I was recently having a coffee chat with a close friend who was planning to venture into business. We discussed his idea and plan of action, and a lot of it made sense, but something that he said casually caught my attention. He said that he would have to hire a bookkeeping or accounting expert, among other things.
I immediately chucked – “Why not both?” He immediately chucked, “Aren’t they both the same? Why do I need to hire two people for the same job?” And this has stuck with me since and I have realized that many people like him think bookkeeping and accounting to be the same.
But they are not the same, and that’s what we are deducing in this article. Read on to learn the difference between accounting and bookkeeping.
What is Bookkeeping?
Bookkeeping is the process of identifying and recording accounting transactions systematically in the business’ books of accounts. It is the basis of organizational accounting and is concerned with the proper maintenance of books, such as the journal, the ledger, and the cash flow statement.
Bookkeeping is only done to maintain a systematic record of all financial transactions; unlike accounting, it has nothing to do with interpretation or scrutiny.
Here are the steps involved in bookkeeping –
- Identification of financial transactions
- Recording their requisite implications (debit and credit)
- Generating invoices based on the records
- Preparation of Financial Statements
- Tracking Payroll
- Maintaining general ledger, subsidiaries’ balances, and historical accounts
One of the primary tasks of bookkeeping is maintaining the general ledger (where all revenues and expenses are recorded). Each financial transaction is posted in the general ledger, which is then used to create financial statements.
Businesses used to do it manually back in the day but with rapid technological advancements most of them have shifted to specialized software or computerised spreadsheets. The choice of bookkeeping system can vary based on several factors, such as business size, volume of transactions, and the number of people employed.
Bookkeeping Types
Bookkeeping can be divided into two broad categories – single-entry and double-entry. Small entities prefer the single-entry system of bookkeeping as it reduces their workload, and they only have to record every transaction once (as an income or expense).
SMEs and large corporations follow the double-entry system as it is more accurate and makes the transactions more traceable. Here, every transaction is recorded twice (credit and debit) and is more complex, making it suitable for entities with more resources.
Bookkeeper Credentials
Bookkeeping doesn’t require you to have any formal license or credential. All it demands is for the professional to be sincere, strive for accuracy, and have knowledge about basic financial topics, such as the golden ratio and the concepts of incomes, investments, and expenditures. The work of a bookkeeping professional is usually double-checked by an accountant or the business owner (in the case of small businesses).
What is Accounting?
Bookkeeping sets the foundation for accounting to take over. Accounting is the process of transforming the raw data collected via bookkeeping into meaningful numbers, which aid in decision-making.
Accounting involves the creation of financial statements, such as income statements, balance sheets, and cash flow. These determine the financial position of the organization and present it to the internal and external stakeholders in a more understandable manner.
Accounting statements are mostly made for a specific period or showcase the company’s financial position on a specific day. These allow meaningful comparisons from previous periods and allow the requisite people to interpret performance, identify issues and trends, and find the scope of improvements for the upcoming periods.
Various external stakeholders also take the help of accounting to make vital decisions. The financial statements presented to them form the base to assess investment, regulatory, and other decisions surrounding the organization or the industry it is in.
It’s why regulatory bodies worldwide have introduced several financial reporting standards or frameworks, such as accounting standards (for example – Ind AS for India), for uniformity in accounting and reporting. These ensure compliance and uniformity in accounting and reporting across businesses and industries.
Accountant Credentials
The role of an accountant is often handled by professionals who at least have a Bachelor’s degree in accounting (B. Com). Most businesses prefer handing over their accounting needs to an experienced professional with a CA (Chartered Accountant) degree.
