Financial accounting

 Financial accounting is a branch of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders are examples of people interested in receiving such information for decision making purposes.

Financial accountancy is governed by both local and international accounting standards. Generally Accepted Accounting Principles (GAAP) is the standard framework of guidelines for financial accounting used in any given jurisdiction. It includes the standards, conventions and rules that accountants follow in recording and summarizing and in the preparation of financial statements.

On the other hand, International Financial Reporting Standards (IFRS) is a set of accounting standards stating how particular types of transactions and other events should be reported in financial statements. IFRS are issued by the International Accounting Standards Board (IASB). With IFRS becoming more widespread on the international scene, consistency in financial reporting has become more prevalent between global organizations.

While financial accounting is used to prepare accounting information for people outside the organization or not involved in the day-to-day running of the company, managerial accounting provides accounting information to help managers make decisions to manage the business.

Business finance

 

Business finance, or corporate finance, covers all the financial activities related to running a business. You can think of this in terms of acquisitions and investments, funding, capital budgeting, risk management, and tax management needed for business growth in financial markets. 

Companies must balance cash flow, risks, and investment opportunities to increase their value and strengthen their capital structure. 

A great example of corporate finance is when a business chooses between equity financing and debt financing to raise capital. Equity financing is the act of securing funding through stock exchanges and issues, while debt finance is a loan that must be repaid with interest on an agreed date.

Businesses have to develop a revenue-generation plan which determines business profitability in the medium- and long term.

Public Finance

 Like individuals, governments must allocate their resources to different sectors of the economy. Public finance is how federal, state, and local institutions track revenue and manage expenses for all the services they provide to the public. 

Some of a government’s most essential functions include collecting money from the public sector via taxes, raising capital through bonds, and channeling money into a broad range of services that benefit the public. When the public sector distributes tax revenues across multiple functions, including debt servicing, infrastructural development, and recurring expenditures. By overseeing income generation and government spending, government agencies help ensure a stable economy and prevent market failure. 

Other aspects of public finance include tax management, debt issuance, budgeting, international trade, and inflation regulation. These factors have a direct and lasting effect on business and personal finance. 

Personal finance

 Personal finance refers to managing an individual’s monetary resources across 5 key areas: Income, savings, investments, spending decisions, and asset protection. The goal is to make intelligent investment decisions and build a safety net and meet their goals without taking on too many debt obligations.

A personal financial system can also involve generational wealth transfer, taking advantage of tax planning opportunities, filing tax returns, using credit cards, and buying, selling, and managing assets. Personal finance is always tailored to one’s specific needs in the short, medium, or long term. 

This means that two people may not make the same financial decisions because of their different goals, earning potential, incomes, and timeframes. When it comes to managing your finances, it’s important to set both short-term and long-term goals. For instance, you may want to prioritize paying off a loan in the short-term, while also considering long-term investments in real estate or the stock market. Personal finance software can be a helpful tool to assist you with modern financial management.

How Personal Finance Can Impact Your Business

Business owners must develop a strategic personal finance plan to protect them from unforeseen circumstances. For example, having personal savings may help you raise startup capital for your business, and saving for retirement helps the business owner avoid running out of money and being forced to sell the business.

History Finanace

 The origin of finance can be traced to the beginning of state formation and trade during the Bronze Age. The earliest historical evidence of finance is dated to around 3000 BCE. Banking originated in West Asia, where temples and palaces were used as safe places for the storage of valuables. Initially, the only valuable that could be deposited was grain, but cattle and precious materials were eventually included. During the same period, the Sumerian city of Uruk in Mesopotamia supported trade by lending as well as the use of interest. In Sumerian, "interest" was mas, which translates to "calf". In Greece and Egypt, the words used for interest, tokos and ms respectively, meant "to give birth". In these cultures, interest indicated a valuable increase, and seemed to consider it from the lender's point of view.The Code of Hammurabi (1792–1750 BCE) included laws governing banking operations. The Babylonians were accustomed to charging interest at the rate of 20 percent per year. By 1200 BCE, cowrie shells were used as a form of money in China.

The use of coins as a means of representing money began in the years between 700 and 500 BCE. Herodotus mentions the use of crude coins in Lydia around 687 BCE and, by 640 BCE, the Lydians had started to use coin money more widely and opened permanent retail shops. Shortly after, cities in Classical Greece, such as Aegina, Athens, and Corinth, started minting their own coins between 595 and 570 BCE. During the Roman Republic, interest was outlawed by the Lex Genucia reforms in 342 BCE, though the provision went largely unenforced. Under Julius Caesar, a ceiling on interest rates of 12% was set, and much later under Justinian it was lowered even further to between 4% and 8%.

The first stock exchange was opened in Antwerp in 1531.[46] Since then, popular exchanges such as the London Stock Exchange (founded in 1773) and the New York Stock Exchange (founded in 1793) were created.

Financial mathematics

 

Financial mathematics is the field of applied mathematics concerned with financial markets; Louis Bachelier's doctoral thesis, defended in 1900, is considered to be the first scholarly work in this area. The field is largely focused on the modeling of derivatives—with much emphasis on interest rate- and credit risk modeling—while other important areas include insurance mathematics and quantitative portfolio management. Relatedly, the techniques developed are applied to pricing and hedging a wide range of asset-backed, government, and corporate-securities.

As above, in terms of practice, the field is referred to as quantitative finance and / or mathematical finance, and comprises primarily the three areas discussed. The main mathematical tools and techniques are, correspondingly:

for derivatives, Itô's stochastic calculus, simulation, and partial differential equations; see aside boxed discussion re the prototypical Black-Scholes model and the various numeric techniques now applied

for risk management, value at risk, stress testing and "sensitivities" analysis (applying the "greeks"); the underlying mathematics comprises mixture models, PCA, volatility clustering and copulas.

in both of these areas, and particularly for portfolio problems, quants employ sophisticated optimization techniques

Mathematically, these separate into two analytic branches: derivatives pricing uses risk-neutral probability (or arbitrage-pricing probability), denoted by "Q"; while risk and portfolio management generally use physical (or actual or actuarial) probability, denoted by "P". These are interrelated through the above "Fundamental theorem of asset pricing".

The subject has a close relationship with financial economics, which, as outlined, is concerned with much of the underlying theory that is involved in financial mathematics: generally, financial mathematics will derive and extend the mathematical models suggested. Computational finance is the branch of (applied) computer science that deals with problems of practical interest in finance, and especially emphasizes the numerical methods applied here.

Managerial finance

 

Managerial finance  is the branch of finance that deals with the financial aspects of the management of a company, and the financial dimension of managerial decision-making more broadly. It provides the theoretical underpin for the practice described above, concerning itself with the managerial application of the various finance techniques. Academics working in this area are typically based in business school finance departments, in accounting, or in management science.

The tools addressed and developed relate in the main to managerial accounting and corporate finance: the former allow management to better understand, and hence act on, financial information relating to profitability and performance; the latter, as above, are about optimizing the overall financial structure, including its impact on working capital. Key aspects of managerial finance thus include:

Financial planning and forecasting

Capital budgeting

Capital structure

Working capital management

Risk management

Financial analysis and reporting.

The discussion, however, extends to business strategy more broadly, emphasizing alignment with the company's overall strategic objectives; and similarly incorporates the managerial perspectives of planning, directing, and controlling.