What’s the Difference Between Bookkeeping and Accounting?
Monitoring your business’s financial health is essential to know how well you’re doing. There are several advantages to keeping up with your company’s bookkeeping and accounting, from facilitating the filing of tax returns to providing an accurate picture of expected cash flow. Both functions help CEOs and entrepreneurs keep tabs on spending, gain insight into critical business decisions, and prevent possible fraud and theft.
Though they have some similarities, bookkeeping and accounting are actually quite different. Bookkeeping involves documenting monetary transactions, while accounting entails analyzing these transactions. In this article, we’ll compare and contrast bookkeeping vs accounting, highlighting the contributions that each makes to a company’s success.
What Is Bookkeeping?
As stated by Corporate Finance Institute, bookkeeping is the process of regularly keeping track of a business’s financial transactions. Companies can make better-informed decisions about their operations, investments, and financing with access to accurate financial records.
A company’s financial data is managed by bookkeepers. Without these professionals, businesses would be in the dark about their financial health and the nature of their day-to-day transactions.
Bookkeeping involves several components and processes for every given business. According to MasterClass, these include:
Everyday financial transactions: Much of bookkeeping consists of recording figures and keeping an eye on regular financial transactions that arise during the day. Bookkeepers can keep track of all credits and debits using a general ledger. Small firms can keep track of their economic activities with bookkeeping or accounting software.
Invoicing: Bookkeepers handle all invoice processing, including those for accounts receivable and payable.
Taking care of the books: The bookkeeper is responsible for reconciling the bank statements for the business using either a single-entry or double-entry system.
Tax preparation: Bookkeepers guarantee a trouble-free tax season, from initial filing to possible audits.
Financial statements: Bookkeepers are responsible for maintaining the general ledger, which compiles financial information like the cash flow statement, balance sheet, statement of changes in equity, and income statement.
Payroll: Employee salaries and applicable deductions are calculated by bookkeepers. Keeping track of employee timesheets is one of the weekly bookkeeping responsibilities that help business owners understand their operating costs. When business owners know their upcoming payroll obligations, they can spot unapproved hours, anticipate financial shortages that could impact payment, and learn how to better secure funds by classifying transactions.
Aside from the business, investors, banks, and governments rely on accurate bookkeeping to make informed policy and funding decisions. Reliable and credible bookkeeping is essential for companies since it serves as a reference for various stakeholders.
When organizations keep accurate books, they have a trustworthy indicator of how well they’re doing. It’s helpful in setting a standard for expected sales and profits and for making strategic decisions. In a nutshell, once a company is up and running, it’s crucial to devote extra time and resources to keeping accurate records.
What Is Accounting?
Business News Daily states that accounting involves collecting and evaluating financial data about a business. You can use these insights to better comprehend the company’s operations and produce accurate financial reports.
Businesses need to keep accurate and detailed accounting records to satisfy tax authorities, regulatory agencies, and other watchdog organizations. These organizations will examine your company’s financial records if you ever decide to find investors or additional shareholders.
There are several reasons why accounting is essential for businesses. Knowing your company’s assets, liabilities, and inventory is critical for any entrepreneur. This will attract investors and allow you to expand your firm further.
The primary uses of accounting in business are as follows:
Assessing how well a business is doing: You can learn a lot about your company’s health by analyzing its financial statements. They can show you where your organization is succeeding and where it needs improvement. If you want to attract investors, these insights are crucial.
Making financial forecasts: To better manage your company’s finances, having a firm grasp on financial records is crucial.
Filing tax returns on time: Keeping up with your company’s accounting will make tax season considerably less stressful. Your tax liability will be clearly outlined in both your annual and quarterly tax statements.
What Are the Differences Between Bookkeeping and Accounting?
Even though they do some of the same things, it’s crucial to recognize how bookkeeping differs from accounting. The primary distinctions between these responsibilities are as follows:
Roles: Bookkeeping is the practice of documenting financial information chronologically and is essential in accounting. The reliability of a financial statement relies heavily on accurate financial information. Accounting, on the other hand, involves categorizing, analyzing, and reporting financial information. This process offers an easy way to forecast whether a business will succeed or fail.
Skills: Bookkeepers need thorough familiarity with bookkeeping processes and careful attention to detail. On the other hand, professional accountants nowadays need training and experience with increasingly complicated accounting issues.
