What’s the Real Difference Between Bookkeeping and Accounting?

In business, numbers are very important, and bookkeeping and accounting help explain what those numbers mean. In 2020, companies around the world spent a huge amount of money, about $544.06 billion, on accounting to help them understand their finances. 

In fact, this is going to grow even bigger, up to $735.94 billion in just a few years by 2025. This shows that more and more businesses understand how good accounting can make a big difference in how they run and grow.

It’s not always clear, however, to everyone how bookkeeping is different from accounting. Both are equally important for any business but at different stages. Bookkeeping involves recording every financial transaction in detail, laying the foundation for financial management. Accounting builds on this by analyzing the data to provide a clearer view of the company’s finances. 

Accountants prepare financial statements, manage tax calculations, find ways to cut costs, and offer strategic financial advice. Essentially, bookkeeping tracks the details, and accounting uses those details to help guide business decisions.

Having sound accounting and bookkeeping practices in place is essential for any business, no matter how small or large. Let’s take a closer look at accounting vs bookkeeping and how they work together.

What is Bookkeeping?

Bookkeeping is the process of collecting, keeping, and noting down all the financial activities like purchases, sales, receipts, and payments for a business or an individual. It’s important because it helps businesses monitor their money flow, allowing them to make smart financial choices. Additionally, bookkeeping is important for preparing taxes and financial reports.

When we talk of bookkeeper credentials, bookkeepers don’t usually need formal credentials or licenses to work. However, they must be extremely precise and knowledgeable about important financial topics. An accountant or the business owner, for whom the financial records are managed by a bookkeeper, typically reviews the bookkeeper’s work.

Bookkeeping comprises several key activities, including:

• Writing down financial transactions
• Recording debits (money out) and credits (money in)
• Creating invoices
• Preparing financial reports like the balance sheet, cash flow statement, and income statement
• Keeping and balancing detailed records, ledgers, and past accounts
• Handling payroll tasks

Types of Bookkeeping

Learn about the two main bookkeeping methods that help keep your finances accurate and organized, suitable for any size business. See how each method can improve the way you handle money:

Single Entry Bookkeeping

This method records each transaction as either a debit or a credit to only one account. It’s popular among small businesses and individuals because it’s straightforward to set up and manage. Instead of making journal entries and posting them to ledgers, transactions are recorded in a simple register, like a checkbook, where the running balance helps reconcile the bank statement.

Double Entry Bookkeeping

In double-entry bookkeeping, transactions impact two types of accounts: assets and liabilities. Assets are things the business owns, like cash and equipment. Liabilities are what the business owes, such as loans or debts.

Every transaction affects both an asset and a liability account. For example, if a business purchases $100 of office supplies on credit, it would affect both accounts receivable (an asset) and accounts payable (a liability). This method helps keep detailed track of all financial activities in a business.

While double-entry bookkeeping can seem complex for small businesses, there are software tools like QuickBooks that can simplify the process and help manage finances using this method.

What is Accounting?

Accounting is how a company organizes and reports its financial information to people who need to see it, like stakeholders and owners. Its goal is to provide clear and prompt financial data that helps in making decisions.

When we talk about accountant credentials, an accountant can be recognized if they have at least a bachelor’s degree in accounting or a closely related field like finance. 

Accountants can also pursue additional certifications that enhance their qualifications. One of the most recognized certifications is the Certified Public Accountant (CPA). To earn the CPA title, accountants must pass the Uniform CPA Examination and have professional experience in accounting. These qualifications contribute to an accountant’s cost.

