Bookkeeping and Accounting – what are the differences?Articles
Years ago when accounting software for small businesses was not as popular, the roles of a bookkeeper and an accountant were distinctively different.
A bookkeeper typically handles and records daily transactions such as paying bills, creating invoices, collecting payments, making deposits, managing timesheets for payroll, reconciling bank accounts etc. Records kept by a bookkeeper reflect all cash-in, cash-out of a business in chronological order. The process of compiling these records to prepare financial statements and other meaningful reports is, however, referred to as accounting.
Bookkeeping is a critical part of accounting. Without accurate bookkeeping, financial reports will not be accurate. However, good bookkeeping alone may not give you meaningful financial reports. It takes specialized knowledge, skills, and experience to produce variety of financial statements and quality accounting reports.
Now that accounting software for small businesses can produce Balance Sheet and Profit & Loss reports at the press of a button, the line between bookkeeping and accounting is not as distinctive to some small businesses. Regardless, accounting software still needs input from experienced accountants to produce meaningful reports.
To see how a bookkeeper and an accountant would record a transaction differently, let’s take a look at the following scenario:
A business paid $5,000 down payment and agreed to pay $750/month for 36 months to purchase a vehicle. Sales price of the vehicle was $30,000.
A bookkeeper would typically record the $5,000 as a simple entry cash-out for auto expense.
An accountant would record the $30,000 as fixed asset, and also record the total loan balance, principal payment, interest expense and depreciation expense.
Accurate bookkeeping with organized records provides a strong foundation for quality accounting. Quality accounting enables meaningful reports. Meaningful financial reports reveal true profitability, financial position and cash flows of a business. Meaningful financial reports allow business owners and their consultants making insightful analysis and strategic planning accordingly