Education: Bookkeepers are frequently required to finish a certification course. These professionals often register as BAS agents. Meanwhile, a professional accountant is expected to hold a bachelor’s degree in accounting from a recognized institution, such as a university.
Workplace setting: While larger companies generally employ dedicated bookkeepers, many small businesses now do their own bookkeeping in-house with the help of cloud-based solutions. You can also hire a bookkeeping service to do it for you. On the other hand, businesses often outsource their accounting needs to specialized firms.
Daily tasks: Bookkeepers are responsible for maintaining accurate financial records and files while accountants keep tabs on the big picture and relay any relevant information to management.
Scope: Accountants examine and analyze data to prepare statements and reports that are essential in decision-making, whereas bookkeepers often do not.
Decision making: Basically, the bookkeeper is in charge of the ledger entries and keeps track of everything that happens financially. Meanwhile, an accountant takes the bookkeeper’s data and turns it into a streamlined presentation, making it easier to read and understand.
Tools: Bookkeepers rely on computers and accounting software like FreshBooks, QuickBooks, and Wave to assist them in their work, but expertise and training are still crucial. However, besides their education and expertise, accountants rely on the following tools and resources: financial reports, accounts, computers, and the internet.
Financial statement preparation: Small businesses can benefit from having their bookkeepers generate financial statements such as cash flow statements, balance sheets, and profit and loss statements. In accounting, financial statements are documents that detail a company’s operations and economic well-being. Financial statements are frequently audited by other accounting companies and government organizations to ensure their accuracy, tax liabilities, financing, and investment opportunities.
What Are the Similarities Between Bookkeeping and Accounting?
Bookkeeping and accounting are both related to finances and hence have some common ground. Here are some of their similarities:
They both deal with financial information: Since both bookkeepers and accountants deal with finances, they need a keen eye for detail to spot and fix errors. Financial management is essential to the success of any business, so accountants and bookkeepers must pay close attention to the most minor details that can have a significant impact on the company’s bottom line.
Both require an understanding of fundamental mathematics, accounting, and finance concepts: Bookkeepers and accountants use mathematics on a daily basis, ranging from simple addition and subtraction to more complex calculations related to taxes and investments. Accurately calculating financial ratios and recording transactions requires a solid grasp of mathematics.
Small businesses can have roles that overlap: The everyday operations of a company are reflected in its financial records, which are maintained by bookkeepers and accountants. In some cases, a bookkeeper’s duties typically extend beyond just recording payments and updating the books. In a similar vein, accountants are sometimes enlisted to not only manage the books but also analyze the client’s data and information.
Computers: Bookkeepers need to be able to use a variety of record-keeping interfaces, as many individuals and businesses rely on spreadsheets and software applications for their general ledger. At the same time, accountants also rely heavily on their computer skills to retrieve, examine, and interpret such information.
Problem-solving: Bookkeepers rely on their problem-solving talents to help them stay on track when reconciling accounts or navigating complex regulatory procedures. Similarly, accountants need to be able to apply creative problem-solving skills to the specific financial challenges faced by their companies or clients.
Time management: Teamwork, resource management, timely payment, and reporting to the board, regulatory bodies, auditors, lenders, and other stakeholders are all essential components of accounting. At the same time, this facilitates bookkeepers’ ability to meet the time constraints imposed by their clients, particularly during peak reporting times.
Ethics: Bookkeeping and accounting both require honesty, high ethical standards, and compliance with the law to preserve accurate and trustworthy financial records. By adhering to these standards, accountants and bookkeepers can protect their companies from legal action and regulatory penalties.
Bookkeeping is the foundation of, or the first step in, accounting processes. The two go hand in hand. Since most bookkeeping responsibilities are administrative in nature, having familiarity with business is sufficient. However, accounting is more analytical, so a solid foundation is essential.
Conclusion
When it comes to handling your company’s funds, understanding the difference between bookkeeping and accounting is crucial.
Bookkeeping is concerned with the details of a company’s financial activities and the timeliness of its financial statements. Accounting, on the other hand, looks at the bigger picture. You may want to consult an accountant for assistance with financial planning, budgeting, and tax filing.
Depending on the size and growth of your business and your familiarity with financial matters, it may be worthwhile to invest in a bookkeeper, an accountant, or both. If you want to learn more about managing business finances, visit our website or contact us today.