What’s The Difference Between Accounting & Bookkeeping?
Posted on Monday, June 29th, 2020 - 1,860 Reads
Two of the most important functions for any business are accounting and bookkeeping. Both accounting and bookkeeping are designed to work with financial data and generate reports pertaining to financial transactions.
While these two functions are somewhat similar, there are many differences between the terms that every company should know about.
Before you hire a professional accountant or bookkeeper, it’s a good idea to become aware of the differences between them, which are detailed further in the following paragraphs.
What Is Accounting?
Accounting is a common process that involves recording various financial transactions that a business makes. This process will include analyzing, creating summaries, and reporting the transactions to regulators, tax collectors, and various oversight agencies.
The financial statements that an accountant gathers, operate as a detailed summary of financial transactions that have occurred over a certain accounting period. This summary will include a company’s cash flows, operations, and financial position.
Accounting can be handled by an accountant or bookkeeper. While bookkeeping differs from accounting, a bookkeeper must have extensive knowledge of accounting for their profession, which means that they can sometimes provide accounting services.
The reports that are generated by an accountant can be critical towards making sure that businesses make the correct financial decisions. Keep in mind that accounting is essential no matter the size of the business in question.
There are several types of accounting that you might want to be aware of, which include financial accounting, managerial accounting, and cost accounting. Financial accounting focuses entirely on generating annual and interim financial statements for the company in question.
The results of the transactions that a company has made are summarized before being placed into a cash flow statement, balance sheet, and income statement.
While managerial accounting uses similar data when compared to financial accounting, the data is used in a variety of different ways. For instance, monthly or quarterly reports will be created so that the management team for the company can make important decisions about the operation of the business.
Cost accounting is centred around making sure that a company understands all of the costs involved with producing or manufacturing a product. The data that’s gathered and summarized by an accountant will be used to determine what a product should be priced at.
Now on to what bookkeeping is.
What Is Bookkeeping?
Bookkeeping is an essential business process that involves the recording and eventual organizing of all financial transactions that a company makes. A bookkeeper must make sure that all transactions are recorded on a daily basis, which ensures that these records are up-to-date and comprehensive. This particular process is considered by many businesses to be a facet of accounting.
It’s important to understand that every kind of financial transaction is handled by a bookkeeper, which includes sales and purchases. While bookkeeping is mainly used by businesses, it is also important for non-profit organizations and individuals.
The various transactions that are recorded by a bookkeeper include, but are not limited to:
- Loan payments.
- Expense payments that are made to suppliers.
- Generating financial reports.
- Monitoring any amount of asset depreciation.
- Customer payments for any invoices.
While bookkeeping can be simple for individuals, it’s a process that can require entire financial teams at larger companies. Bookkeeping becomes much more complicated when investments, taxes, loans, and assets are involved.
Make sure to stay up to date and read our recent article titled Read This FAQ Before Filing Your Ontario Income Taxes.
Primary Differences Between Accounting and Bookkeeping
Even though bookkeeping and accounting have their similarities, there are many notable differences that are important to understand.. For one, bookkeeping focuses mainly on measuring, recording, and identify financial transactions.
Accounting is much broader and is centred around interpreting, summarizing, and communicating any financial transactions that are displayed in a ledger. Bookkeeping records these financial transactions.
It’s also important to note that business managers are unable to make decisions based off of bookkeeping. They can, however, make critical business decisions with the information that they are provided with from an accountant.
When a bookkeeper records all financial transactions that a company makes, they don’t prepare financial statements with this information. Accountants will take the information that’s recorded by a bookkeeper to prepare financial statements. Many accountants will oversee the work that’s performed by a bookkeeper.
To better understand the difference between accounting and bookkeeping, a company will perform bookkeeping at the very beginning of the accounting process. Once an accountant has used this information to create financial statements, they will then assist with the preparation of loan proposals, company budgets and so forth.
Whether you run a small business or large corporation, both accounting and bookkeeping are essential components for the ongoing success of your company. When implemented correctly, these processes will ensure that any issues with a financial transaction or problems with the taxes that your business has paid can be addressed through the records that you’ve kept.
Both of these processes can also be helpful in the event that you or your business is audited.
Need help with your accounting and bookkeeping? See all our services here to find out how we can help you: https://llmbusinesssolutions.com/services/
By Lana Leigh McDole
Lana Leigh McDole is the owner of LLM Business Solutions. She studied accountancy at CGA Ontario in Ottawa Ontario and graduated in 2012. Her passion is her work and providing her customers with the best service possible, at the best prices.
Email: [email protected] | Phone: 226-802-0541