Bookkeeping is the basic activity of keeping track of the financial records of a business.
Accounting is an advanced version of bookkeeping, which involves not just recording transactions, but also classifying, summarizing, and presenting them in a meaningful format to each stakeholder.
Small-scale businesses can go without accountants if they have bookkeepers, but large and medium-scale enterprises need to have both.
Accountants need to have a greater set of skills than the bookkeepers.
Bookkeeping and accounting are often considered synonymous because of an overlap in some of the activities performed under both. However, the two have some major differences. While the former only involves the maintenance and recording of transactions, the latter is more extensive, time-consuming, and thorough because of the interpretations and estimations it requires. Therefore, if you want your business to thrive, it is important that you are mindful of the distinctive features of both processes so that you are able to incorporate the benefits of both in your company, especially in the software you choose for each.
There are several types of bookkeeping and accounting methods. Let’s find out the route your business needs to take, what methods can be beneficial, and if there is a need for both accounting and bookkeeping for your company or if just one of the two could work.
What is Bookkeeping?
Bookkeeping refers to the process of recording a company’s most basic transactions each day. There are largely two methods of doing it; single-entry bookkeeping and double-entry bookkeeping. The size of the business usually serves as a guide to determining which of the two is suitable and effective. As the name suggests, a single-entry bookkeeping method is rather simplified and straightforward. It only requires you to make one entry per transaction and does not require any high-level accounting training to be able to do that. The method works well for small-scale enterprises having small inventories, fewer assets and those that do not sell or buy in credit.
However, if a very small-sized, cash-based business decides to opt for the double-entry method, it will only lead to complications and greater encounters with errors as double-entry bookkeeping is extensive and rather technical. Under this method, the existence of two accounts, credit and debit are assumed and every transaction has a dual impact. The principle requires both of them to be equal if your business wants its books to be balanced. Such a mechanism suits larger businesses well as they mostly deal in credits. The method is often prioritized over single-entry bookkeeping because it is an indirect way of double-checking and verifying your entries.
What is Accounting?
Accounting, on the other hand, is the process of recording, classifying, analyzing, interpreting and reporting the transactions recorded through bookkeeping. A rather robust process that often involves high-level calculations and financial knowledge, accounting leads to the determination of numbers that are important to the business, involves the preparation of financial statements, predicts the future of a company, draws comparisons of the business’s financial performance over successive periods, and assembles a well-curated budget. Accounting is of many different types. The most notable ones include financial accounting, managerial accounting, and cost accounting. Where financial accounting normally leads to the creation of financial statements for external use, managerial accounting provides updates on a weekly or quarterly basis to the internal decision-makers. Similarly, where managerial accounting helps your business in making the right choices concerning the management, whereas cost accounting prioritizes decisions around cost.
The Difference Between the Two
Where bookkeeping often also takes the role of accounting in small-scale business setups, there are some major differences between the two, often visible only when the companies have an expanded status. The most important distinctive feature between the two is the requirements of the two processes.
Bookkeeping simply involves the preparation of records, whereas accounting also involves the interpretation, reporting and thorough analysis of those records. You can be a bookkeeper without having a degree even from your high school years if you are intelligent with numbers. The process does not require in-depth knowledge of economics or accounts, but the opposite is true for accounting.
In most cases, accountants need to have a degree that serves as evidence of their problem-solving and technical skills. Moreover, when it’s time for filing for taxes, bookkeepers are responsible for providing the necessary documents but the actual process of filing tax returns, conducting planning regarding taxes and advising the businesses accordingly is the duty of the accountants. Similar is the case for audits. The material is supplied by the bookkeepers but the entire audit process is carried out by the certified accountants. Thus, bookkeepers often work under the supervision of accountants and do not require a vast set of skills. In addition, bookkeepers are also assigned for the processing of payrolls but no such responsibility is shouldered by the accountants. This shows the difference between the two processes and how only small-scale businesses have the margin of opting for either of the two.
Benefits of Bookkeeping for A Business
Besides saving your time, bookkeeping offers multiple benefits which, in the long term, are meant to ensure consistent growth for your business. For instance, during audits, it is essential to provide the auditors with adequate and up-to-date financial information in order to avoid any penalties. This is only possible if your business ensures efficiency, accuracy, and regularity in the preparation of its books. Similar is the situation at the time when you are filing for taxes. If in case, you neglect bookkeeping, it is very likely that you will miss out on many receipts and details that might land you in hot waters sooner or later.
