financial services

Difference Between Bookkeeping and Accounting

For many business owners, it can be difficult to see the difference between bookkeeping and accounting. Indeed, both terms refer to the scope of tasks that manage the accounting side of a company and share some common goals. But there are some fundamental distinctions between these two notions.

Bookkeeping implies a more administrative work of keeping financial recording and retaining documentation for transactions. Many bookkeepers begin with performing functions of data-entry clerks, and then by gaining more experience in the field, their role within a company may evolve into being an accountant.

accounting small business

The functions of an accountant are more subjective. Their work may also involve reporting and business analysis to provide business owners with insights based on the information obtained through bookkeeping. As we see, a bookkeeper and accountant work in close cooperation. It is often that a bookkeeper is a link that helps maintain a strong business relationship between an accountant and management of a company.

Now, when we have acquainted with the basic terms, it’s time to learn the difference in their functional areas and the roles that bookkeepers and accountants perform within a company.

The functions of a bookkeeper

The work of a bookkeeper includes the daily systematic recording and processing of financial transactions. Such a specialist maintains documentation of each monetary transaction to provide correct information on the income and expenses and create a base for subsequent accounting activities.

The main functions of bookkeeping are:

  • recording monetary transactions;
  • posting ledger entries;
  • invoicing;
  • maintaining ledgers, subsidiaries, and historical accounts;
  • filling out payroll forms

Maintenance of the general ledger is the primary task of a bookkeeper. This document reflects the daily data on business transactions such as cash incoming and outgoing, sales and purchase of goods, expenses, etc. A bookkeeper records entries in the day books like cash book, purchase, sales, journal, etc. and then posts the data in the corresponding ledger.

The functions of an accountant

Accounting implies a more complex process that uses financial information formed by a bookkeeper and by these data it generates a report on the financial condition of a company and other financial statements.

The functions of accounting include:

  • Preparation of adjusting records (recording of expenses occurred that had not been yet recorded within a bookkeeping process);
  • Preparation of financial statements of a company;
  • Analysis of operating costs;
  • Filling in tax returns;
  • Assisting business owners in making financial decisions

In the process of accounting, all monetary transactions of a similar nature are recorded, grouped, and summarized. The final figures are displayed in the financial statements. These reports are then analyzed, and on their basis, all the interested parties can receive easily understandable conclusions on the results of the financial statements of a company for a particular financial year. The users of such information can be investors, creditors, employees, managers, suppliers, government, and the general public.

Based on the accounting statements, a business owner and all the interested parties gain a better understanding of the real profitability and awareness of the cash flow within a company. Accounting information is also used in other financial activities of a business, for example, in strategic tax planning, financial forecasting, and tax filing. Thus, the accountancy can be divided into several adjacent areas:

  • Financial Accounting
  • Cost Accounting
  • Management Accounting
  • Human Resource Accounting
  • Social Responsibility Accounting

Today, as we have a privilege to employ bookkeeping and accounting software, some accounting functions have been duplicated in the bookkeeping. For example, some of the bookkeeping software allows creating financial reports as well. Thus, to some extent, we can see the merging of traditional functions of accounting and bookkeeping.

The roles of bookkeepers and accountants in the business world

For business owners, it is critical to have an understanding of differences between the roles that these professionals perform to determine when and for what scope of work to hire an accountant or a bookkeeper.

As a rule, a bookkeeper should have from two to four years of experience in the field or an associate’s degree. To be a successful bookkeeper, an individual is required to be accurate in his/ her work and also be aware of the key financial topics. Usually, bookkeepers are accountable to an accountant or an owner of a small business whose books they maintain. A bookkeeper does not compile financial statements and does not require performing any analytical work.

To become an accountant, a person must have a bachelor’s degree in accounting. Typically, other financial degrees are considered to be sufficient to qualify a candidate for the position of an accountant if an individual does not have such a specialized degree. Additionally, the profession of an accountant requires certain analytical skills and profound knowledge of financial topics.

Optionally, both bookkeepers and accountants can acquire certification through the corresponding organizations. Bookkeepers can apply to the AIPB (American Institute of Professional Bookkeepers). For accountants, such an organization is AICPA (American Institute of Certified Public Accountants). However, unlike bookkeepers, accountants have the right to obtain more professional certificates. Accountants that have sufficient experience and education can receive the title of Certified Public Accountant (CPA) via passing the Uniform Certified Public Accountant exam.

In conclusion

Bookkeeping is an integral part of accounting as it forms an informational base for further accounting processes. The correctness of financial statements generated via accounting largely depends on how accurately bookkeeping records are maintained. Since the bookkeeping department carries out clerical tasks, the knowledge of commerce is sufficient while accounting involves more analytical work. Therefore, profound financial knowledge is necessary.