7 Differences Between Bookkeeping and Accounting
Accounting and bookkeeping are key business functions and are often used interchangeably. However, these terms have different meanings and functions. While bookkeeping involves recording all the transactions in business, accounting provides the inspection of the final accounts. The two functions (when used correctly) can provide the business owner with full financial support.
Bookkeepers record the transactions in chronological order, hence, most of the work is clerical in nature. Today, however, most of the bookkeeping tasks are heading towards cloud-accounting. All thanks to the invention of accounting software such as Xero and QuickBooks. As a result, bookkeepers in small firms also perform some accounting roles in that they summarise financial data. Such persons are called full-charge bookkeepers and are paid higher salaries than regular bookkeepers. Many business owners are now also embracing the digital age and are taking advantage of outsourcing their bookkeeping requirements to remote bookkeepers.
Defining bookkeeping vs accounting
Bookkeeping is related to measuring, identifying and recording financial transactions. Apart from recording business transactions in chronological order, bookkeeping also involves the reconciliation of bank statements. Accounting emphasises the interpretation of the financial transactions recorded in the ledger account. Some bookkeeping services will also provide a financial analysis service, whereby, the company accounts are carefully scrutinised to find business trends to help with key business decisions and in turn, help with cashflow decisions.
The primary objective of bookkeeping is to record all the financial transactions in a systematic order while accounting assesses the financial situation of the business.
What tools do accountants and bookkeepers use?
Bookkeepers prepare ledgers and journals along with preparing financial statements like balance sheets, income statements and cash flow statements thanks to the use of cloud-accounting. The accountant then checks through the work and files the end of year accounts. This explains why bookkeepers need to be accurate when recording financial transactions. For Vat registered businesses who need to conform to the Making Tax Digital Law, using an app like ReceiptBank works wonders too. Receipts are submitted via the app whereby, the bookkeeper can attach the receipts to the relevant transactions in the cloud-accounting software. This process ensures the correct vat is applied to the transaction in question. Companies that have both accountants and bookkeepers run like well-oiled machines.
Bookkeeping works in conjunction with accounting. Hand in hand, the two functions work to empower businesses. Bookkeepers have become key in many business operations. Using cloud-accounting they can split transactions into classes which helps business owners drill down where their cash flow is mainly being used. Many accountants will prepare the accounts for their understanding, leaving their customers with no knowledge of what is happening in their businesses (finance related).
Some bookkeepers can offer a virtual finance director service, whereby, in-depth reports can be collated for business owners in a format that they can understand. Having a level of understanding about your accounts can empower business owners as they can make educated decisions about their business functions using the detailed reports.
The innovative way of tracking transactions with classes and having summarized nominal accounts is a huge advantage for highly skilled bookkeepers. Accountants use information prepared by bookkeepers to analyse and prepare the year-end accounts for companies. Accounting is not just about preparing financial information but also having the ability to solve problems whether they are complex business operations or simple accounting issues. Additionally, accountants should be able to formulate financial plans in relation to a firm’s departments.
Preparation of Financial Statements
The preparation of financial statements is not part of the bookkeeping process. On the contrary, it is just the first step to the accounting process. The accounting process, however, involves the preparation of financial statements. Normally, the accounting process involves three types of transactions:
- The first involves reversing entries from the preceding period
- The second involves recording business transactions
- The third comprises period-end processing required to close the books and prepare end-year financial statements
The first two processes are performed by bookkeepers but the last step is done of every account by accountants as it involves the aggregation of the information obtained from previous steps. The information is aggregated to prepare a trial balance that lists the ending balances. The accountant then prepares the balance sheet, which shows the assets, liabilities and shareholders’ equity and the income statement, which displays revenue expense items.
What qualifications do bookkeepers and accountants need?
Normally, bookkeepers are not required to obtain any formal education to perform their duties. However, having the right qualification enables an individual to demonstrate his or her expertise. The Association of Accounting Technicians offers a bookkeeping course for people who desire to pursue this form of career. Accountants, on the other hand, need to prove they are eligible for the task by obtaining an accounting education. Beginners can enrol for AAT or ACCA courses, which are recognised internationally.
What types of bookkeeping are there?
Single-entry bookkeeping can be used by very new and very small businesses. This method would involve using spreadsheets or cash books to monitor the transactions in the business. Single-entry bookkeeping is as the name suggests, whereby, transactions are entered into a journal as a single entry.
Double-entry bookkeeping is based on accounting principles hence, records every aspect of a transaction. Accounting involves a broad range of categories, depending on the size of the firm and the industry it operates in. The most common include cost accounting, financial accounting and management accounting. Financial accounting involves the preparation of financial reports, cost accounting analyses the costs involved in the production of goods (usually in a manufacturing firm) while management accounting assists the management to make informed decisions and assess their impact.
Some bookkeepers have a range of bookkeeping skills while others have none. Qualified bookkeepers can prepare PAYE and VAT returns. Some accountants, on the other hand, have detailed knowledge about capital gains tax, corporation tax and inheritance tax, among other statutory taxes that affect businesses. Not all accountants will have this expertise as they may only specialise in one specific field. For example Property tax or construction laws
What is the difference in cost between a bookkeeper and an accountant?
Hiring a remote bookkeeper is cheaper because their fees can either be hourly depending on how many hours they work or fixed monthly rates for full-time support. The advantage of outsourcing your bookkeeping is that there are no other overheads such as holiday pay or sickness expenses. Accountants, however, charge a fixed monthly fee and not on an hourly basis. The fee includes preparing the annual financial statements, a company’s payroll and management accounts and filing tax returns. The rate charged depends on the size of the company and the range of services the bookkeeper/accountant is offering
Businesses need both professionals. However, technology has changed, causing a shift in bookkeeping and accounting roles. Accounting software has caused the automation of a range of bookkeeping duties, making this function nearly obsolete. As a result, a majority of bookkeepers have taken on the advisory role because they know their clients’ businesses in detail. What’s more, as advanced technology continues to develop more accounting tools at a rapid rate, bookkeepers are training in a variety of accounting solutions. Their goal is to become the best technology consultants in the accounting field.
Accounting is an essential part of any business, both small and large businesses. Accountants not only prepare financial statements but also offer good advice, especially during the early days of setting up a company. They help a business owner decide on the most suitable entity type, offer strategic advice on how to maximise profits and file returns. The nature and size of the business determine whether it needs a bookkeeper or an accountant. A small company may start off with a bookkeeper but as its operations grow and become complex, it should consider working with an accountant as well. These rules help a business decide whether it wants to employ a bookkeeper or an accountant, or both:
- When starting a business, it is essential to consult an accountant to understand the requirements of the company and its financial workings
- Some business owners perform bookkeeping activities during the first few months or years of the firm as long as it has few financial operations
- Engage an accountant when filing taxes. They ensure you get it right.