Accounting Vs. Bookkeeping: What Are The Differences?

In finance, accounting and bookkeeping go side by side. They both have the same goal, and each requires basic accounting knowledge to work with financial data. While many people may confuse and use these two terms interchangeably, they are in fact different.    

Basically, accounting is the overall process, while bookkeeping is a step within that process. The accounting process involves recording, summarizing, analyzing, consulting, and reporting on a company’s financials. Bookkeeping is the recording step of that process, in which all of the business’s financial transactions (revenue and expenses) are recorded onto a database.

This article will explain how accounting and bookkeeping are not the same by highlighting 10 key differences. Before presenting a table of those differences, the definitions and scope of bookkeeping and accounting will be covered. 

What is bookkeeping?

Bookkeeping is the systematic process of recording and classifying all business transactions that occur while operating a business. All financial activities: sales, purchases, taxes, interest, payroll and other operational expenses, loans, investments are recorded in books of accounts. Bookkeepers post these transactions to the general ledger, which is then used while preparing a balance sheet.

Bookkeeping is an indispensable part of accounting and is primarily focused on tracking day-to-day financial transactions. Its purpose is to gather financial information and make sure that every record is correct, up to date, and complete. As a result, accuracy is critical to this procedure. The complexity of a bookkeeping system depends on the business size and the total number of transactions completed daily, weekly, and monthly.

Bookkeeping tasks

The responsibilities of a bookkeeper will vary depending on the model of your business. Here are some typical tasks for a bookkeeping position:

  • Recording financial transactions
  • Billing for goods sold or services provided to customers
  • Processing accounts receivable and accounts payable
  • Recording receipts 
  • Verifying invoices from suppliers
  • Completing payroll 
  • Maintaining and balancing subsidiaries, general ledgers, and historical accounts
  • Performing bank reconciliation

In short, bookkeeping is integral to the effective day-to-day running of a business. As bookkeepers’ primary responsibilities focus on organizing and recording financial transactions, they lay a solid foundation for accounting analysis. In other words, a business’s performance will go downhill if its bookkeeping system is not working properly. 

Read/check out these articles (from Shoeboxed) to learn more: 

What is accounting?

 Accounting is a broader concept than bookkeeping. Accounting is the process of reviewing, interpreting, and summarizing the financial records provided by the bookkeeping system to issue financial statements. A complete accounting cycle starts from recording business transactions and finishes by publishing financial reports at the end of a fiscal year. 

Accounting is also known as the language of business, as it helps stakeholders grasp the overall of a company’s financial performance. It tells you whether your business is making a profit, the current value of your assets and liabilities, where your money goes, and what changes should be made in the future. 

Accounting tasks 

An essential part of accounting is presenting financial information in the form of multipurpose financial statements (balance sheets, profit or loss statements, cash flow statements, etc.). These reports must adhere to generally accepted accounting principles, known as GAAP or US GAAP.

Below are some of the main tasks for an accountant: 

  • Reviewing and verifying financial data 
  • Analyzing operational costs 
  • Filing income tax returns, conducting tax planning and providing tax advisory services
  • Preparing financial statements
  • Ensuring regulatory compliance  
  • Assisting the business owner in making financial decisions
  • Undertaking financial audits 

It goes without saying that every business, regardless of size, needs accounting. Thanks to thorough accounting practices, managers and external stakeholders can fully understand what’s going on financially within the company, allowing them to make informed, strategic decisions for future growth.     

Read/check out these articles (from Shoeboxed) to learn more: 

Top 10 differences between bookkeeping vs. accounting 

Bookkeeping and accounting sometimes overlap each other, but the following are 10 major differences to help you distinguish between the two:

Bookkeeping Accounting 
Definition Bookkeeping is the activity of recording and categorizing business transactions systematically.   Accounting is the art of analyzing and communicating recorded transactions.   
Purpose Bookkeeping’s purpose is to maintain a proper recording of all financial transactions. Accounting’s purpose is to provide valuable and reliable financial data for stakeholders.
OutcomeBookkeeping provides input for the accounting process.Accounting provides financial statements for critical decision-making.   
Job title Bookkeeper/Bookkeeping clerkAccountant 
Skills Bookkeeping work is clerical; hence, no special knowledge or skills are required.   Accounting requires higher-level skills with a deep understanding of various accounting practices and regulations. 
Preparation of financial statementsThe bookkeeping process does not involve the preparation of the financial statement. Accountants are responsible for preparing financial statements and reports.
Decision making Bookkeeping data is not comprehensive enough for managers to make decisions.Accounting data enables decision-makers to take critical actions.
AnalysisThe bookkeeping process does not require any analysis. Accountants analyze and interpret records provided by bookkeepers.
Qualifications A bookkeeper only needs to be meticulous and knowledgeable about some financial aspects. No financial qualification is required. Accounting has a more complex nature. That’s why an accountant typically must have a bachelor’s degree in accounting or professional qualification such as CPA (Certified Public Accountant)

Salary 
Because of their additional education and certificates, accountants usually get paid higher than bookkeepers. 

