3 Key differences between Accounting and Bookkeeping

If you’re a sole trader, partnership, or limited company business, then the upkeep of your numbers is sometimes achieved by a mixture of bookkeeping and accounting, that several would seem to be one in all identical.

But there’s a clear distinction between the 2 functions.

What specifically is bookkeeping?

“So bookkeeping is that the method by that a business records its financial gain associated expenditure in an organized format. The one who undertakes this role is known as a bookkeeper.”

This applies whether or not you are a sole trader, partnership, limited company, or LLP business. Before laptop and software package advancements merely notice the method, this was sometimes done by manually repeating transaction details across from the bank statements into what is known as a cash book.

It permits the bookkeepers to categorized the transactions by kind, before recording a monthly or weekly total for every financial gain and expense type. This method would sometimes be repeated for various bank accounts and any fund cash expenditure. The bookkeeping method was, and typically still is a time-consuming process that requires an organized approach.

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To understand the distinction between bookkeeping and accounting, we also need to take a look at the accounting process. Although there is a single-entry cash book system for simplistic financial affairs, bookkeeping normally uses a double- entry system that uses debits and credits. This includes a ledger system and the use of journal entries.

What exactly is Accounting?

“Accounting is the process of taking the numbers which have already been organized by the bookkeeper, and presenting them using standard accounting principles.”

And a format that is suitable and understandable to stakeholders of the business. Stakeholder of the business usually starts with HMRC, the taxman, as they are often the creditor. In other words, a body or business that will own taxes too.

If you are a limited company, then company houses too, as your business will have a mandatory compliance requirement. And as your business grows, stakeholders could include partners, private investors, other creditors, employees, clients, and so on.

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Accounting will involve a good understanding of accounting standards that determine how numbers and information needs to be presented within the accounts, and will usually require the accountant to make a series of adjustments to the accounts known as accounting entries.

When trying to understand the need for accounting entries, it is good to remember that there are a number of transactions that may not appears on the bank statements, but still, need to be represented in the financial statement. A few examples include asset depreciation, home office allowance, provision for tax liabilities, accruals, and prepayments. This is the process of moving income and expenses from the accounting period they were actually paid, into the accounting period they actually relate to.

It is additionally the task of the accountant to form the numbers more understandable for the top user. This can be sometimes done by providing comparative numbers from the previous periods that enable the reader to see wherever the business is doing well, and wherever it’s not, yet as giving statement within the type of notes that provides any context.

This could be along the lines of administrative expenses for the year ending 31 December 2021 have increased 15% over the prior year. This is a result of replacing small office equipment where the cost was not capitalized.

These notes give the end-user a much better understanding of what’s happening in the business and assist them to interpret the base numbers. In the UK, at least, accountants need to also consider in what format HMRC required the numbers to be presented. And when preparing accounts for limited companies they will also need to consider companies’ houses as well.

Accounting Records VS Financial Statements:

The two terms area unit typically assumed to mean the same. However, this is often not the case. Accounting records could be a general term that refers to paperwork that supports the numbers. This might consult with expense receipts, client invoices, provider invoices, and bank statements in addition to manual calculations ready by bookkeepers, and generally accountants.

The financial statement often referred to as accounts are the result of compiling all the numbers from the accounting records, and presenting them in a digestible format. The financial statement usually covers a set period of time, normally 12 months, and may be used for each internal and external uses. Financial statements for external use will usually need to be paired in a particular format.

Key differences between Accounting and Bookkeeping:

Now, there are definitely more than three differences between the two functions. However, we’ve summarized what we feel are the top differences.

Number one, the objective of bookkeeping is mainly of data entry and the processing of raw data from source material such as your business bank account transactions, whereas accounting is the adjusting of the already processed data to a standard and format that is digestible, and acceptable for compliance purposes and third-party users.

Bookkeeping is the start of the process, and accounting begins where bookkeeping normally ends. The accounting function cannot operate without the bookkeeping being completed, as it first needs the data to be organized in a way that can then be

adjusted and made presentable.

Number two, bookkeeping tends to organize the numbers more for internal preparation for the business owners and management, and is not necessarily geared towards assisting you, the business owner with decision-making.

Accounting, on the other hand, is often focused more on presenting the numbers for external users for a true and fair view, such as the company's house, HMRC investors, and your bank, and practically any other stakeholder or interested party. And it is normally geared towards helping you, the business owner and management to make decisions.

And finally, number three, accounting is generally regulated by the accounting bodies, such as the ACCA and ICAEW here in the UK, and requires specialist skills, training, and qualifications. Whereas bookkeeping can be done by good technicians who don't necessarily need to be qualified or regulated by a relevant body, and you could even do it yourself.

With powerful modern accounting software, such as Xero or QuickBooks, it gives you, the small business owner, the ability to do it yourself. In fact, many of this software is becoming more intelligent and the software providers themselves market their product towards a non-accountant, that is you, the business owner.

If I were to use an analogy, there's nothing to stop you from changing the oil and filter on your own car, or climbing up a ladder and cleaning out the gutters in your own house. But any activity comes with its own risks and opportunity costs.

If you change the oil and filter of your own car and make a mistake along the way, or don't have the necessary tools to carry out the job effectively, then there could be consequences, not to mention the time, effort, and perhaps financial cost you have expended.

And certainly, if your business starts to grow, the bookkeeping function will need more time, energy, and attention. So, as a final thought, always think carefully about how much your time and energy are actually worth.

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3 Key differences between Accounting and Bookkeeping

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