Accounting involves several crucial activities, including:

• Preparing and Adjusting Entries
• Reviewing Company Financial Statements
• Analyzing Costs of Operations
• Completing Income Tax Returns
• Aiding the Business Owner in Understanding the Impact of Financial Decisions

Types of Accounting

Learn about the different types of accounting that can help you manage your business better. Each type has a specific role that can improve decision-making, ensure you meet legal requirements, and help with future planning:

 

• Tax Accounting: Tax accountants help individuals and businesses comply with tax laws and strategize to legally minimize taxes. This service is crucial for avoiding costly errors and legal issues with tax filings.
• Financial Accounting: Financial accountants record and organize financial transactions and prepare statements like income statements and balance sheets. These are crucial for external reporting to investors or banks and must follow specific standards.
• Management Accounting: Management accountants generate internal reports to aid in strategic decision-making, focusing on future forecasting and operational efficiency.
• Cost Accounting: Specializing in tracking production costs, cost accounting helps businesses understand spending patterns and find ways to cut costs effectively.
• Forensic Accounting: Forensic accountants investigate financial discrepancies and potential crimes like fraud or embezzlement, providing crucial insights during legal proceedings.
• Governmental Accounting: Government accountants manage and track public funds according to specific government standards, focusing on budgeting and financial management.
• International Accounting: For businesses operating globally, international accountants ensure compliance with international standards and local financial regulations.

Difference Between Bookkeeping and Accounting

Having a clear understanding of the functions of bookkeeping and accounting will help you manage the financial health of your company. Here’s a clear look at how they differ:

Function in Financial Management
This aspect highlights how each function contributes to the overall financial management of a business.

• Bookkeeping: Bookkeeping primarily involves the systematic recording of daily financial transactions such as sales, purchases, receipts, and payments. It focuses on maintaining accurate and detailed records of these transactions to ensure transparency and compliance with financial regulations.
• Accounting: Accounting takes the recorded financial data from bookkeeping and goes a step further. It involves analyzing and interpreting this data to provide valuable insights into the business’s financial performance, trends, and forecasts. Accounting helps in making informed decisions, planning strategies, and evaluating the overall financial health of the business.

Scope of Work

This aspect delves into the specific tasks and responsibilities encompassed by each function.

• Bookkeeping: Bookkeeping tasks mainly revolve around data entry and record-keeping. It involves accurately recording financial transactions, organizing financial documents, and maintaining general ledgers (GLs), which can be used to produce the balance sheet and income statement or accounting software. Bookkeepers ensure that all financial records are up-to-date, categorized correctly, and easily accessible for reference.
• Accounting: Accounting extends beyond data entry to include a broader range of financial activities. Accountants analyze financial data to create financial reports, such as income statements, balance sheets, and cash flow statements. They also conduct financial analysis, budgeting, forecasting, and tax planning to provide strategic guidance and support decision-making.

Objective

This aspect outlines the primary goals or objectives pursued by each function.

• Bookkeeping: The main objective of bookkeeping is to maintain accurate and detailed records of financial transactions. Bookkeepers focus on ensuring that all financial activities are recorded correctly, efficiently, and in compliance with accounting standards and regulations.
• Accounting: Accounting aims to provide meaningful insights and financial advice based on the recorded data. Accountants interpret financial information to assess the financial health of the business, identify trends, detect financial risks, and recommend strategies for improvement. They play a crucial role in helping businesses make informed financial decisions and achieve their long-term goals.

Typical Tasks

This aspect highlights the specific tasks performed under each function.

• Bookkeeping: Typical bookkeeping tasks include recording sales transactions, tracking expenses, managing accounts payable and receivable, reconciling bank statements, and maintaining financial records. Bookkeepers ensure the accuracy and integrity of financial data through meticulous record-keeping and organization.
• Accounting: Accounting tasks encompass a broader spectrum of activities, such as preparing financial statements, conducting financial analysis, performing audits, developing budgets and forecasts, and evaluating financial performance. Accountants analyze financial data to assess profitability, liquidity, solvency, and overall financial stability.

Focus

This aspect highlights the primary areas of focus for each function.

• Bookkeeping: Bookkeeping focuses on capturing and recording day-to-day financial transactions accurately and efficiently. It emphasizes the timely and accurate documentation of financial activities to maintain transparency, accountability, and compliance.
• Accounting: Accounting focuses on analyzing and interpreting financial data to provide strategic insights and guidance. It involves assessing financial performance, identifying trends, forecasting future outcomes, and making recommendations to support business decision-making and planning.

