For individuals with a non-commerce background, it’s not so easy to distinguish between bookkeeping and accounting. This could have a profound effect not only on the services provided for your business, but also the cost that you incur in terms of hiring the respective services. While all businesses require both services, the scope of each is similar and different to certain extents.
Even though many people use the terms accounting and bookkeeping interchangeably, it is important to note that the latter is the first step to the former, that is, bookkeeping is the stepping stone of accounting. The bottom line is that accounting is more in-depth and analytical compared to bookkeeping. As a business owner, you should acknowledge that bookkeeping is only a part of accounting, which creates a base for accounting.
We experience many accounting activities in our daily lives. For example, a mother prepares a monthly budget to run her family based on past expenses, including grocery bills, utility bills, children’s school fees, bank loans, savings, etc. Similarly, in a business, accounting forms a basis for interpreting, classifying, analysing, reporting and summarising financial data since such information is valuable in understanding the financial position of the business.
Generally, accountants analyse transactions in the financial statements as well as business reports by strictly following stipulated accounting principles, standards and requirements. They analyse and interpret financial data to report the financial situation and performance of your business to shareholders with the aim of helping the company make informed business decisions.
The process of recording financial data is often referred to as Bookkeeping. The bookkeeping expert sometimes not only records the financial transactions but also summarize it for creating reports. Without the availability of detailed data, anyone can challenge the authenticity of the financial statement.
Bookkeepers record financial transactions in chronological order on a daily basis. Since accounting software automates many processes, some bookkeepers in small organizations also classify and summarize financial data in financial reports. These bookkeepers are often referred to as full-charge bookkeepers. They make higher salaries than bookkeepers but lower salaries than accountants.
Similarities between Accounting and Bookkeeping
To an amateur, accounting and bookkeeping may sound as the same profession because both work with financial data. Technically, their roles and duties rarely overlap, as the two professionals work in tandem to ensure business financials are accurate and up-to-date, and the financial health of your business is carefully monitored.
In both professions, you must have basic accounting knowledge of data entry of financial transactions and generating management reports. In smaller companies, not only do bookkeepers record transactions, but also handle more of the accounting process and generate reports using the financial transactions.
Even though an accountant is a key player on your team, if you’re still in the early days of your business, you might choose to do the bookkeeping yourself, or hire a bookkeeper for a couple of hours a month until it makes sense to bring someone on full time.
There is no need for the accountant or the bookkeeper to actively participate in the strategic financial planning if you are a start-up business. However, both record the financial transactions for a company, and handle the bookkeeping functions of the accounting process.
Differences between Accounting and Bookkeeping
By definition, bookkeeping is a subset of accounting that focuses on the recording of a company’s financial transactions in a systematic process, and therefore, the work is clerical in nature.
Accounting summarises, interprets, classifies, analyses, and reports the recorded financial data and transactions, which require a high level of subject knowledge, proficiency, analytical skills, and conceptual understanding of the process.
Bookkeeping does not require any extraordinary skills and expertise to carry out their duties. Bookkeepers only need to be well conversant with various financial topics to ensure accuracy in their work, which is usually overseen by accountants.
Accounting calls for special skills because the processes are more complex and analytical. Accountants with adequate experience and education usually attain the title of Certified Public Accountants (CPA).
In bookkeeping, the objective is to keep the records of all financial transactions by the book and systematically.
When it comes to accounting, the objective is to examine the financial situation of your business and further communicate the information to the relevant authorities including the shareholders.
Preparation of Financial Statements
Bookkeepers do not prepare financial statements as a part of the bookkeeping process.
Accountants prepare (summarises, interprets, classifies, analyses, and reports) financial statements during the accounting process.
In bookkeeping, the basic tools used to record financial transactions are journals and ledgers
In accounting, balance sheets, cash flow statements, and profit & loss account are the main tools.
The two basic types of bookkeeping are Single Entry System and Double Entry System.
In accounting, preparation of companies’ budgets and plans as well as loan proposals are carried out through financial accounting, cost accounting, management accounting, human resource accounting, and social responsibility accounting.
Financial Position and Decision Making
On the basis of bookkeeping records, the management can make vital business decisions based on the financial data provided by bookkeepers because it does not reflect the financial position of an organization.
In accounting, a big chunk of the financial data provided by the accountants can be used by the management can take critical business decisions because it clearly depicts the financial position of the entity.
Bookkeeping is a stepping stone to or the initial stage of accounting procedures, which makes the two inseparable. If the bookkeeping is done properly, it perfectly complements accounting and vice versa. Since bookkeeping tasks are clerical, some knowledge of commerce is enough. On the other hand, accounting is more analytical so thorough knowledge in this field is a prerequisite.