Basic Differences Between Accounting and Bookkeeping

Many people confuse accounting and bookkeeping, mistakenly thinking that they are one and the same. Find out what differentiates accounting from bookkeeping, and their functions in business.

Accounting and basic bookkeeping are needed by all kinds of enterprises from start-ups to global conglomerates. These are financial instruments for the gathering and management of business transactions. Small-scale enterprises usually combine these two functions to be cost-efficient. In other words, the accountant also acts as the bookkeeper. However, there are differences between the two that entrepreneurs have to understand.

Accounting Information

This branch of learning refers to the organized financial documentation of regular business as well as analysis of said transactions. Bookkeeping is only one component of this discipline. The methodology also involves preparation of monetary statements, assets and liabilities of companies along with outcomes of the entire business. Accounting makes use of bookkeeping information, interprets this data, summarizes the figures into reports, and submits a final account to management. The most vital facet of accounting is the analysis of negotiations and purchases.

Records of assets, liabilities, expenditures, revenues, equities, and dividends are called accounts. This collective information is listed in a general ledger. Debits and credits describe changes in each account which is required by a particular transaction. Companies log performance in traditional format referred to as financial statements. The three widely used systems are the following:

  • Income Statement
  • Cash Flow Statement
  • Balance Sheet

Functional Areas of Accounting

Accounting has three working areas.

Financial Accounting determines the results of the company on a continuing basis such as six months. This will assist you in ascertaining long-term courses of action. This specific area considers money as production factor from the economic point of view. Management and cost accounting assist management in coming up with decisions on a daily basis. On the other hand, cost accounting deals with achieving the worth of direct and indirect costs. This value will help management make knowledgeable decisions in enhancing production. Cost accounting quantifies economic operations and a clear indicator of product resource execution. It supplies comprehensive cost information management required to manage operations and formulate future plans.

Managerial accounting includes seven aspects of analyses:

  • Margin establishes the amount of earnings that a corporation generates from particular product lines, stores, clients or demographics.
  • Breakeven evaluates margins of contributions and unit volumes where businesses break even.
  • Constraint helps identify possible log jams and how these affect income and profit.
  • Target helps design new commodities by gathering costs, comparing these to targeted levels and report said information to management.
  • Inventory Valuation determines direct costs of sold merchandise and inventory goods. It also allocates overhead expenditures for these products.
  • Trend Analysis reviews trending of different costs to find out discrepancies from the long-term configuration.
  • Transaction Analysis delves deeper into essential information and looks at individual transactions to figure out causes of inconsistencies.
  • Capital budget analysis reviews propositions for procuring permanent assets to find out if these are required.

Bookkeeping Function

Bookkeeping is the function of recording transactions and relationships between these deals. It is a mechanical procedure which does not entail analytical work. In the past, records were stored in books. That is why the tool was labeled bookkeeping. Since then, books have been replaced with sophisticated software applications. The process records received payments (cash or check) and documents outgoing transactions such as utility bills.

Single entry means that transactions are posted in credit or debit columns. Under double entry, two entries for every contract are incorporated to the ledger. The first entry is included in the credit side while the other goes to the debit portion. Both entries can be verified for accuracy. It will be easier to comprehend bookkeeping if you study the following measures:

  • File receipts or standard payment records for all business expenses.
  • Go over income and expense records on a regular basis. It can be daily, weekly, or once a month.
  • Use these summaries to make financial reports which will provide detailed information regarding your company. This can be monthly profits or worth of your business at a given time.

All-inclusive synopsis of your revenues and expenses are the core of this process. However, this cannot be created legally in a void. Sales and purchases should be supported by records which contain the amount, date and pertinent information regarding the sale. This is authentic regardless of the fact that accounting software or manual ledgers are used.

The complete ledger consists of a rundown of revenues, spending and whatever you want to monitor. These can be entered from receipts based on dates and categories. These summaries may be used in the future to respond to explicit financial questions about the company such as profits generated.

Start with a blank ledger page or automated file of vacant rows and columns. Post amounts indicated in the receipts of sales and purchases into the ledger. The frequency of posting depends on the company accounting department. Additional sales mean regular posts on the financial record book. It is possible to acquire software that produces ledgers once you input the necessary information. It is also advisable for corporations to purchase software package for bookkeeping. Accounting software makes preparation of monthly and annual financial reports very easy as soon as you enter daily, weekly or monthly statistics.

Financial reports are valuable since these integrate key parts of business financial information. Although the income ledger shows that you earned substantial income within a certain duration, it is not possible to determine if you earned profit without measuring income versus total expenses. Even then, comparisons of income and expenses do not indicate if customers pay fast enough to maintain sufficient cash flow. Financial reports will make all these possible.

