Are Bookkeeping and Accounting the Same
Every business cannot afford to operate without any of these two functions – bookkeeping and accounting. Whereas bookkeeping helps you record all financial transactions in the organization, accounting is required to interpret, analyze, classify, summarize, and report financial data. The untrained may think that bookkeeping and accounting are the same, but they are actually different. The misinterpretation between the two often happens because bookkeeping and accounting have overlapping roles and modes of use.
What is bookkeeping?
Bookkeeping is the process by which your company’s financial transactions are recorded on a regular basis. Proper bookkeeping helps companies keep up with all the information on their books which they can use to decide on operational, investment, and financial matters.
An individual who does the management of your financial data is known as a bookkeeper. Without this person, it would be hard for your company to know its financial position and the transactions taking place in the business.
It is vital that bookkeeping be done as accurately as possible. External users such as financial institutions, investors, and the government consider this to be an important undertaking and they rely on it to make crucial lending and investment decisions. Thus, any given business will need accurate bookkeeping which would benefit both internal and external users.
Bookkeeping often serves as a source of information for preparing accounts. Even though it is a distinct process, you can view it from the broader perspective of accounting scope.
Your company has the obligation of recording each transaction, even if it is a question of sale or purchase. That is the overall essence of bookkeeping – record and track numbers pertaining to the financial side of the business.
Bookkeepers often have tasks related to, but not limited to:
- Loan payments
- Expense amounts to suppliers
- Generation of financial reports
- Monitoring asset depreciation
- Customer payments for invoices
What is accounting?
Accounting entails the systematic process by which business transactions are recorded. Part of the recording done includes having a system for record-keeping, tracking transactions that take place in the system, and compiling the overall information in a set of financial reports. The three aspects of accounting further get classified as follows:
- System record keeping – To keep records for accounting purposes, businesses need to use standard accounting procedures and policies in addition to standardized forms. The procedures adopted must have controls that make sure assets are used as required.
- Tracking transactions – You need to have a procedure in place for collecting information regarding each type of business transaction. For instance, the business may need separate systems that can process customer orders, collect cash from customers, and bill customers. Transaction tracking is one of the most engaging elements of an accountant’s job.
- Financial reporting – Numerous accounting frameworks like IFRS and GAAP make it mandatory to treat accounting records and financial statements in a particular manner. That gives yield to statement of cash flows, balance sheet, and income statement which help support disclosures of the financial position and reporting period.
Whereas accounting covers a wide range of activities, you can aggregate it into a data collection system, a system that continuously collects data, and report generation from the particular system.
You may have seen that we briefly mentioned concepts like GAAP and IFRS. These are accounting principles that govern how companies create their financial statements. GAAP means Generally Accepted Accounting Principles. It sets policies around a wide range of topics including assets and liabilities as well as financial statement presentations. IFRS stands for International Financial Reporting Standards.
Differences between bookkeeping and accounting
The following factors help tell the difference between bookkeeping and accounting:
Bookkeeping revolves around processes that entail identifying, measuring, and recording financial transactions.
Accounting involves the systematic process by which business transactions are recorded.
You cannot rely on the data from bookkeeping to decide at the management level.
Management can use data from accounting procedures to make critical decisions.
The overall goal of bookkeeping is to properly and systematically record financial transactions.
Accounting has the overall goal of gauging financial position and communicating this to the required parties.
Bookkeeping does not need special skill sets.
Considering the analytical nature and complexity involved in accounting, your accountant must have special skillsets.
Bookkeeping does not require specific analysis.
Accounting utilizes information sourced from the bookkeeping process and analyzes it to create reports.
You have two types of bookkeeping approaches to consider – single-entry bookkeeping and double-entry bookkeeping.
The accounting side entails preparing company budgets and proposing loans.
The bookkeeping process does not involve preparing financial statements.
The core part of the accounting process is to prepare financial statements which the management bases on to make crucial decisions.
The function of bookkeeping can entail any of the following activities:
- Posting debits and credits
- Producing invoices
- Completing payroll
- Recording financial transactions
- Maintaining and balancing subsidiaries, historical accounts, and general ledgers
The function of accounting can entail any of the following:
- Completing income tax returns
- Preparing adjusting entries
- Analyzing costs of operations
- Preparing company financial statements
- Assisting the business owner to comprehend the impact of financial decisions
Bookkeeper and accountant role
In the real-world scenario, you may find the bookkeeper and accountant doing the same work. However, the first task that a bookkeeper is keen to observe is recording transactions and ensuring the organization is financially organized. On the other hand, the accountant provides some sort of consultation, analyses, and qualified advice on matters to do with taxation.
When it comes to the credentials side of it, bookkeepers mostly do not require formal education. Typically, what they need to do is to have an apt for accuracy and be knowledgeable on matters related to financial topics. In most cases, the work that a bookkeeper does has to be verified by an accountant. That explains why bookkeepers cannot call themselves accountants.
On the other hand, to become an accountant, you must undertake a bachelor’s degree in accounting. If you do not have a specific degree in accounting, you can comfortably rely on a finance degree as an entry point to the accounting career. Furthermore, accountants would need to take certifications like Certified Public Accountant (CPA).