Finance is a general term encompassing various things regarding the study, development, management, and accumulation of capital and monies. The discipline of finance has evolved through the ages in response to changes in economy, culture, and society. In modern times, finance is often viewed as the science of funds management. As such, it has become important for everyone to understand its entirety in order to apply its principles to their own personal and professional lives.
Finance is not a subject that would typically appear on most college curriculums, but like any subject worth studying, it is necessary for individuals to master the fundamentals of it if they wish to thrive as consumers, investors, public figures, or the government officials who control the purse strings. At this point in time, finance is broken down into three main branches: banking, insurance, and investment. Within each of these branches, there are numerous sub-specialties that further complicate understanding.
The world of banking refers to the institution’s ability to lend money, invest it, and make loans to other institutions. Banking influences nearly all other aspects of economic activity, from production and distribution to savings and investment. A bank is also responsible for the management of the national economy, acting as an intermediary between government and private sector interests. Without banks, the entire structure of finance would be unable to function, with large-scale changes in economic activity being at a virtual impossibility.
Accounting is the area of finance that describes the process of collecting, recording, and analyzing financial information. Accountants evaluate, plan, and analyze the value of a company, identifying patterns and trends that emerge over time. They test the financial instruments, develop models, create reports, and keep a record of every single transaction that occurs within the firm. This process of collecting, organizing, interpreting, and reporting information about finance works behind the scenes of virtually every major business, making accounting an essential part of the whole money management process.
Finance and banking combine to create financial systems, the processes by which monetary units are lent, converted into cash, collected, and invested. All aspects of these financial systems are built on a number of foundations, including laws and regulations, economics, law, accountancy, management, insurance, investment, management, banking, public policy, risk management, securities, and personal beliefs and expectations. As a result, each aspect of the entire system is a complex process that has a direct effect on the results that occur within the various components of the entire system. Finance and accounting are intimately related, since they are inseparable. Finance is the science of using numbers to make decisions about investing, spending, and saving, while accounting describes the whole process by providing information about transactions.
Finance and banking are very interrelated because of the way in which they are regulated and how they affect each other. Regulations and rules enacted by authorities such as the Federal Reserve System, Securities and Exchange Commission, Federal Deposit Insurance Corporation, and the Bankruptcy Code dictate how banks must operate and how they must interact with each other. The rules that apply to individual banks and individual employees within individual companies can be compared to the rules that govern the conduct of scientific studies about the world and its climate. The comparison is not exact, but it does give a sense of the similarities and differences between the two kinds of financial activities.