Furthermore, bookkeeping is an incredible way of keeping a check and balance on the employees and preventing the occurrence of frauds and discrepancies. When even the smallest of transactions are recorded, it becomes easier to detect irregularities and also curb fraudulent behaviors. Having a fresh record of your financials always available also makes it easier to predict the future and plan your activities accordingly. This prevents your business from experiencing any major dip and you are able to cash in on a maximum number of opportunities.
Previously, bookkeeping was more of an arduous task but simple bookkeeping software such as QuickBooks and FreshBooks have truly made the process uncomplicated and trouble-free. These software providers automate the entire bookkeeping process and will thus be a great helping hand for your financials to get sorted, especially if you are not a qualified accountant.
Benefits of Accounting for A Business
When your business will have a sorted status on its bookkeeping, accounting and its consequent merits will automatically surface and benefit your company. Preparation of financial statements such as the income statement, balance sheet, and statement of cash flow are all the products of accounting. Although technically demanding, their preparation leads to an incredible route to drawing comparisons between a company’s performance over the years and also with the competitor businesses. It is also through accounting that you can get a detailed overview of your company’s standing and present it to the investors or lenders.
Accountants, with their knowledge, are able to correctly guide your financial decisions that eventually determine the fate of your business. In case your business ever encounters a legal battle, it is the savior process of accounting that can help you smoothly sail out of it. This is due to the accountant’s expertise that enables them to have a solution to the legal issues companies often get embroiled into.
Accounting also facilitates unchallenged business management. With the prices and ratios calculated through reliable accounting methods, the management team will not find hurdles in evaluating your company’s performance or taking the necessary decisions. Streamlined budgeting is also an important benefit of accounting. With the comparisons, predictions, costs and ratios at your disposal due to accounting, you are able to prepare a more sustainable budget that does not require frequent changes. Hence, the incorporation of healthy and reliable accounting practices is a key to success for any business regardless of the scale it operates on.
To experience the most minimum levels of hurdles in accounting procedures, advanced accounting software like Oracle NetSuite can be fully trusted, especially by mid to large-scale enterprises. The software is not just easy-going but also saves a lot of time with a range of integrated modules.
The Combination of Bookkeeping and Accounting
Bookkeeping and accounting mostly go hand-in-hand. It is the accountants that usually supervise the bookkeepers and it is the bookkeepers that are the source of gathered financial details about a company for the accountants. Where bookkeeping ensures organization in a business saves time and costs, accounting helps in preparing financial statements, taking important decisions, and preparing the right management reports. When a company has both processes working smoothly, the benefits add up and lead to greater prosperity and consistent sales.
How to Make the Right Choice?
It is important to determine when only bookkeeping or accounting can be enough and when both are a necessity for a business. If your business operates on a very small scale, bookkeeping should be all you need. As there wouldn’t be a lot to manage, basic records of transactions and payments can be sufficient for ensuring a stable future for the business. Although there exists multiple accounting software to facilitate accounting for small-scale businesses, small businesses do not have enough resources to operate the software. It would, therefore, be unwise to spend on a resource that you don’t really need. However, if your business is not too small or is in the expansion phase, it is essential that you take the help of both the processes and not just one in case you want your business to be on the right track. Only a record of what you have paid and what you are going to receive is not enough. There needs to be a system that involves tracking inventory, applying estimates, classifying transactions and preparing financial reports. In case a medium-scale or large-scale enterprise lacks in its accounts, even a slight irregularity can bring torments upon the entire business and losses that are worth millions. It is, thus, the size and complexity of your business that will decide the path you will take.
Precisely, bookkeeping is a basic activity of keeping track of the financial transactions of a business, whereas accounting is an advanced version of the process encompassing multiple steps. Bookkeeping is helpful for small businesses to track their expenses or file taxes. It is also a reliable way of curbing financial irregularities in a company and detecting frauds. On the other hand, accounting aims at providing accurate financial information for both internal and external stakeholders. For small-scale businesses, bookkeeping can be sufficient as they don’t have a lot on their plate but for medium and large-scale enterprises, it is important to attain the services of professional accountants as they need to sort a wide variety of processes.