Understanding the differences and similarities between bookkeeping and accounting can help you figure out if your enterprise will require bookkeeping or accounting or even both.
Both accounting and bookkeeping are important business functions, but there is a sharp distinction between them, although they do have similarities. Do you know the difference? If you hail from a non-commerce background, it may not be easy to differentiate between bookkeeping and accounting. It is important to understand the difference and similarities as you can understand what you will be paying for when outsourcing these services. While your business may require both the services, the scope of bookkeeping and accounting is similar and different to a certain extent.
Keep in mind that bookkeeping is the stepping-stone of accounting. To keep it simple, remember that accounting is more in-depth and analytical when compared to bookkeeping. Bookkeeping is only a part of accounting and is used to create a base for accounting.
Understanding bookkeeping and accounting
Accounting involves interpreting, analyzing, classifying, reporting and summarizing financial data, as this information is needed to understand the financial position of a business. An accountant would analyze transactions in a financial statement as well as in a business report, while keeping a check on accountings standards, principles and other such requirements. The financial situation and the performance of an enterprise will be reported to its stakeholders with the purpose of helping the enterprise take informed business decisions.
Bookkeeping refers to the procedure of recording financial data in a chronological order on a daily basis. A bookkeeper may not record financial transaction, but may also summarize it and create reports. Bookkeeping is critical to accounting as without the availability of detailed data, the authenticity of the financial statement can be challenged.
Differences between bookkeeping and accounting
- Bookkeeping is a subset of accounting that records a company’s financial transactions in a systematic process. Bookkeeping is clerical in nature. Accounting requires a higher level if proficiency, knowledge and analytical skills, as the accountant would have to accurately interpret, classify, analyze and report financial data and transactions.
- The primary objective of bookkeeping is to maintain a record of all the financial transactions systematically and by the book. The foremost objective of accounting is to examine the financial situation of the business and communicate this information to the enterprise’s shareholders.
- Bookkeepers do not create financial statements, while accountants prepare financial statements during the course of the accounting process.
- Journals and ledgers are the basic tools used by a bookkeeper to record financial transactions. In accounting, cash flow statements, balance sheets, profit and loss accounts are the tools used.
- Bookkeeping consists of single entry or double entry system. Accounting involves the preparation of budgets and plan as well as cost accounting, financial accounting, management accounting etc.
- With a bookkeeping record, the management of a business cannot make vital business decision, as it would not reflect the financial position. The management of a business on the other hand can use financial data provided by an accountant, as it would precisely depict the financial position of the company.
- Undertaking a few accounting courses and gaining a basic understanding of accounting will qualify a person for bookkeeping. However, for accounting, a person should obtain a degree in finance and accounting and should also be certified as an accountant before practicing. While accountants are qualified to handle the entire accounting process, bookkeepers would only be able to handle the recording of financial transactions. Many a time, you would find accountants serving as advisors for bookkeepers and even reviewing their work. Bookkeepers on the other hand lay the groundwork for accountants, so that they can expertly evaluate the financial data of an enterprise.
Similarities between Accounting and Bookkeeping
- Bookkeepers and accountants should possess a basic accounting knowledge of data entry of financial transactions and creating management reports.
- Accountants may choose to do the bookkeeping themselves if there is no bookkeeper available.
- Accountants and bookkeepers do not actively participate in the strategic financial planning of a business. However, both would record the financial transactions of a company.
Bookkeeping is a stepping-stone to or the initial stage of accounting procedures, which makes the two inseparable. If the bookkeeping is done properly, it perfectly complements accounting and vice versa. Since bookkeeping tasks are clerical, some knowledge of commerce is enough. On the other hand, accounting is more analytical so thorough knowledge in this field is a prerequisite.
Bookkeeping and accounting are inseparable, as bookkeeping is the stepping-stone of accounting. If bookkeeping is carried out properly, it will only complement accounting. What service is your enterprise looking for? Maybe you require help only with entering data or maybe you need a skilled accountant to help you analyze your financial data. Whatever be you need, we at Outsource2india can help you. Find out more about our bookkeeping and accounting services.
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