For the not-so financially savvy amongst us, here is a brief explanation of the differences between Bookkeeping and Accounting, terms which are often (incorrectly) used interchangeably.
Bookkeeping and accounting are both essential business functions required for all businesses.
Bookkeeping is responsible for the recording of financial transactions.
Accounting is responsible for interpreting, classifying, analysing, reporting and summarizing financial data.
The Function of Bookkeeping
Bookkeeping is the process of recording daily transactions in a consistent way and is a key component to building a strong business foundation.
Bookkeeping is comprised of:
• Recording financial transactions
• Posting debits and credits
• Producing invoices
• Maintaining and balancing subsidiaries, general ledgers, and historical accounts
• Completing payroll
Maintaining a general ledger is one of the main components of bookkeeping. The general ledger is a basic document where a bookkeeper records the amounts from sale and expense receipts. This is referred to as posting and the more sales that are completed, the more often the ledger is posted. A ledger can be created with specialized software, a computer spreadsheet, or simply a lined sheet of paper. The complexity of a bookkeeping system often depends on the size of the business and the number of transactions that are completed daily, weekly, and monthly. All sales and purchases made by your business need to be recorded in the ledger, and certain items need supporting documents.
The Function of Accounting
Accounting is a high-level process that makes sense of the information previously compiled, and produces financial models using that information. The process of accounting is more subjective than bookkeeping, which is largely transactional.
The process of accounting includes:
• Preparing adjusting entries (recording expenses that have occurred but aren’t yet recorded in the bookkeeping process)
• Preparing company financial statements
• Analyzing costs of operations
• Completing income tax returns
• Aiding the business owner in understanding the impact of financial decisions
The process of accounting provides reports that bring key financial indicators together. The result is a better understanding of actual profitability, and an awareness of cash flow in the business. Accounting turns the information from the ledger into statements that reveal the bigger picture of the business, and the path the company is progressing on. Business owners will often look to accountants for help with strategic tax planning, financial forecasting, and tax filing.
The Bookkeeper Role vs. The Accountant Role
Understanding the difference between bookkeeping and accounting is empowering as a business owner, but it’s also important to understand the kinds of credentials accountants and bookkeepers have in order to determine how or when to use each. Read on for a look at what the roles of bookkeeper and accountant entail.
The Bookkeeper: Typically, bookkeepers are required to have between two and four years of experience or an associate’s degree. In order to be successful in their work, bookkeepers need to be sticklers for accuracy, and knowledgeable about key financial topics. Usually, the bookkeeper’s work is overseen by either an accountant or the small business owner whose books they are doing.
The Accountant: To qualify for the title of accountant, generally an individual must have a bachelor’s degree in accounting. For those that don’t have a specific degree in accounting, finance degrees are often considered an adequate substitute. Accountants, unlike bookkeepers, are also eligible to acquire additional professional certifications. For example, accountants with sufficient experience and education can obtain the title of Certified Public Accountant (CPA), one of the most common types of accounting designations. To become a CPA, an accountant must pass the Uniform Certified Public Accountant exam and possess experience as a professional accountant.
The Bottom Line
A successful marriage between bookkeeping and accounting will contribute to the long-term financial success of the business. Organized financial records and properly balanced finances produced by the bookkeeping and accounting processes are both key factors to this success. Some business owners learn to manage their finances on their own, while others opt to hire a professional so that they can focus on the parts of their business that they really love. Whichever option you choose, investing – whether it be your time or money – into your business financials will only help your business grow.
Pendragon can help you run your business more efficiently, saving you time and money. For further information please don’t hesitate to contact us, book an appointment or reach us at [email protected] or 02 9407 8700 where one of our Australian team members will gladly help you.