Wait a minute! Let’s clarify something that often gets confused: bookkeeping and accounting are not the same. While they both play crucial roles in managing a company’s finances, there’s a fine line present that distinguishes them. When we talk about bookkeeping it involves recording financial transactions in a systematic manner. On the other hand, accounting takes it a step further by analyzing, interpreting, and summarizing the financial data provided by bookkeeping. Both the components are essential for decision making, resulting in growth of your business.
It is not your fault if you believe that bookkeeping and accounting are the same, this is a common viewpoint of an untrained eye.However, failing to differentiate between them can lead to significant errors in financial operations. This article will provide you with detailed information about the differences between accounting and bookkeeping in the financial management process, offering valuable insights on how to effectively manage both within your business. So, read thoroughly and gain a deeper understanding of these essential financial components and how they contribute to your business success.
What is Bookkeeping in Finance Management?
Bookkeeping is a process that maintains and records all your financial transactions and generates an original book of entries for your business. You can also say that the procedure of bookkeeping is meant to organize all the transactional data in a systematic manner. It focuses on the daily financial activities of your business, the individual responsible for managing all these records is known as the ‘Bookkeeper’. Who manages all the financial transactions such as payment of taxes, loans, payroll, interest income, revenue, investment, expenses, and all the other things and generates original books of accounts where you can see a big- picture of your business’s financial health.
What is Accounting in Finance Management?
There is nothing wrong when we say accounting is a bigger pitcher than bookkeeping. It is like you are zooming out of the process of bookkeeping. A procedure of accounting involves collecting the data, making a compiled report, analyzing the finances, and summarizing the financial data to provide us with a complete financial statement of your business. In simple terms, accounting is the precise summary of financial transactions over an accounting period. These statements play a major role in understanding your business’s financial position, operations, and cash flows. Accounting is very important because it summarizes the data to make it understandable and clear for all business owners. It helps make decisions easy, timely, and accurately.
Bookkeeping vs. Accounting? Detailed Differentiation
While bookkeeping and accounting may seem similar at first glance, there is a very thin line in between, which is important to understand if you want to handle your financial data correctly and professionally. To clear out the clutter in your mind, here is the major difference between both of these financial components. Reading them through will surely make you understand why bookkeeping is not synonymous with accounting! Here you go:
Roles: Bookkeeping managing payroll for employees, tracking invoices from contractors, and keeping complete tracks of bill payments. And the accounting process uses these bookkeeping records for further analysis reports such as budget management, managing tax filings and returns, and advising business operations.
Decision-Making Process: In terms of decision-making, bookkeeping serves as an initial step as it only collects financial data in one place. The process of bookkeeping involves identifying, measuring, and recording the financial data. On the other hand, accounting goes beyond simply collecting data. It is a complete financial journey that starts with collecting the data and ends with analyzing and summarizing the financial actions you have to take, which were classified in the ledger account.
Objectives: The basic objective of bookkeeping is to collect and record all financial transactions in a proper and systematic manner. Conversely, the basic objective of accounting is to guide you through the detailed financial condition of your business and help you make the best decisions for the growth of your success.
Types: Bookkeeping has three basic types: single-entry bookkeeping, double-entry system of bookkeeping and virtual bookkeeping. However, accounting contains seven basic types, such as financial accounting management, HR accounting, internal auditing, cost accounting, responsibility accounting, and tax accounting.
Tools: The tools involved in bookkeeping are journals, cash registers, and ledgers. And in accounting, the accountant uses a balance sheet, cash flow statement, trading account, income statement, profit and loss account, and many more. These tools help in managing and categorizing the financial record more clearly.
Period of time: Bookkeeping provides details of financial transactions on a day-to-day basis, and accounting, on the other hand, provides information for an entire fiscal year.
Preparing a financial statement: A financial statement is not prepared in bookkeeping. On the other side, in the accounting process, the financial statements are prepared during the analysis of the accounting process.
Process Used: The process used in bookkeeping is identifying the financial transaction, recording all the data, preparing a ledger account, and finally providing you with a trial balance sheet. The process of accounting starts with recording, adjusting entries, preparing the financial statement, analyzing it, making a trial balance sheet, estimating the operating expenses, filing out the tax returns, and lastly, gauging the financial decision-making effects.
Complexity: In terms of complexity, bookkeeping is considered to be relatively uncomplicated. In addition, the level of accounting complexity is considerably greater.
Clouser Note!
Now that you have a thorough understanding of the distinctions between accounting and bookkeeping, you are in a position to select the superior option from the two. The capabilities of both components of the financial management system are critical in determining their respective roles. If your sole objective is to maintain financial records, we strongly advise you to consider bookkeeping services. However, if you have a more ambitious plan, then go for accounting and financial management services, which can satisfy all your advanced accounting needs. We believe that the guidance presented in this article helps you out of the confusion and empowers you with the confidence necessary to select an appropriate financial service for your business growth.