Roles and Responsibilities

This aspect clarifies the roles and responsibilities assigned to individuals performing each function.

• Bookkeeping: Bookkeeping tasks are typically performed by bookkeepers or accounting clerks responsible for recording and organizing financial transactions. Bookkeepers ensure the accuracy and completeness of financial records and support the day-to-day financial operations of the business.

• Accounting: Accounting tasks are carried out by professional accountants or certified public accountants (CPAs) with specialized knowledge and expertise in financial analysis and reporting. Accountants play a strategic role in interpreting financial data, analyzing trends, preparing financial statements, and providing financial advice and guidance to management.

Complexity of work

This aspect discusses the level of complexity associated with tasks performed under each function.

• Bookkeeping: Bookkeeping tasks are generally routine and repetitive, involving straightforward data entry and record-keeping processes. While accuracy and attention to detail are essential, bookkeeping activities are relatively less complex compared to accounting.
• Accounting: Accounting tasks are more complex and analytical, requiring a deeper understanding of financial principles, regulations, and reporting standards. Accountants engage in financial analysis, interpretation, and decision-making, addressing complex financial issues and strategic challenges faced by the business.

Contribution to Financial Process

This aspect highlights how each function contributes to the overall financial management process.

• Bookkeeping: Bookkeeping serves as the foundation of the financial process by capturing and recording raw financial data. It provides the essential information and documentation required for accounting analysis, reporting, and decision-making.

• Accounting: Accounting builds upon the foundation laid by bookkeeping to analyze, interpret, and leverage financial data effectively. Accountants utilize the recorded financial information to generate comprehensive financial reports, perform financial analysis, and offer strategic recommendations to stakeholders. Accounting plays a pivotal role in guiding financial planning, resource allocation, and business growth initiatives.

Regulatory and Standard Compliances

This aspect addresses the regulatory requirements and standards associated with each function.

• Bookkeeping: Bookkeeping focuses on ensuring compliance with basic financial regulations and standards while maintaining accurate financial records. Bookkeepers must adhere to accounting principles and regulatory guidelines to ensure the integrity and legality of financial transactions.
• Accounting: Accounting involves a deeper level of compliance with accounting standards, regulations, and reporting requirements. Accountants must stay updated with changes in accounting principles, tax laws, and financial regulations to ensure accurate financial reporting and regulatory compliance. Accounting standards, such as Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), govern the preparation and presentation of financial statements, ensuring transparency and consistency in financial reporting practices.

Reporting and Usage

This aspect explores how financial information is reported and utilized within each function.

• Bookkeeping: Bookkeeping culminates in the preparation of essential financial reports, such as ledgers, journals, and transaction records. These reports provide a detailed overview of financial transactions and serve as a reference for auditing and compliance purposes.
• Accounting: Accounting utilizes the financial data recorded by bookkeeping to prepare comprehensive financial statements, including income statements, balance sheets, and cash flow statements. These financial statements offer insights into the financial performance, liquidity, and solvency of the business. Accountants analyze the financial reports to evaluate the business’s profitability, assess financial risks, and make informed decisions regarding resource allocation, investment strategies, and operational improvements. Additionally, accounting reports serve as valuable tools for external stakeholders, such as investors, creditors, and regulatory authorities, to assess the financial health and performance of the business.

End Note!

Bookkeeping and accounting do more than just track your finances. They’re essential for guiding your business to success.

Bookkeeping accurately records all transactions, and accounting uses those records to help make important business decisions. By understanding the difference between these services, you can make good profits in your business.

Remember, getting professional help is always a better option. At Focus CPA Firm, we understand the importance of good bookkeeping and accounting. We recommend using these services to keep your business running smoothly and profitably.

In addition to bookkeeping and accounting, we also provide services like CFO advisory consulting, virtual CFO services, and outsourced/fractional CFO services. You can reach out to us if you need financial strategy, forecasting, or guidance for your business goals.