Conclusion 

Bookkeeping provides accurate financial data for further analysis and interpretation to be performed by accountants. While bookkeeping and accounting are different, they both help businesses manage and control finance in a logical and systematic way. 

With today’s technology, software can simplify and automate both bookkeeping and accounting processes. Shoeboxed does just that.

Shoeboxed digitizes and extracts important data from receipts, invoices, and other accounting papers in just one click. With a proven, unique human-verified function, Shoeboxed guarantees every document is scanned thoroughly by a team of data experts to verify and make necessary corrections. 

Try Shoeboxed for FREE!  

[Guest Post] 5 Money Management Tips for Solopreneurs

There’s no doubt that solopreneurship is on the rise. Solopreneurs are, of course, entrepreneurs, but because they’re often the only ones with real skin in the game, their money situation is typically unique. 

While there are lots of resources for managing small business finances, managing your money as a solopreneur has its own set of considerations. It’s particularly important that solopreneurs delineate between their personal finances and their business’ revenue. 

Moreover, solopreneurs don’t have designated team members to who they can delegate the “business side” of their business. This means that managing a business’ finances, on top of all other duties, falls squarely in their laps. 

Managing your money as a solopreneur may be tricky but it’s far from impossible. We’ve put together a list of 5 tips to help you get on top of your money. 

Tip #1: Separate Your Personal Bank Account from Your Business 

Banks, of course, are a key partner when it comes to managing your business’ finances. If you’re not already leveraging an online banking partner, it’s worth looking into. Even if you’re working from home, you can have direct access to your bank account, meaning you always have a line of sight into your business and expenses. 

That being said, we strongly recommend separating your personal bank account from your business’ bank account. Separating these transaction types will be crucial when it comes to tax time. You’ll need to quickly and easily understand what expenses need to be reported, which can become unnecessarily difficult when your personal spending is mixed with your business’ expenses. 

If you’re going to have multiple bank accounts, consider a mobile bank account without fees.  Separate and secure your personal finances from your business’, without paying to access your own money.

Tip #2: Track Your Expenses 

Personal finance experts always tout the importance of budgeting, but this advice applies to solopreneurs too. Tracking your expenses is essential to understanding your profit margins and cash flow. But for a lot of solopreneurs, this task can feel like housekeeping and easily fall to the wayside. 

As Spencer Barclay, CEO and Founder of Savology puts it, “Far too many solopreneurs will set up a spreadsheet to track their expenses, but then once they get involved in the daily grind, they end up never using it. The end result is that they have no idea where their money is going, which can lead to overspending or cause them to miss crucial deductions at tax time.”

But tracking your expenses doesn’t have to be a manual process. Take advantage of budgeting apps (like Mint) to automate tracking your cash flow. Instead of having to constantly update your budget on a spreadsheet or on paper, utilize an app that will give you a bird’s eye view of how money is flowing in and out of your business. 

Of course, using an automated solution for budgeting is much more straightforward when you have a dedicated bank account for your business. But regardless of your set up, it’s essential to understand money coming in and money going out. 

Tip #3: It’s Always the Right Time to Prepare for Tax Season 

As a solopreneur, preparing for tax season will need to become a part of your routine. In particular, making sure you’re ready to report your expenses will be key to filing in time for the tax deadline.

Staying on top of your expenses puts you in a great position to take advantage of itemized tax deductions. Receipts for expenses such as business lunches or office purchases need to be kept and carefully stored so that they may be submitted as proof for these deductions. Digital files are typically easier to store and export, and services like Shoeboxed will help you scan, digitize, and organize your receipts. 

Pssst… check out our guide to organizing your receipts for taxes (and maximizing your deductions). 

On top of making sure you’re fully prepared to report your expenses (with proof), you’ll also want to start saving for the possibility of owing taxes. FinancialBin recommends putting 20-30% of your earnings into a short-term savings account to cover state taxes, local income taxes, and self-employment taxes. 

Tip #4: Save For a Rainy Day

The importance of saving up for a rainy day cannot be overstated. Both in your personal and business life, having money put aside for situations where money could be tight is crucial for staying afloat. Did you know only 40% of Americans have enough money put aside for a $1,000 emergency? 