Why Hire an Accountant

Bookkeeping and accounting are applicable tools in conveying any financial activity, performance and condition of an enterprise. The value of these fields of study in any form of entrepreneurship has stepped up the demands for these two services in enterprises globally. You need to hire a Certified Public Accountant based on your business structure. Corporations are mandated to comply with the Sarbanes-Oxley Act. Thus, these institutions must take into service third-party CPAs for the purpose of conducting financial statement auditing.
The Sarbanes-Oxley Act of 2002 was ratified due to the emergence of various major corporate and accounting indignities. These conditions affect email retention requirements, truthfulness and supervision. This particular act is applicable to all publicly-traded corporations as well as the lawyers and Certified Public Accountants of these firms.

This legislation highlights minimum retention periods for all accounting records, working documents, communications, as well as file attachments transmitted through email, instant messaging, or other forms of IT communications.

The following Sections should be taken into consideration: Sections 103(a) and 801(a) oblige corporate organizations to maintain all records including electronic documents that form the foundation of an audit or review for seven years. Meanwhile, Section 302 entails that chief executive and financial officers should personally certify and be liable for their companies record retention policies and financial reports.

There is a major distinction between the Certified Public Accountant and ordinary graduate of a four year course in accounting. The CPA performs audits of and certifies financial statements. The non-CPA is not authorized or licensed to do these two tasks. Accountants are well-versed with the business atmosphere and tax situations. These financial experts can give recommendations regarding business and financial plans, insurance, or enterprise expansion. The accountant is capable of bringing in a new dimension of insights to entrepreneurs or company management teams due to the broad perspective on financial matters.

The accounting professional introduces the system of assessing productivity and revise prices. It makes sense to hire bookkeepers for daily record management. However, it is the seasoned accountant who can introduce a system of monitoring expenditures, looking at trends and reducing fees in accomplishing financial statements as well as tax returns. Accountants also help in the areas of tax planning and compliance. Planning minimizes total tax burden while compliance refers to tax legislation conformity. Likewise, auditing is a major responsibility of a CPA. It ranges from the preparation of simple financial statements to performing actual audits of corporations.

Why Hire a Bookkeeper

The bookkeeper possesses the important competencies that business owners need such as:

  • Reconciling company banking statements
  • Preparing payroll a well as accounts payables and receivables
  • Posting and keeping journal entries updated and organized

Bookkeepers should have the experience and professional accreditation. In the United States, it is not compulsory for bookkeepers to get licenses but it is an option to take part in voluntary authorization programs. Those who are certified by the American Institute of Professional Bookkeepers or National Association of Certified Public Bookkeepers translate to absolute proficiency and experience. Membership in professional associations means a lot. The criteria are generally stringent so being a member means the professional’s status and steadfastness means that integrity is beyond doubt.

The efficient bookkeeper will strive to maintain the books of any company properly. This alone is an indication that you need to get one for your business. Moreover, you should hire good bookkeepers for the following reasons:

  • Bookkeepers can be relied upon to make correct invoices promptly. This is a time-consuming task that ordinary persons may not be capable of performing. The bookkeeper can also track down status of your accounts easily.
  • There are restrictions and deadlines for tax filing as well as other government requirements. Failure to comply on time will call for sanctions and costly penalties. The responsible bookkeeper will not miss these things.
  • The bookkeeper can always classify items for tax purposes correctly. These service providers are updated about tax laws and provisions. This finance specialist also understands tax deductibles for your company. Hiring can save you finances and time in the long-term.
  • Almost all bookkeepers today are well-versed with accounting software. These programs facilitate faster procedures of entering data appropriately.

Trends in these Fields


Is accountancy and bookkeeping a rewarding profession? This is a foremost concern if you want to become an accountant or bookkeeper. The options are varied since you can work for individual clients, small businesses, large corporations, and government offices. The industry continues to grow for the better due to changes in the business, more legislation and technological modernization. Accountants and bookkeepers are assuming fresh roles in the domain of business along with financial counseling. The outlook for employment is also becoming more upbeat especially when it comes to compensation and promotion.

There are three trends in technology that will have a significant impact on accounting. These are the employment of accounting software, cloud accounting and data analytics. Software will become more highly developed. Applications will help users to log in, sort out and automate various transactions. Business proprietors will certainly require accountants to supervise submission of Business Activity Statements and ITR (income tax returns) for mandatory reporting. It is not just simple entry of data this time around.

Cloud accounting will be in demand. Data will be kept off-site and accessed through the worldwide web. Users can now manage and impart information through mobile devices. Through the cloud, you can perform accounting, speed up expenses and time sheet approval and gain entry to real-time monetary reports. Data analytics will go hand in hand with cloud accounting. Use of software apps will provide end users with improved perspective of financial conditions. Real-time data can be accumulated using modern software programs. Accessing through the cloud will help enterprises understand financial positions and sustain the manner of making informed decisions. Collation and analysis techniques will be improved. Corporate institutions will surely see the results starting 2015 and beyond.

This is definitely an exciting moment for bookkeeping and accounting. Stakeholders perceive the coming years as being more lucrative. Most of the fundamental tasks will be accomplished with the use of software. Hence, accountants as well as bookkeepers can channel time and resources to more crucial responsibilities which include advisory and training. CPAs, regular accountants and bookkeeping experts can look forward to more roles in support of clients or companies where each one works.