Differences Between Bookkeeping and Accounting: Keeping track of your financial transactions should be a top concern if you want to know how your small business is going. There are many benefits to maintaining sound bookkeeping and accounting procedures for your small business, from making sure tax returns are done correctly to accurately projecting cash flow.
But how do accounting and bookkeeping vary from one another? Finding correct data and presenting the proper documents need an understanding of the differences. The primary distinction between the two is that with bookkeeping, you or a professional must acquire financial information and organize it appropriately. A CPA (Certified Public Accountant) may assist you go one step further and examine your financial data if your company is large enough or you need an extra set of eyes.
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What is Bookkeeping?
Maintaining and documenting all financial transactions in a company’s initial books of entry is known as bookkeeping. The bookkeeping process entails chronologically and methodically summarizing and organizing all of the business’s financial transactions.
The daily financial activities and transactions of a firm are the main focus of bookkeeping. The books of accounts are kept up to date and recorded by bookkeepers. The original books of accounts contain a record of all financial activities, including tax payments, sales revenue, loans, interest income, wages and other operating costs, investments, etc.
Since they serve as the foundation for accounting, the books of account must be current. The correctness of a business’s accounting procedures is dependent upon the precision of bookkeeping.
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What is Accounting?
Accounting is the process of evaluating, analyzing, summarizing, and reporting a business’s financial transactions. The financial statements created by accounting are an exact overview of all financial activities during an accounting period. These financial statements provide an overview of a company’s operations, cash flows, and financial situation.
Accounting combines financial data in order to make it transparent and intelligible for all parties involved. It assists companies in keeping up-to-date, accurate financial records.
The accountant keeps and compiles records of a company’s daily activities into financial statements including the income statement, cash flow statements, and balance sheet. All stakeholders can evaluate a company’s performance using the financial statements.
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Differences Between Bookkeeping and Accounting
1. Definitions: Bookkeeping vs Accounting
The definitions of bookkeeping and accounting are where there is the first significant distinction. The act of gathering, arranging, storing, and gaining access to an entity’s financial information base is referred to as bookkeeping. It serves as the cornerstone for creating financial statements, tax returns, and other significant reports. It is essential for day-to-day corporate operations. Bookkeeping, in its simplest form, is the practice of documenting financial transactions.
The scope of accounting is wider than that of bookkeeping. The “systematic process of detecting, documenting, measuring, categorizing, verifying, summing up, analyzing and conveying financial information” is what accounting is described as. In other words, accountants are taught to explain to important corporate stakeholders what the financial data means, in addition to just recording transactions.
An accountant, for instance, may produce reports on the organization’s present financial situation, which can then help the owner or executive make wise business decisions moving forward.
2. Objectives: It only seems natural that since bookkeeping and accounting are considered to be two separate procedures, their ultimate goals would vary as well. A bookkeeper’s main goal is to meticulously, analytically, and methodically record all financial transactions. In general, bookkeepers document such financial transactions in a chronological order. They make use of one of the two main record-keeping systems that we shall go into more depth about later.
The fundamental objective of an accountant is to ascertain the financial standing or health of the business and communicate this information to the important stakeholders. Therefore, accountants are largely focused on the analysis and interpretation of all the financial data that has been gathered rather than the daily activities of accounting (although they are necessary).
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3. Scope of Work: The following tasks might be part of bookkeeping responsibilities:
a. Pay down bills when they become due.
b. Send invoices to customers
c. Gather sales taxes, then send them to the government.
d. Register cash receipts.
e. Put money in the bank.
f. Perform a monthly bank account reconciliation.
g. Reconcile all accounts on a regular basis to guarantee correctness and completeness.
h. Keep the petty cash fund active.
i. Maintain a well-organized accounting file system
j. Keep the annual budget in place.
k. Handle payroll consistently and on time
l. As required, offer clerical and administrative assistance.
A greater range of important tasks are included in accountant responsibilities.
These could include doing the following steps:
a. Reading and interpreting financial records correctly
b. Ensuring that the business complies fully with all applicable state and federal laws
c. Providing business executives with specialized financial counsel
d. Preparing tax forms and researching strategies to pay as little tax as possible
e. Financial statement preparation
f. Delivering reports to important stakeholders
g. Establishing a thorough accounting structure to prevent fraud or theft
h. Directing the activities of bookkeepers
Although there is frequently a large amount of overlap between bookkeeping and accounting responsibilities, accountants are primarily concerned with using the company’s financial data to make informed business decisions while bookkeepers are generally focused on the daily maintenance of financial data.
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4. Skills required: Most professions do not need a specialized skill set or a graduate degree. However, bookkeepers must be excellent in simple algebra and arithmetic, extremely organized and detail-oriented, and meticulous in their job to prevent errors.
The National Bookkeepers Association can certify bookkeepers (NBA). Additionally, they can acquire a license from the National Association of Certified Public Bookkeepers to practice as a Certified Public Bookkeeper (NACPB).
An accounting bachelor’s degree or a degree in a similar subject, such internal auditing, is typically required for accounting employment. Master’s degree requirements exist for several accounting occupations.
For the purpose of earning their qualifications as Certified Public Accountants, accountants frequently choose to sit for the Uniform CPA Examination (CPA). Most state boards mandate that before an accountant is allowed to take the test, they must have two years of professional experience.
After becoming certified, CPAs must regularly take continuing education courses and renew their license in order to keep current with laws and practices.
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5. Types of Bookkeeping & Accounting: Single entry and double entry are the two fundamental forms of bookkeeping procedures. In single-entry systems, each transaction involves a single record. They are mostly concentrated on activities involving cash receipts and payments. The possibility of fraud is significant despite the straightforward record-keeping method since accounts cannot be reconciled.
For every transaction in a double-entry system, there are two records kept: one for each account that is credited and one for each account that is debited. The double-entry approach is substantially more complicated than the single-entry method, but it follows GAAP and is thus more secure and extensive in its use. A wide range of crucial tasks are covered by accounting roles, as opposed to the two basic types of bookkeeping listed above.
These comprise the subsequent accounting disciplines:
b. Those forensic accountants entrusted with thoroughly examining financial data in order to identify omissions, mistakes, or fraud
c. Third-party auditors provide protection against fraud and embezzlement.
d. Staff accountants are referred to as the specialists in the accounting profession.
Although there are significant distinctions between bookkeeping and accounting, both of these functions are essential for long-term corporate success. Of course, in order to fully profit from such services, it is crucial to fill both jobs with highly qualified and experienced individuals.
Edeh Samuel Chukwuemeka ACMC, is a Law Student and a Certified Mediator/Conciliator in Nigeria. He is also a Developer with knowledge in HTML, CSS, JS, PHP and React Native. Samuel is bent on changing the legal profession by building Web and Mobile Apps that will make legal research a lot easier.