Bookkeeping vs. Accounting: What’s the Difference

Many small business owners are confused about the difference between bookkeeping and accounting and often wonder if they even need either of them. All businesses need both.

What Is the Difference between Bookkeeping and Accounting?

Bookkeeping and accounting are often confused as being the same thing. In fact, while certainly related, they are two different functions that aim at a single goal. The goal, of course, is to know if a business is making a profit.

Bookkeeping

Bookkeeping includes the following steps:

1. Identifying and collecting all the financial transactions a business makes on a timely and systematic basis.

2. Organizing and categorizing that financial information.

3. Recording the information in a way that is relevant to the business. This is usually done in a set of books. A proper set of books will be set up to record the following:

• Cash receipts – the money a business collects from its customers
• Cash Disbursements – the money a business uses to pay its bills
• Invoices – the bills a business sends to its customers for the work done for them by the business, if they are given time to pay rather than paying cash immediately
• Payables – the bills received by the business that must be paid for the goods and services it needs to operate
• Ledger(s) – a summary of these items

4. Preparing timely reports, normally on at least a monthly basis, that summarize the results of a business’s operations and its financial health.

5. Repeating the process. Bookkeeping is the process that accountants use to perform their duties. Today this is almost always computerized using either an in-house system or software provided by an outside vendor.

Accounting

Accounting normally involves the following duties:

• Creating the set of books
• Managing the bookkeeping function
• Taking the information generated by the bookkeeping function and preparing reports that are in a format that is generally accepted by internal users (ownership/management) and external users (entities outside the business who may have an interest in its finances)

Why is Bookkeeping and Accounting Important?

Ownership and management require financial information to inform their business management decisions. Depending upon the size of the business, they may rely on an internal accountant (known as a Controller) to design and produce reports tailored to present this information meaningfully.

If the business is not large enough to hire a Controller, they can use an outside accountant, who does this for a number of businesses, to help with at least some of the reporting duties.

Types of Internal Reports

The types of internal reports that a Controller or similar person within the business might prepare include:

• Budgets (including comparisons with actual performance)
• Cash flow analysis
• Inventory analysis
• Cost projections
• Specific, detailed information required by managers of various departments

If a business isn’t large enough to hire a Controller, they should still have information to operate their business. An outside accountant can help by setting up a bookkeeping system that can be performed easily and monitored periodically by both the Owner/Manager and the accountant to find out what the numbers mean and how they can be used to manage the business.

Most small businesses fall into this category – they don’t need a Controller, but they do need the insight that one could provide without all the duties of a person hired to do that job.

External users include creditors, investors, various government agencies including the Internal Revenue Service and state taxing agencies. However, most small businesses just need to satisfy the tax filing requirements.

How Can a CPA Help?

A CPA has special training, has passed a rigorous examination, has met certain experience and ethical requirements and has been licensed by the state in which they operate. In addition, they must engage in a certain amount of hours of continuing education each year.

A CPA can set up the bookkeeping and accounting systems and provide valuable insight into the financial operations of a small business.

A Properly Run Company Needs Both

To summarize, bookkeeping and accounting are related but different, approaching the same goal from different perspectives. Bookkeeping is the recording of the financial information of a company; accounting is the formalization and interpretation of that information to help in the financial management of the company.

A properly run company needs both so that it can maximize its profit, manage its cash flow, legally minimize its taxes, and remain healthy so that it can continue and fulfill its purpose.

Frequently Asked Questions