What Is the Difference Between Bookkeeping and Accounting?
Many people use the terms “bookkeeping” and “accounting” interchangeably. However, if you’ve ever operated a business or spent time within the financial industry, then you realize that there are significant differences between the two.
If you want to grow your business, then it’s important for you to know this information. For that reason, let’s dive into what bookkeeping involves, what accounting involves, and what major differences exist between the two concepts.
What is bookkeeping?
Simply put, bookkeeping is the process of keeping accurate and up-to-date financial records. A bookkeeper “keeps the books,” so to speak, by:
- Recording all financial transactions made by your business (e.g., customer invoices, utility bills, tax payments, etc.)
- Maintaining a list of your business’ debits and credits so that your books are “balanced”
- Creating key financial statements like balance sheets
Bookkeepers need to be extremely detail-oriented and meticulous in their work. Even a small error can affect the accuracy of a company’s financial records, and result in a lot of extra work.
What is Accounting?
While accountants can perform bookkeeping duties, their role is more involved than merely recording transactions. Accounting mainly refers to the analysis of financial data, rather than simply entering it onto a balance sheet, or into a computer program. Accountants will usually perform tasks such as:
- Preparing and filing taxes
- Reviewing financial statements, and interpreting the data in order to recommend a certain course of action
- Making financial projections for the future based on current information
Accountants usually have more education and experience than bookkeepers, since their skill set needs to be more diverse.
Bookkeeping vs Accounting: The Main Differences
If you boil it down, the main difference between bookkeeping and accounting is that bookkeeping refers to the process of recording financial transactions, whereas accounting refers to the process of analyzing them.
Of course, that is just a high-level explanation. There are many more details involved. For instance, note the following list of differences between the two concepts:
- Purpose. As mentioned above, the main purpose of bookkeeping is to keep financial records accurate and up-to-date. The purpose of accounting, however, is to analyze relevant financial data and then communicate any findings to key decision-makers within the organization. Thus, there is an extra layer of interpersonal skill that an accountant must cultivate in order to be effective in his or her job.
- Decision-making. As you may have already guessed, senior management can’t make any major decisions based on bookkeeping data. Bookkeeping only answers the question: “Is there anything wrong with our records?” In contrast, accountants help company leaders answer the question: “Is there anything wrong with our business?” For example, an accountant can help decision-makers identify areas in which the company is spending too much. Armed with that information, company leaders can make sound financial decisions moving forward.
- Skills. Other than a firm grasp of basic accounting principles and a strong eye for detail, bookkeeping doesn’t require a specialized skill set. Accounting, though, does require specialized training and education. For instance, accountants are often trained to conduct financial risk assessments that help businesses identify trends and events that could trigger losses, and then take proactive measures to reduce those risks.
- Education. Some bookkeeping jobs are entry-level positions. In contrast, most accounting positions require the candidate to be licensed as a Certified Public Accountant (CPA). In order to obtain this license, accountants must pass the Uniform CPA Examination, and meet their state’s education and experience requirements.
At GeneralCents Accounting, our team of highly-trained financial experts can help you determine whether your business needs help with bookkeeping or could benefit from an accountant’s analytical skills. Reach out to us today for a free consultation.