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Accounting vs. Bookkeeping – What’s the Difference?

7 mins read

This article provides the reader with an understanding of the differences between accounting and bookkeeping.

Your company’s financials are very important, as they help to guide decision making. Every business owner should understand their financial insights such as cashflow, operations, and performance. Two major elements of your financials are accounting and bookkeeping, however if you were asked to describe the difference between the two, you may have difficulty. Although accountants and bookkeepers do share common goals, they support your business’s financial health in many different ways.  Bookkeeping is considered more transactional and administrative, dealing with the physical financial transactions of the company while accounting is more subjective, requiring the analysis of the bookkeeping information in order to provide business insights. Let’s explore what exactly accounting and bookkeeping are, the similarities between them, and also the 5 key differences.

 What is Bookkeeping?

Bookkeeping is the process of consistently recording, categorizing, and reconciling daily financial transactions for a business. The term bookkeeping comes from the use of physical books to record transactions in the past. Your finances are tracked by these daily transactions that are recorded, which gives you a glance at the money entering and exiting your business. Bookkeeping is considered the first step in the entire accounting process for a business. Think of a bookkeeper as the runner who starts off the track relay. Once they finish the first leg of the race, they hand over the baton – financial information from journals and ledgers – to the accountants who finish the race.

 What is Accounting?

Accounting is a high-level process of interpreting, analyzing, and reporting compiled financial information from bookkeeping, to produce financial statements that show business insights summarizing your business performance. An accountant often plays the role of an advisor and draws the big picture of a business’s financial health. Accounting turns the information received from the ledgers into financial statements that show the bigger picture of your company, and the path you are proceeding on. This allows businesses to make well informed accurate decision making on just how they would like to proceed.

Similarities Between Accounting and Bookkeeping

Bookkeepers and accountants sometimes do the same work. Here are some of the similarities between the two:

  1. They work with financial data from the business
  2. They share a common goal of improving the financial health of the business
  3. Their roles may overlap in small businesses due to bookkeeping software that can compile financial statements
  4. Both require basic accounting knowledge to enter the profession
  5. Both are tax compliant

Differences Between Accounting and Bookkeeping

Though bookkeeping and accounting can be similar, here are 5 key differences:

1. Roles and Objectives

Accounting:

    • The objective of accounting is to interpret and analyze the financial situation of a business then further communicate the information to the relevant authorities
    • The accountant’s role is providing consultation, analysis, and advice on tax matters. They interpret, summarize, and communicate the information from the financial transactions

Bookkeeping:

    • The objective of bookkeeping is to maintain proper, systematic records of daily financial transactions
    • The bookkeeper’s role is to keep you financially organized. They identify, classify and record all your financial transactions
2. Tasks

Accounting:

    • Preparing financial statements – to help assess the financial health of your business
      • Balance sheets – snapshot of your financial position at a specific point in time. Calculated through the following formula: Assets = Equity -Liabilities
      • Income statements – record of all your income and expenses over a period of time
      • Cash flow statements – record of cash going in and out of your business over a period of time
    • Analyzing journal and ledger entries, making adjustments as needed (reconciling)
    • Providing tax advice
    • Completing and filing tax returns
    • Offering financial advice
    • Helping understand the impacts of financial decisions

Bookkeeping:

    • Recording income from services
    • Creating sale invoices
    • Paying supplier invoices
    • Managing payroll functions – though not a core bookkeeper function
    • Comparing balances in books against bank transactions
    • Accounts payable – tracking money you owe
    • Accounts receivable – tracking money owed to you
    • Maintaining a general ledger
3. Credentials

Accounting:

    • Must have at least a bachelor’s degree in Accounting
    • High cost associated with employing an accountant internally or using external accounting – costs can be kept lower by using a bookkeeper for the bookkeeping duties
    • Finance degrees are often considered an acceptable substitute
    • Eligible to acquire additional certifications such as obtaining the title of CPA (Chartered Professional Accountant) 

Bookkeeping:

    • Typically, bookkeepers are not required to have any formal education
    • Lower costs than employing an accountant
    • Most positions require 2-4 years of experience
    • Diploma and certification courses available
    • They are not able to acquire further certifications without an accounting degree
4. Tools Used

Accounting:

    • Bookkeeping software
    • Balance sheets
    • Income statements
    • Cash flow statements

Bookkeeping:

    • Bookkeeping software
    • Journals – all financial transactions are recorded as journal entries
    • Ledgers – all journal entries are categorized into the different accounts listed within the ledger
5. Decision Making

Accounting:

    • Financial decisions can be made based on accounting records and advice given
    • Senior management takes interest in the work of the accountants to acquire information for making future decisions
    • Accountants give advice to senior management, and can be involved in the decision-making process depending on the business

Bookkeeping:

    • Financial decisions cannot be made on bookkeeping records alone
    • Senior management is generally not involved in the functioning of the bookkeepers
    • Bookkeepers are rarely making decisions for the business – they are recording and organizing data given 

The Bottom Line

Both bookkeeping and accounting contribute directly to the long-term success of your business. While they go hand-in-hand, there are key differences between the two such as their objectives, roles, credentials, skills, tools used, and how they are involved in the decision-making process. To achieve healthy business finances requires: organized financial records and properly balanced finances prepared by a bookkeeper, pair that with a smart, recommended financial strategy and accurate tax filing by an accountant, do that and your finances will be in great shape. Then the only thing you will have to worry about is having a great BIG business idea!

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