Bookkeeping and accounting represent two vital functions within any business organization. In the most straightforward terms, bookkeeping involves the fundamental task of recording financial transactions, while accounting encompasses the more intricate duties of interpreting, categorizing, analyzing, reporting, and summarizing financial data.
To an inexperienced observer, bookkeeping and accounting might seem synonymous. This perception arises from the fact that both fields work with financial data, necessitate a foundational understanding of accounting principles, and involve the organization and reporting of financial transactions. Nonetheless, these processes inherently diverge and offer distinct advantages. To gain insight into the key difference between bookkeeping and accounting, read this article till the end.
What is Bookkeeping?
Bookkeeping entails systematically maintaining and recording all financial transactions within a business’s original entry books. This process involves the chronological organization and summarization of the company’s financial activities.
Bookkeeping primarily focuses on a business’s day-to-day financial operations and transactions. Bookkeepers are responsible for meticulously maintaining and recording the company’s accounts, encompassing a wide range of financial activities, including tax payments, sales revenue, loans, interest income, payroll, operational expenses, investments, and more. All of these transactions are diligently documented in the original books of accounts.
The up-to-date status of these books of account is crucial since they serve as the foundation for the subsequent accounting procedures employed by the business. The precision and accuracy of bookkeeping play a pivotal role in determining the accuracy of the overall accounting process.
Activities Involved in Bookkeeping
The difference between bookkeeping and accounting states that the former involves systematically documenting financial transactions in the company’s accounting records. Subsequently, these recorded transactions are entered into their respective ledger accounts. This process encompasses various activities, such as:
- Recording transactions: Whenever a transaction takes place, document these transactions in the primary entry book or subsidiary records.
- Posting into the ledger account: Categorizing transactions and transferring data from various categories to the relevant ledger accounts.
- Casting the total of ledger accounts: After the ledger account has been created, the process of summing up various ledger accounts takes place.
- Balancing accounts: Balancing is the procedure to verify that the sum of the debit column in the ledger account matches the total of the credit column.
What is Accounting?
Accounting is a methodical system for documenting, quantifying, and conveying data concerning financial transactions within a business. Its role extends to ascertaining a company’s financial standing and conveying this information to interested parties.
Accounting aids in immediate and long-term decision-making for a company and serves as a medium for demonstrating a company’s reliability in the market. It is often referred to as the “language of business.”
The primary objective of accounting is to present a company’s financial statements to its stakeholders, encompassing investors, creditors, employees, and government entities.
Activities Involved in Accounting
The difference between bookkeeping and accounting is that in accounting, the financial dealings of an entity are recognized and meticulously documented. Following this, these transactions are categorized, meaning transactions of a similar nature are assembled into distinct groups. This process is referred to as ledger posting. This aspect of accounting is considered a subset of bookkeeping. Thus, in addition to the tasks encompassed by bookkeeping, it also incorporates:
- Preparation of Trial Balance: It compiles a trial balance using the balances derived from different ledger accounts.
- Passing Rectification Entries: If there are mistakes or omissions, the subsequent stage in the accounting process involves making essential entries for adjustments and corrections.
- Preparation of the Income Statement: This stage encompasses the creation of a profit and loss account using the figures presented in the trial balance. It illustrates the financial outcomes of business operations.
- Preparation of the Balance Sheet: After determining the firm’s profit or loss, the subsequent step involves crafting the balance sheet. This document comprehensively overviews the company’s assets, liabilities, and capital.
The Shifting Landscapes of Bookkeeping and Accounting
Bookkeeping and accounting have a longstanding history and have experienced significant transformations over the years. Furthermore, this trend of evolving landscapes is anticipated to persist. Here are a few of the forthcoming changes in these domains:
1. Merging Bookkeeping and Accounting Functions
The advent of bookkeeping and accounting software has led to certain accounting functions gradually becoming integrated into the bookkeeping process. Additionally, bookkeeping software is now capable of producing financial statements. Consequently, the distinction between bookkeeping and accounting difference is becoming less noticeable.
2. Bookkeeping to Slowly Become Obsolete
Although many businesses will continue to require a bookkeeper to maintain their financial records, the role of bookkeeping is evolving beyond mere data entry, bank ledger balancing, and bank statement reconciliation. These traditional functions are gradually waning and may eventually become obsolete as several tasks are automated and managed by bookkeeping software in the years ahead.
3. Extending the Services
Emerging technologies deliver additional services like payroll processing and credit card reconciliation through advanced software. Bookkeepers and accountants must now embrace technological progress and explore the ever-evolving software solutions available.
4. Advent of Smartphones
Many businesses are transitioning to online operations, particularly as smartphones and mobile devices become more user-friendly and accessible. Business owners seek the ability to access data from anywhere in the world on various devices, and accounting and bookkeeping professionals ensure that the reports they generate are readily available online for their clients to access at their convenience.
Difference between Bookkeeping and Accounting
Now, let’s examine the critical distinctions between bookkeeping vs accounting in the table below:
| Basis | Bookkeeping | Accounting |
|---|---|---|
| Definition | Bookkeeping involves the identification and recording of all financial transactions. | Accounting involves the measurement and documentation of all financial transactions occurring within a fiscal year. |
| Objective | Bookkeeping aims to create the primary records of accounts. | Accounting aims to record, analyze, and interpret all transactions. |
| Scope | Its scope is limited. | Accounting encompasses a broader scope in contrast to bookkeeping. |
| Decision Making | Management cannot make decisions based on bookkeeping alone, as bookkeeping is solely focused on the record-keeping of financial transactions. | Management can make informed decisions through accounting, which is responsible for conveying the information. |
| Analysis | Information is only documented in bookkeeping and not subject to analysis. | In accounting, analysis is conducted to gain valuable insights into the business. |
Conclusion
To summarize, we can assert that bookkeeping vs accounting complement and support one another. While the bookkeeping and accounting differences imply that it is a routine and repetitive task, it is also an integral accounting component.
FAQs accounting and bookkeeping
What are the techniques of bookkeeping?
Depending on the volume of financial transactions, there are two ways to conduct bookkeeping: a-single and double-entry system. Secondly, on the basis of revenue accrual, bookkeeping can be done using cash and accrual-based techniques.
Can a bookkeeper become an accountant?
Certainly, a bookkeeper has the potential to advance to the role of an accountant, typically by accumulating relevant experience and acquiring a bachelor’s degree in accounting. To become a CPA, bookkeepers must fulfill the same educational prerequisites as other candidates and successfully pass the Uniform CPA exam.
Can accountants do bookkeeping?
Indeed, accountants are capable of carrying out the responsibilities of a bookkeeper. Nonetheless, accountants typically command higher compensation than bookkeepers, which is why it may not be cost-effective to assign accountants to handle the more routine duties traditionally associated with bookkeeping.