If you’ve ever been confused about the difference between bookkeeping and accounting, this article will help clear things up for you. There is a common misconception that bookkeeping and accounting are the same, which is not true. There are several key differences, and here I will outline them and clarify the uses, advantages, and limitations of each.
Why The Difference Between Bookkeeping and Accounting is Confused
To begin, let’s look at why there is such confusion. Some people just think that bookkeeping and accounting are the same things, but with a different name. This is mainly because bookkeepers and accountants both deal with financial data and require knowledge of how to record financial transactions.
The distinctions between the two terms have also become blurred due to accounting software. A bookkeeper often uses accounting software to maintain a companies accounts. In fact, a bookkeeper can perform many of the jobs of an accountant because the computer software does the hard work for them, provided they know how to use it correctly.
Businesses rarely use the term bookkeeper but prefer the expression accounts clerk. There is, after all, no bookkeeping department in a large corporation, but there is an accounts department. Here accounts clerks (bookkeepers) will often be supervised by accountants. Let’s take a closer look at the 7 main differences here:
So what are the differences in the definition of bookkeeping and accounting?
Bookkeeping - Simply recording financial transactions. Each is identified, categorized, and recorded. This could be in paper ledgers or on a computer.
Accounting - This is where financial transactions are classified, analyzed, interpreted, reported, and summarized to provide important financial data and a complete set of accounts.
2. Decision Making
What financial decisions can be made from documents kept by a bookkeeper or an accountant?
Bookkeeping - The information produced by a bookkeeper is too basic to facilitate any management decisions to be made using the data provided.
Accounting – The detailed information that an accountant can provide gives an in-depth view of a business's financial status. It is, therefore, essential for making the right decisions regarding the future of the company.
What are the main objective differences?
Bookkeeping - The key objective is to maintain records of every financial transaction made by the business. Ensuring it is lodged in a clear, systematic way where a third party can easily understand each transaction. A bookkeeper must also keep the books balanced.
Accounting – This goes beyond simply maintaining a record of transactions and gauges the companies financial situation. This information can then be communicated to other parties such as banks, financial institutions, or government authorities.
4. Preparation of Financial Statements
What sort of financial statements are produced?
Bookkeeping – A bookkeeper is not typically expected to produce financial statements. They may be required to study certain key areas of income or expenditure within a business and report these to management for review, but generally, no financial statements will be prepared by a bookkeeper.
Accounting – One of the primary functions of accounting is to produce detailed financial statements that can be used by management and submitted to third parties.
What analysis is done?
Bookkeeping – A bookkeeper is not generally required to analyze the books. There are some exceptions to this; for instance, the management may require a breakdown of staffing costs or to know how much of a particular product is sold or purchased. These types of analysis are straightforward to do and can easily be deduced from the ledgers kept by a bookkeeper.
Accounting – The person responsible for producing the annual accounts may also be asked to provide detailed information which they have analyzed, interpreted and used to generate complex reports.
What different types of bookkeeping and accounting are there?
Bookkeeping – There are two types of bookkeeping, single and double entry. Single entry is where the transactions are recorded only on one side of a single ledger. Usually, this is either a single expense if a purchase was made or a sale if something was sold. In double-entry, this is balanced by recording the other side of the transaction in the appropriate ledger.
For example, if using the single entry system, a box of files was purchased, then all that is recorded is the figure for the files being brought. If a double-entry system is used, not only would the purchase of the files being recorded in a purchase ledger, but also the other side of the transaction would also be recorded in the appropriate ledger, banking, for example. Hence the name, double-entry. Double-entry provides a much better record and also helps to avoid errors as both balances in and out must agree. If they do not, it is clear a mistake has been made.
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Accounting – In order to prepare accounts, budgets, proposals, and so on, the accounts department uses the information created by bookkeepers. But there is only one style of accounting.
What kind of skills are required?
Bookkeeping – Most people in a bookkeeping role will have had some level of training. This is because it’s necessary to understand the principles involved when keeping books. However, to be a bookkeeper doesn't require any special skills.
Accounting – Someone working as an accountant will have specific accountancy training and qualifications, as to produce a set of accounts requires a specialist skillset.
Bookkeepers vs. Accountants
What are the key differences between Bookkeepers and Accountants?
Bookkeepers – Must accurately record every financial transaction made by the business. They do not require formal qualifications, only a thorough understanding of the processes necessary to maintain an accurate set of books.
Accountants – Are qualified persons usually with a degree. There are many different types of accountants, including Certified, Staff, Investment, Cost, Project, Management, or Forensic. Each has a slightly different field of expertise.
The Evolution of Bookkeeping and Accounting
Now you understand the difference between bookkeeping and accounting, it’s easy to see how the line between the two is becoming more confused. In recent times there has been a tremendous change in the way things are done. Computer software and smartphone app development all mean that the procedures for generating more complex accounts have been dramatically simplified. There is no reason to expect this trend will not continue into the future.
Due to technology, the distinct line between accounting and bookkeeping continues to diminish. Over time many aspects of accounting are being absorbed into the area of bookkeeping. Today's software can generate many financial statements, which were previously the remit of an accountant.
But does this mean bookkeeping will become obsolete? The truth is that there will always remain a divide between the two roles, and even though the software can generate a set of complex accounts from information that was input by a bookkeeper, the human touch of an accountant will still provide necessary nuances that a computer program is incapable of.
An excellent example of this is year-end accounts, where specific adjustment entries are required. These include:
- Any expenses or liabilities that have not as yet been entered onto the computer system.
- Revenues or assets earned that have not yet been entered into the system.
- Depreciation expenses, bad debts, and so on that must be taken into account.
Without these adjustment entries being made, the completed set of accounts will not be a true reflection of the business's financial position and could be misleading.
How is Using Software Better than a Manual System?
There are several benefits for using specialist accounting software over handwritten ledgers or spreadsheets to keep your books.
Fewer mistakes – Particularly when you use a double-entry software system because all transactions must marry up, it is far easier to spot an error, although not impossible.
Speed – The automation aspect of using software means things can be done a lot faster than writing everything in ledgers.
Storage – keeping handwritten ledgers takes up a lot of space. Information on a computer is virtual, so a great deal less room is required.
Sharing – Sending written ledger accounts to be viewed by others is not very practical, especially if the other person is not local. Sharing statements kept on computers is far easier and less time-consuming.
Clarity – For larger organizations with hundreds of accounts and thousands of transactions, it is far easier for someone to search for specific information or view isolated accounts than it would be if all of the data was kept in ledgers.
As you can see, the line that makes the difference between bookkeeping and accounting clear has become blurry over time. The invention of computers and the continued growth of technologies that make keeping financial records simple are ever-increasing. However, there still is a difference between the two functions and it is likely this will remain.
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