Differences Between Bookkeeping and Accounting
Here’s what differentiates bookkeeping and accounting services from each other –
| Aspect | Bookkeeping | Accounting |
| Scope of Work | Recording daily financial transactions | Analyzing, summarizing, and interpreting financial data |
| Skills Required | Basic financial knowledge and data entry skills | Advanced financial expertise and analytical skills |
| Timeframe | Focuses on day-to-day transactions | Covers monthly, quarterly, and annual reports |
| Purpose | To maintain accurate and organized records | To provide financial insights for decision-making |
| End Product | Journal entries, ledgers, and trial balances | Financial statements, reports, and tax filings |
1. Scope of Work
Bookkeeping’s scope of work is primarily responsible for the initial stages of recording a transaction. Daily transactions, like sales, purchases, and payments, are meticulously recorded and categorized by the bookkeeper to facilitate further processing.
As for accounting, the bulk of their scope of work lies in the interpretation and analysis of information provided to them by the bookkeeping solution. Accounting provides a comprehensive view of the organizational health by preparing financial statements, analyzing variances, and showcasing potential trends.
2. Skills Required
The primary task of a bookkeeper is to record financial transactions. So, a bookkeeper must be efficient with a basic understanding of financial concepts, data entry, and attention to detail. Most bookkeepers do not require a deeper understanding of how financial statements work; those having it find it easier to succeed in that profession. They also need skills to handle the accounting software deployed by the organization they work with.
Accountants require more in-depth and diverse accounting knowledge regarding topics like financial regulations, taxation laws, and analytical techniques. These are taught thoroughly in accounting courses, such as CA, enabling these professionals to handle and interpret complex financial data and derive meaningful insights. Accountants also require strong problem-solving and strategic thinking skills to succeed.
3. Timeframe
The timeframe is another vital difference in the jobs of accountants and bookkeepers. In most cases, businesses record financial transactions daily. It means bookkeepers have to be on their toes and operate on a real-time or near-real-time basis. It is a continuous process which requires bookkeepers to be prudent and maintain up-to-date and accurate records of daily financial activities.
As for accountants, they have a broader timeframe to play with. They can consolidate data periodically, say monthly, quarterly, or annually. Their role is less of management and more of analyzing and the longer span allows them to analyze trends, assess overall performance, and evaluate the financial position of the business more accurately.
4. Purpose
Bookkeeping’s primary purpose is to develop a systematic and accurate record of all financial transactions. It forms a basis of all the subsequent financial analysis and helps businesses to comply with legal and regulatory requirements. Since bookkeeping is done chronologically and on a real time or near-real-time basis, it enables the financial workflow to be organized and error-proof.
Accounting is more about number crunching and generating actionable insights for better decision-making. It is focused on creating the basis for stakeholders to understand the business performance and compare it with its peers. The primary purpose of accounting is to guide entities in the right direction using numbers.
5. End Product
Bookkeeping results in the creation of detailed records, such as ledgers and trial balances. Through these documents, every financial transaction of the organization in a particular period is traceable and can be examined in an organized manner. These records serve as critical inputs for accounting professionals and act as starting points for in-depth financial analysis.
While bookkeeping and accounting are intertwined, the latter starts where the former ends. Accounting uses the inputs from bookkeepers to prepare financial statements, tax filings, and performance reports of an entity. These documents showcase the organizational financial performance and aids in decision-making for internal and external stakeholders.
Conclusion
Bookkeeping and accounting and independent processes that are carefully weaved together to form a seamless collaboration to achieve success. While bookkeeping lays the foundation for capturing and organizing financial transactions systematically, accounting uses it to develop financial statements and perform higher-level analysis, planning and reporting. So, they both co-exist and one would not be sustainable without the other.
Some business owners have learned to manage basic accounting and bookkeeping, but the volume of work starts taking a toll if the transactions exceed a threshold. That’s why most entities hire professionals or are happy to go the outsourced accounting and bookkeeping route. That way, they get to spend more time managing the more important things and enable their businesses to expand faster.
At MyFinnar, we are proven experts with years of experience in providing accounting and bookkeeping services to our clients.
Get in touch with us today if you are looking to hire an expert to manage your bookkeeping and accounting hassle-freely.
