The Ultimate Guide to the Difference Between Bookkeeping and Accounting

The Ultimate Guide to the Difference Between Bookkeeping and Accounting
The Ultimate Guide to the Difference Between Bookkeeping and Accounting

What is bookkeeping and what is accounting?

Bookkeeping and accounting are two closely related concepts that both deal with the financial aspects of a business or organisation. While they are related, they have distinct roles and functions.

Bookkeeping refers to the systematic process of recording and organising the financial transactions of a business. It involves the day-to-day task of recording financial transactions such as sales, purchases, receipts, and payments. Bookkeeping ensures that all financial transactions are accurately recorded, classified, and summarised.

Accounting, on the other hand, is a broader term that encompasses bookkeeping but extends beyond it to higher-order and more long-term financial functions. Accounting involves interpreting, analysing, and summarising financial data to provide meaningful insights and reports for decision-making purposes.

Bookkeeping

As stated, bookkeeping traditionally refers to the day-to-day upkeep of a business’s financial records and may involve tasks such as:

  • Recording transactions: Bookkeepers record financial transactions by entering them into journals or ledgers. Once these were paper ledgers, but these days most accounting firms use specialised modern software. This function includes recording sales, purchases, expenses, and payments.
  • Classifying transactions: Bookkeepers classify transactions into appropriate categories to ensure accurate reporting. This involves categorising expenses, revenue, assets, liabilities, and equity so that you can have a better overview of your financial position at a glance.
  • Summarising transactions: Transactions are periodically summarised, typically on a monthly or quarterly basis, through preparing financial statements such as income statements, balance sheets, and cash flow statements. They are crucial for effective decision-making and management.

Accounting

Accounting, on the other hand,  refers to the analysis, reporting and summarising of the data that bookkeepers gather. Accounting reports give a bigger, more comprehensive picture of the financial performance of a business and also determine how much tax is owed.

The main functions of accounting include:

  • Financial analysis and interpretation: Accountants analyse financial data to assess the financial health and performance of a business. They interpret the information to identify trends, patterns, and areas of concern.
  • Financial reporting: Accountants normally prepare management accounts, including income statements, balance sheets, cash flow statements, and financial ratios. These reports provide a comprehensive view of the business’s financial position.
  • Budgeting and forecasting: The accounting process provides budgets and financial forecasts based on historical data and future projections. Such reports provide insights into revenue expectations, expense management, and overall financial planning.
  • Tax planning and compliance: Accountants ensure that businesses comply with tax regulations by preparing tax returns and advising on tax planning strategies. They help optimise tax liabilities and identify opportunities for tax savings, while still remaining compliant.

The benefits of using a professional bookkeeper or accountant

Bookkeeping and accounting are vital to the success of any small business, that goes without saying. Keeping accurate financial records and staying on top of tax regulations are essential for growth and profitability, and an accurate and up-to-date set of financials will also benefit those entrepreneurs looking to access funding. However, as a small business owner, you may find it challenging to juggle bookkeeping tasks while also managing the day-to-day demands of your business. This is where a professional can assist. For those not looking for a full-time hire, outsourced or part-time accounting or bookkeeping services should be considered.

A professional bookkeeper or accountant brings the following to the table:

  • Expertise and specialised knowledge in financial management and accounting principles that you might not have in-house.
  • Time savings and increased efficiency by outsourcing financial tasks that would take your employees away from their designated roles.
  • Accuracy and compliance with tax laws and regulations.
  • Expert financial analysis and reporting for informed decision-making.
  • Tax planning and optimisation to minimise tax liabilities and ensure compliance.
  • Business advice and guidance on higher-order financial matters such as projections and planning.
  • Scalability and flexibility to adapt to changing business needs, as you would be able to scale their services up or down as needed.
  • Risk management through internal controls and data security, as most professionals use the latest in accounting software with cloud backup.
  • Professional bookkeepers and accountants used on a part-time or outsourced basis can provide valuable expertise in maintaining accurate financial records, ensuring compliance, and optimising financial management for your growing business.

Outsourced CFO Bookkeeping and Accounting services

At the foundation of any company’s finance function lies the bookkeeping and reporting process. A streamlined flow of financial information enables higher-value financial activities that support the company’s growth, while the lack thereof hinders the ability to make quality financial decisions. Outsourced CFO can assist your growing enterprise with:

Income and expense allocations that are accurate and make sense A clean balance sheet that reflects the company’s financial position well Cash flow reports that help you clearly see what comes in and what goes outDebtors and creditors information that supports your cash flow cycle A bookkeeping and accounting team that cares about you and your company

Lay a strong foundation. Get the basics right, without having to do it yourself in the evenings. View our Cloud Accounting Packages and get our team of experts on your side, so that you can concentrate on running your business. For further information you can also visit our website at www.ocfo.com