Bookkeeping and accounting are both essential to managing your finances, but they serve different purposes and require different skills.
The Differences of Bookkeeping and Accounting
Bookkeeping is the process of recording all financial transactions made by a business. Bookkeepers are responsible for recording, classifying, and organizing every financial transaction that is made through the course of business operations. Bookkeeping is largely a mechanical process and does not require any analysis. But without proper bookkeeping, accounting will become difficult.
Accounting, on the other hand, is a high-level process that uses financial information compiled by a bookkeeper or business owner, and produces financial models using that information. The process of accounting includes summarizing, interpreting, and communicating financial transactions which have been classified in the ledger account as part of bookkeeping. Accounting is more subjective, giving you business insights based on bookkeeping information.
Here are some key differences between bookkeeping and accounting:
- Definition: Bookkeeping is mainly related to identifying, measuring, recording, and classifying financial transactions. Accounting is the process of summarizing, interpreting, and communicating financial transactions.
- Stage: Bookkeeping is the beginning stage and acts as a base for accounting. Accounting begins where bookkeeping ends.
- Management Decisions: Management cannot make decisions based on bookkeeping. However, management can make decisions based on accounting.
- Objective: The objective of bookkeeping is to keep proper and systematic records of financial transactions. The objective of accounting is to ascertain the financial position and further communicate the information to the relevant parties.
- Financial Statements: Financial statements are not prepared during bookkeeping. However, financial statements are prepared on the basis of records obtained through bookkeeping.
- Skill Level: Bookkeeping, while systematic and methodical, requires a keen eye for detail and a strong understanding of financial patterns. It forms the foundation for sound financial management. On the other hand, accounting is analytical and requires a deeper understanding of financial strategies and management.
In summary, bookkeeping is the recording of financial transactions, and accounting is the interpretation and presentation of that data. Both bookkeeping and accounting are vital for your business and tax compliances.