Bookkeeping and accounting are two different things, who knew? To most, the two functions appear to be the same profession. Today, we are breaking down the main differences between bookkeeping and accounting. While there are some similarities between the two, you will come to find they are most definitely two separate functions. Let’s start with bookkeeping!
According to the dictionary, bookkeeping is described as the activity or occupation of keeping records of the financial affairs of a business. In a typical day, a bookkeeper will record financial transactions (in a chronological order) and classify and summarize financial data. The objective of a bookkeeper is to keep the records of all financial transactions proper and systematic. Bookkeepers are required to be accurate in their work and knowledgeable about financial topics and they are usually overseen by an accountant. Here is a quick list of bookkeeping responsibilities:
- Recording financial transactions
- Posting debits and credits
- Producing invoices
- Maintaining and balancing subsidiaries, general ledgers, and historical accounts
- Completing payroll
Maintaining the general ledger is one of the primary responsibilities of a bookkeeper. This is where the bookkeeper records every transaction from sale and expense receipts. The larger the business, the more complex bookkeeping can become as there will be more and more items to record. Recording a transaction is referred to as “posting.” All sales, purchases, and so on need to be posted in the general ledger, and some items may require supporting documents.
“Purchases, sales, payroll, and other transactions you have in your business will generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain the information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. You should keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense (IRS).”
Do you wear the Bookkeeper hat for your business? We have an awesome Bookkeeping checklist on our website.
The definition of accounting is the action or process of keeping financial accounts. Put simply, bookkeeping is the recording of financial transactions and accounting is the analyzation, reporting, and summarization of the financial data. The objective of accounting is to thoroughly understand and communicate the company’s financial situation to management in order for them to make critical business decisions. In summary accounting includes:
- Preparing adjusting entries (recording expenses that have occurred but aren’t yet recorded in the bookkeeping process)
- Preparing company financial statements
- Analyzing costs of operations
- Completing income tax returns
- Aiding the business owner in understanding the impact of financial decisions
Accounting requires special skills due to the analytical and complex nature of the job. The process is much more subjective than bookkeeping, which is mainly transactional. Accountants have to follow principles, standards, and requirements set forth by the industry. They prepare company budgets and plan loan proposals. They also prepare financial statements. Accountants with a certain level of experience and education can obtain the title of Certified Public Accountant (CPA).
Bookkeepers in small businesses may take on some of the accounting responsibilities and sometimes an accountant may also record financial transactions for a company.
A Changing Landscape for Bookkeeping
The functions of bookkeeping and accounting have been around for a long time and the landscape is changing. Accounting and bookkeeping software is blurring the line between the two functions. Many of today’s software solutions provide aspects of both, like recording transactions (bookkeeping) and preparing financial statements (accounting). Bookkeepers now have the opportunity to support their clients in new ways through the use of the software, best practices, payroll, credit card reconciliation, and so on.
The Bottom Line
Keeping accurate, organized financial records and balanced finances is extremely important. A great bookkeeper coupled with an analytical accountant can make a huge impact on any business. While some business owners choose to manage their bookkeeping and accounting on their own, many prefer to hire a professional so they can focus on the core of their business and serve their customers. When you outsource, you can rest assured that your books are accurate and up-to-date as your business grows and scales.
We’ll work with you to ensure you’re capturing all of those tax-deductible expenses, stay on track with earnings and payroll, give you a monthly snapshot of your business finances, and more. Want to learn more about bookkeeping services? Just head to our services page!
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