Bookkeeping vs Accounting: what’s the difference?
Many new entrepreneurs wonder whether there is a difference between bookkeeping and accounting.
They’re easy to confuse.
On the surface, both activities appear similar, as both deal with the financial management of a company. Yet, there are some key differences between the two that it is important for every business owner to understand.
Here we break down some of the key distinctions.
What is bookkeeping?
Put simply, bookkeeping is the day-to-day recording of the financial transactions and information pertaining to a business. It ensures that records of each individual financial transaction are correct, up-to-date and comprehensive. Transactions include purchases, sales, receipts, and payments either made by, or made out to, a business or person.
With proper bookkeeping, companies are able to track all information on their books to make key operating, investing, and financing decisions. Accuracy is therefore key to the process.
The bookkeeping function has the following core activities:
Recording income from services rendered or products sold
Recording expenses such as rent, utilities and office supplies
Creating invoices for products or services
Making payments for goods and services
Ensuring that balances in a company’s own books match to bank records
Tracking accounts payable – i.e. money a company owes
Tracking accounts receivable – i.e. money owed to a company
Maintaining the general ledger, which is the master accounting document that stores all financial transactions
Essentially, bookkeeping means recording and tracking the financial aspects of the business in an organised way. It is essential for every healthy business but is also helpful for individuals and non-profit organisations.
While the terms bookkeeping and accounting are often used interchangeably, bookkeeping is, in essence, the foundation on which accounting is built. Bookkeeping refers specifically to the tasks and practices involved in recording financial activities, while accounting is more analytical in nature.
What is accounting?
In short, accounting is the process of interpreting, classifying, analysing, reporting and summarising financial data collected during the bookkeeping stage.
One major part of accounting focuses on presenting the financial information in the form of financial statements (balance sheet, income statement, and cash flow statement) that are distributed to people outside of the company.
These external reports must be prepared in accordance with generally accepted accounting principles.
Another part of accounting focuses on providing a company’s management with the information needed to keep the business financially healthy. Although some of the information comes from recorded transactions, much of the analytic process and reporting includes estimated and projected amounts based on various assumptions. Generally, this information is not distributed to people outside of the company’s management. A few examples of this information include budgets and estimated selling prices when quoting prices for new work.
In general, common accounting tasks include:
Creating reports and metrics showing key financial information
Completing tax returns
Preparing financial statements to help business owners understand how their businesses are performing. Financial statements include:
The balance sheet – a snapshot of a company’s financial situation at a single point in time. This is calculated according to the simple formula: Assets = Equity – Liabilities.
The income statement – a complete record of a business’s income and expenses over a period of time.
The cash flow statement – a record of all the money coming into and going out of a business over a period of time.
Accounting results and financial statements are of interest to a number of people both inside the business and outside of it. These include investors, creditors, management, revenue services and regulators.
Different types of accounting
Moving into some of the specifics, there are several different types of accounting, including:
Each has a different function within the business.
Do you need an accountant?
As a new business owner, it is important to understand whether you need to hire an accountant. This decision will be based on several factors including:
The maturity level of your business
The complexity of your business’s finances
The number of clients your business has
How much time you can dedicate to money management
For any new entrepreneur, it can seem daunting to start managing the finances of a new business. There is a lot to stay on top of from monitoring day-to-day transactions to understanding profitability, cash flow, and more.
Yet, with the right Accountant, it’s possible to keep your business’s finances in order – quickly and easily.
With HM Accounting, managing your books has never been simpler. Better yet, with the best of both bookkeeping and accounting functionality, you can gain detailed insights into how your business is growing and track revenue, profit, cash flow and more. It’s the all-in-one solution for any new South African entrepreneur.