Bookkeeping vs Accounting – Accounting and bookkeeping are often used interchangeably by most people. However, the two are not the same. Accounting is a much wider term as compared to Bookkeeping.
Bookkeeping is the recording and maintaining of all financial transactions which take place in a company.
Accounting is the recording, maintaining, analyzing and understanding, grouping, summarising and reporting financial transactions which take place in a company. Bookkeeping is, therefore, the first step of Accounting.
Let us understand the meaning of Bookkeeping and Accounting in detail before finding the differences between the two.
- What is Bookkeeping?
- What is Accounting?
- Bookkeeping vs Accounting – Top Differences
What is Bookkeeping?
Business transactions can be quantitative (purchase of goods 1000 pair of earrings @ $ 15 per pair) and qualitative (transfer of an employee from the procurement team to the supply chain team). Bookkeeping is the process of recording of these quantitative business transactions of an organization in a systematic manner. Recording of business transactions also involves maintaining of complete documentation for all these transactions for future reference.
You might be wondering why there is so much emphasis on the recording of these business transactions. To understand that let us say we have a small business of selling firecrackers. The following are business dynamics:
- Two retail outlets in a given city, a warehouse for stocking our product and a small office where operational activities are carried on.
- Firecrackers are imported from outside the country and some of them are also procured from local distributors.
- On a daily basis, there are around 100 odd customers at each of the given outlets who buy firecrackers at both these outlets on cash, credit and payment through cheque / credit cards (Imagine the volume on an annual basis: 100 customers * 2 outlets * 365 days * $ 100 average shopping per customer = $ 73,00,000. This is just an approximation)
- Stock has to be transferred from the warehouse to the two outlets as and when required. Also, if there is an urgent need, then stock is transferred from one outlet to another.
Imagine the total volume of the transactions which will take place if 100 customers visit one outlet on a daily basis. How will the business owners keep a track of what goes on a daily basis? There has to be a record of these things on a day to day basis. This is the reason why bookkeeping is important. It helps to maintain a systematic record of the following routine business transactions on a daily basis:
- Purchase and purchase returns – These will include cash purchases and credit purchases
- Sale and sale returns – These will include cash sales and credit sales
- Cash book
- Bank book
- Fixed Asset register – Purchase and sale of fixed assets
- Other journal entries
What is Accounting?
Accounting is said to be the language of business. It is how an organization communicates with all its stakeholders (investors, lenders, creditors, employees, etc.). It provides the financial status of the organization at any given point of time.
The starting point of Accounting is the systematic maintaining of records (which is nothing but Bookkeeping). These transactions are grouped into different buckets and analyzed on different parameters. The records are also summarized in a specific format which is known as the Financial Statements for further analysis.
Continuing with the above example of the business of firecrackers, we have understood the volume of transactions. We have also understood why it is important to maintain the records in a systematic format. Now, let us take a step ahead, assume you are the owner of the organization and you need information about the total monthly sale at each of the two outlets in order to plan expansion. In this scenario, if the bookkeeper gives you a list of all sales records which he has maintained over a period of time what purpose will it solve? You have the data readily available but the same needs to be properly grouped, analyzed, summarized and presented in a format which will help you take further actions. This is what accounting helps you to do.
On similar lines, you need to figure out which of the two outlets is more cost efficient. How will the bookkeeper give you these details from the data he has maintained? The data will be available in the form – total salary paid to the support staff at both the outlets, total day wise sales at both given outlets, total other expenditure incurred, etc. This data needs to be systematically organized and then analyzed. Different ratios can be used to determine the cost efficiency such as revenue earned per rupee spent (total cost of both the outlets), total salary paid vis-à-vis the total sale volume, etc. These will then be compared for both the outlets, conclusions will be drawn and necessary action needs to be taken accordingly to cut overhead costs.
There are numerous such questions which can be answered by analysis of the financial statements.
Accounting can be classified into the various sub-heads depending on the function which they serve such as financial accounting, cost accounting, managerial accounting, human resource accounting, corporate social responsibility accounting, tax accounting, etc. The important few sub-heads of accounting are explained as follows:
#1 – Financial Accounting
The ultimate goal of financial accounting is to provide a true and fair view of the financial statements to different users. The financial statements help its users to understand the following basic things about the organization:
- What is the total turnover of the company?
- Against the above-mentioned turnover, what is the profit earned? What is the profit percentage? Has the profit percentage increased or decreased as compared to the last few years? Is there a trend or the growth figures are random?
- What are the key expenses incurred by the organisation? What is the percentage of these key expenses to the turnover of the company? Is there a direct correlation between the two?
