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.
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.
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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.
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.
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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:
|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.|
|Outcome||Bookkeeping provides input for the accounting process.||Accounting provides financial statements for critical decision-making.|
|Job title||Bookkeeper/Bookkeeping clerk||Accountant|
|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 statements||The 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.|
|Analysis||The 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)|
|Because of their additional education and certificates, accountants usually get paid higher than bookkeepers.|
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.
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