We recommend setting up two types of funds: an unexpected emergency fund and a sinking fund. With an unexpected emergency fund, it’s generally recommended that you have enough money saved for a situation in which your business is operating at a major loss for 6 months. 

Emergency Funds 

A good way to prepare for this is to calculate your business expenses by month. If your business costs $1,000 a month to run, you should have at least $6,000 put aside to fund the business in a situation where it was earning $0 a month. It may not be fun to think about the possibility of needing to tap into your emergency fund, but it’s best to prepare for the worst.

Sinking Funds 

With a sinking fund, you’re not preparing for an unexpected loss. Instead, you’re putting money aside for any future liabilities on wasting assets—like items that need to be replaced every few years. While these types of liabilities are technically predictable, they’re not always top of mind. 

Unlike an emergency fund, with a sinking fund you’re putting money away that you know you’re going to have to spend within the next few years.

When used in conjunction, an emergency fund and a sinking fund will help prevent your business’ budget from falling apart and can also help you avoid needing to take out loans and go into debt. A sinking fund also prevents you from using your emergency fund on sinking costs, and vice versa.

Tip #5: Diversify Your Revenue Streams

For many people, solopreneurship started as, or still is, a side project used to earn extra money while working full-time. The “side hustle” is an example of diversified cash flow, or having multiple sources of income. If one of these sources of income were to drop out, people with side hustles would still be able to continue making money. 

Just like you can create a diverse portfolio of income for your personal life, you should try to diversify the revenue streams for your company to hedge your bets. This will help your company stay afloat in case one of your revenue streams is no longer earning money or starts operating at a loss.

For example, let’s say you run a career coaching business. Your primary “product” is client sessions. However, if you want to start adding new sources of revenue, you might think about creating content that only paying members can access. Or you can sell DIY workbooks to people who want to work with you but can’t afford weekly sessions. 

Launching new products isn’t the only way to diversify your revenue streams. We love this example: making your website/business more accessible. Making your business accessible is not only the right (and often legally required) thing to do, it opens up new customer segments who may have previously not been able to use your services. 

However you choose to diversify your revenue streams, finding new ways for your business to make money is never a bad idea. 

Conclusion 

Overall, managing your finances as a solopreneur is easier said than done, but that doesn’t mean you’re completely on your own. We hope these tips help you realize that not only is technology your friend in this fight but also that a little forward thinking about what could be around the bend for your business can go a long way.

Digitize Receipts on YOUR Schedule With Receipt Rollover by Shoeboxed

The Shoeboxed team is excited to announce an update to our annual plans: receipt rollover! Rather than having to plan around your monthly allotment of receipts, you can now digitize receipts when it’s convenient for YOU.

No more monthly maximums means no more stressing about whether or not you’ll get charged an overage for a particularly busy month!

Take a look at each plan’s annual receipt allotment:

Startup

  • 300 physical documents/year 
  • 600 digital documents/year 

Professional 

  • 1800 physical documents/year 
  • 1800 digital documents/year 

Business 

  • 36000 physical documents/year 
  • 3600 digital documents/year

And the best part? On top of increased flexibility, our revamped plans still give you the benefit of 20% off for paying annually. It pays to sign up for an annual plan. 

The Flexibility You Need, Just in Time for Tax Season

With April 15th just around the corner, an annual plan will help you catch up on your pile of receipts with peace of mind. The IRS and Canada Revenue Service accept digitize receipts from Shoeboxed, so you can rest assured that with us on your team, you’re audit-ready. 

Psssst panicking about April 15th? Check out our guide to taxes for small businesses. 

Who are Shoeboxed annual plans best for? 

Even if you’ve got tax season under control, receipt rollover can come in handy for lots of different reasons. 

  • If you’re a seasonal business, like a summer camp or a retail store, the flexibility of annual plans can help you stay on top of your busy seasons. 
  • Catching up on end of the year expense reporting can be a headache, but you won’t have to worry about being charged an overage with a Shoeboxed annual plan. 
  • Or if you just like to save money – annual plans save you 20%!

We know that you’re not always going to be able to anticipate how many receipts you’ll need to digitize in a given month, so our annual plans are now designed with your needs in mind. 

How to Get Started

You can now sign up for an annual plan and start digitizing receipts on your schedule! Or you can try any of our plans for free.

Already on an annual Shoeboxed plan? Great news! All Startup, Professional, and Business annual plans can now take advantage of receipt rollover. 

Not sure an annual plan is right for you? Let’s talk about it.