Difference between Bookkeeping and Accounting
Every company must have bookkeeping and accounting procedures in place to compile its financial records at the end of each quarter or year. Bookkeeping and accounting can assist the company in assessing its value and making future decisions. Bookkeeping and accounting are frequently used synonymously. There is a fine line separating bookkeeping and accounting, despite their inherent interdependence. Accounting includes bookkeeping; however, accounting is a more comprehensive field than bookkeeping. In this article, we will give a comprehensive overview of both accounting and bookkeeping and explain how they differ.
Table of Content
What is Bookkeeping?
The process of keeping track of and documenting every financial transaction in a company's original books of entry is known as bookkeeping. The bookkeeping procedure entails compiling and methodically arranging all of the business's financial transactions in chronological order. Bookkeeping is primarily concerned with a business's daily financial transactions and activities. The accounts books are kept up to date and recorded by the bookkeepers.
The original books of accounts contain records of every financial activity, including salary and other operations costs, investments, sales revenue, loans, interest income, and tax payments. Since the books of account serve as the foundation for accounting, they must be current. The accuracy of a business's accounting process is dependent on the quality of its bookkeeping.
The steps of the bookkeeping process include:
Identifying financial transactions
Recording financial transactions
Maintaining a ledger account
Preparing trial balance
Type of Bookkeeping
Single-Entry Bookkeeping: This is a simple bookkeeping system in which each transaction is entered into a journal as a single entry. One-sided accounting entry is used in this cash-based approach to maintain financial data. Using this system, the main bookkeeping record is a cash book.
Double-Entry Bookkeeping: This is a process of recording entries as either credits or debits in at least two accounts. For transactions to be error-free, the amounts must match. This implies that the amounts that are recorded as debits and credits must match each other.
Importance of Bookkeeping
Depending on your organisation, there are distinct books in bookkeeping for purchases, sales, accounts receivable, and accounts payable. Every book aids in your comprehension of your expenses and sources of income. You become accountable because the records are displayed every day. Additionally, you may simply handle any disputes that may arise between you and your customers or suppliers using the information in your records.
Equipped with bookkeeping data, constructing a feasible budget for the upcoming financial year is effortless. You may even try to find methods to cut costs so that you may concentrate more on the goods and services that bring in more money.
For business owners, tax season is typically an extremely busy one. But you won't have any trouble filing taxes if you keep accurate books. You won't have to look through multiple documents to find the information you need. You stay organised when you keep books. You will so remain composed and cool when it comes time to file your taxes.
It's possible that your company complies with tax laws. But are you going to survive when a deep check is conducted? When the IT department audits your accounts, bookkeeping keeps you safe. You don't have to worry about providing concise answers to queries regarding your income, expenses, losses, and taxes.
Small firms face difficulties since they are unable to keep track of their daily revenue and expenses. One of the issues that bookkeeping helps with is this one. You can easily determine whether your company can afford to pay for additional expenses by looking at the earnings it has made thus far with online bookkeeping solutions. You can use the information to make an informed decision about taking out a loan.
What is Accounting?
Accounting is a more comprehensive and in-depth process that includes interpreting, assessing, summing, and reporting a company's financial transactions. An accurate synopsis of the financial activities throughout an accounting period is provided by the financial statements that are prepared in accounting. An organization's cash flows, operations, and financial status are all summed up in these statements.
Accounting compiles financial data so that all parties involved can easily comprehend and interpret it. It supports companies in keeping accurate and timely financial records. An accountant keeps track of daily business operations and organises them into financial statements including the balance sheet, cash flow statement, and income statement. All stakeholders can evaluate a company's success with the use of its financial statements.
Types of Accounting
Cost Accounting: The entire cost of manufacturing is the subject of cost accounting, a subfield of accounting. Comparing input and output expenses facilitates the evaluation of financial performance for decision-making in a company. There are various forms of cost accounting, including conventional costing, marginal costing, activity-based accounting, and lean accounting.
Financial Accounting: Accounting and financial accounting are terms that are occasionally used interchangeably. It is the process used to document, compile, and report on financial transactions. This approach makes use of accepted accounting standards in accordance with the legal and financial reporting obligations of the company. There are two forms of financial accounting: accrual and cash techniques.
Managerial Accounting: This area of bookkeeping is utilised internally. Documents, reports, and financial statements are produced for the management. Management can make budgetary decisions, develop trend charts, and make business-related decisions using these reports. The various forms of management accounting include budgeting, financial leverage measurements, product costing, cash flow analysis, inventory turnover analysis, constraint analysis, and AR.
Importance of Accounting
Accounting aids in the planning of your business's expansion. You can assess how your business is doing from your financial statement and take prompt action. It acts as a roadmap to assist you in projecting the direction of your business over the course of the next one to five years or longer.
To draw in investors or obtain outside capital for your company, your financial statements need to be in order. This data is necessary for banks and investors to assess your cash flow in past years and to estimate future levels of it.
If you don't review your records, you will not be aware of who owes you money if you manage a large number of sales locations. You can see how much your debtors have paid and how much is still owed from the balance sheet. This facilitates your ability to monitor payments and follow up with clients who have fallen behind.
Accounting also facilitates monitoring your creditors. You could have debts in so many locations that it gets challenging to figure out who you still owe money to. On the other hand, your balance sheet will show you who you owe money to and if you have enough cash on hand to pay off your obligations.
You can file taxes accurately and on time if your financial records are accurate. By doing this, you raise your compliance level and avoid paying hefty fines.
Differences between Bookkeeping and Accounting
The differences between bookkeeping and accounting are illustrated in the table below:
Conclusion
The differences between accounting and bookkeeping are numerous. Nonetheless, both are critical to comprehending a company's overall financial status. Accounting creates, summarises, and reports financial transactions through financial statements, whereas bookkeeping documents them.
FAQ
Q1. Why is accounting dependent on bookkeeping?
Bookkeeping provides the basic information. Accounting procedures including financial statement creation and financial analysis would be difficult without proper bookkeeping.
Q2. Which career path, accounting or bookkeeping, requires more formal education?
More formal education is typically needed for accounting, and many accountants hold degrees and qualifications like CA.
Q3. Can an accountant handle activities related to bookkeeping?
Although an accountant can do bookkeeping duties, having a professional bookkeeper for everyday transactional work is frequently more efficient for firms.
Q4. How does accounting add value to a business?
Accounting gives managers and owners information about the financial health of their company, enabling them to make wise decisions. Based on their study, accountants can make recommendations regarding operations, spending, tax matters, and other financial difficulties.
