concept of time value of money. Say you have a loan with a principal amount, interest rate, and number of maturity periods. If you’re standing where (when) it’s issued, then compound interest tells you what the value will be at maturity. If on the other hand you’re sitting at the maturity date, then present value tells you what the original face value of the instrument was when it was issued. (For those of you conversant in algebra, this reflects an inverse relationship between the two.)

You can review the concepts in the study Cramlets(TM) and practice endlessly going backwards and forwards using the bottomless worksheets.

By the way, this insight can also help those of you considering accounting and finance as a major. Are you most comfortable looking forward and figuring out your next moves, or have visions of leading your own company some day? If so, finance shares your forward-thinking approach. If you’re more of a ‘where have we been’ sort of person, on the other hand, maybe accounting will prove more to your liking. (Choosing a major is never easy, either way… but that’s a topic for another day.)

Keep your perspective clear,

Professor Cram