- How many different businesses does the organisation have and what is the key source of its revenue?
- How is the company funded? The proportion of debt and equity?
- Does the company have a positive working capital?
- Will the company be able to pay its interest commitments on a timely basis?
- What are the key assets of the company?
- How much inventory does the company hold?
There are similar questions which can be solved with the help of financial accounting.
#2 – Cost Accounting
Cost accounting is very helpful from the point of view of costing various products. It helps to derive a cost price for complex products which require various raw materials, processes and ingredients in its manufacture. It also helps to identify the key costs (fixed and variable) associated with each product and the break-even point for the products.
This serves a very important purpose for any given company. It derives a cost which in turn helps to derive the selling price of the product. The selling price will be derived on the basis of various parameters such as the margin percentage to be maintained by the company, the market competitiveness, strategy involved in selling the product, etc.
#3 – Managerial Accounting
This section has more to do with planning and support decision. The data organized by other fields of accounting is analyzed further to plan, take strategic decisions and prepare a roadmap. Here, reports (MIS – Management Information System) are prepared on daily / weekly / monthly basis for internal audiences such as the chief financial officer, chief executive officer, managers and other top level executives who take informed decisions on behalf of the company. The reports help them get a better perspective and take informed decisions. Some of these decisions involve – capital budgeting, trend analysis, forecasting, etc.
Bookkeeping vs Accounting Differences
Having understood what is meant by bookkeeping and accounting, let us now go through differences between the two:
|Sr. No.||Point of difference||Bookkeeping||Accounting|
|1||Starting point – Bookkeeping vs Accounting||The starting point for bookkeeping is the raw business data which needs to collected from different sources such as bank statements, cash register maintained by the cashier, material register maintained by the warehouse entry / exit gate, purchase team for various purchase orders and supporting documentation to record purchase, sale register maintained by the retail outlets to etc.||The starting point for an accountant will be the books maintained/updated by a bookkeeper. Once the basic entries are done in the books, an accountant can use the data to analyze, summarize, group it further.|
|2||Key skills required – Bookkeeping vs Accounting||A bookkeeper is required to have a basic idea of bookkeeping and should be thoroughly well versed with concepts like journal entries, ledger accounts, the three types of ledger accounts, the effect of passing these journal entries on the company’s balance sheet.
Apart from that, other skills required are alertness, thoroughness when it comes to documentation and maintaining of records in a systematic manner.
|Some of the key skills required by an accountant are:
Analytical skills, ability to take timely and measured decisions, thinking out of the box, being able to balance the risk & return trade-off for the company, understanding different revenue models, interpreting the financial statements, giving valuable suggestions based on experience and knowledge.
|3||Day-to-day routine activities – Bookkeeping vs Accounting||Day-to-day activities of a bookkeeper will involve the following:
||Day-to-day activities of an accountant will involve the following:
|4||Level of responsibilities – Bookkeeping vs Accounting||A bookkeeper is generally a part of the low/middle level management in the organization. The ultimate responsibility is to maintain proper and updated books of accounts.
Note: Even though a bookkeeper does not shoulder very heavy decision making responsibilities, it should be noted that in the case of financial fraud, the bookkeeper can play a key role in manipulating the books. So a thorough background check should be done before recruiting a candidate in this role.
|An accountant is part of the middle-level management of the organization. Here, the responsibility is to present a true and fair view of the financial position of the company to various stakeholders.
Note: A thorough background check is required even in this case as the accountant is in a position to manipulate the financial results of the company.
|5||Computer knowledge – Bookkeeping vs Accounting||Accounting ERP used by the company will be the most frequently used computer tool used by the bookkeeper. Apart from that basic knowledge of Ms Excel will be helpful.||Advance MS Excel, MS PowerPoint, accounting ERP used by the company,|
The two Bookkeeping vs Accounting are inter-related and go hand in hand with each other. The job of the accountant will have no meaning if the bookkeeper has done incorrect journal entries in the books of accounts. Also, if there is no one to summarize and analyze the data prepared by the bookkeeper, it will have no value addition and the data will be junk after a point of time.
Another interesting way to look at the interrelation between the two (Bookkeeping vs Accounting) is that the accountants help to design controls, best practices, procedures, etc. for the bookkeeper which makes the process of bookkeeping and accounting easier. These controls will also help to eliminate errors, detect frauds/thefts, etc.
These internal controls which are set by the accountants can be as simple as a manual maker-checker system where a maker will prepare a document (e.g. a cash voucher) and get it approved by his / her superior. It can also be as complex as an inbuilt feature in the ERP which will highlight and disallow creation of a duplicate vendor ledger by checking the unique company identification number.
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