Many of us are wondering about “how finance is related to economics?”There are 2 links between economics and finance. The setting of a firm which operates, and the abstract the support for the tools made by financial decision making.
The factor economics like economic growth, the rate of the domestic saving, government role in the economic affair, the tax, relationship of the external environment, the funds which are available for the corporate sector, inflation rate, inflation rate, the rate of interest, in which the firm can finance. Note that the financial manager cannot ignore the macroscopic development.
There should be a basic knowledge about economic and most importantly one must know about macroeconomics in order to understand the method of firm operate and a good understanding of the environment where the firm operates understanding the principles of microeconomic which helps the tools of the financial decision making sharper.
The relationship betweenfinance and accounting
There 3 points to be remembered on the relation between the finance and the accounting. These are as follows:-
- Scorekeeping and the value maximizing
Accounting is involved with the scorekeeping, but the finance is totally aimed with the maximizing the value. The main point of accounting is to calculate the firm’s performance, fixes the condition of the finance and finds the foundation to pay the tax.
The financial management’s goal is using the shareholder’s value which is invested in a positive way and minimizes the cost of the finance. The role of the accountant is to provide and develop the firms’ old, present and the future.
- The method
Usually, the accountant records the accountsusing the two methods i.e. accrual method and cash flow method. In cash method when the cash is received from the customer and revenues are recorded,the expenditures are recorded, when they are paid to the employees and supplier.
- Certainty and uncertainty
Normally the accountings are dealt with the pasts and these arerecorded. When there is a probability of winning or losing in the business can be called as certainty whereas there is no idea about the future it is said to be uncertainty.