When it comes to bookkeeping and accounting, many people find it hard to distinguish between the two processes. However, while these two functions share common goals, bookkeepers and accountants support the financial cycle of your business at different stages. Bookkeeping can be described as more administrative and transactional as it is mainly concerned with the recording of financial transactions. Accounting is a more subjective process as it uses bookkeeping information to provide you with business insights. Busy business owners might be outsourcing bookkeeping and accountancy.
The Bookkeeping Function
Bookkeeping can be described as a process of recording the daily transactions of a business in a consistent way and is the key component to financial success in a business. It includes the following:
• Recording of all financial transactions
• Posting of debits and credits
• The production of invoices
• Balancing and maintaining general ledgers, subsidiaries, and historical accounts
• Managing payroll
One of the main tasks of a bookkeeper is to maintain a general ledger which is a basic document that records the details of monies received or spent on sales and purchases referred to as ‘posting’. All financial transactions completed are posted to the ledger. The more sales there are the more postings have to be completed. In addition to the traditionally lined sheets of paper used in the past, nowadays specialised financial software can be used to create a ledger or transactions can simply be recorded on a computer spreadsheet.
The size of a business will determine the complexity of the bookkeeping system used based on the number of transactions completed and whether they are recorded daily, weekly, or monthly. Certain sales and purchase items recorded in the ledger may need supporting documentation. For example, the IRS sets out on their website the type of business transactions that need supporting documentation.
The Accounting Function
The accounting process is a high-level function that utilises the financial information posted to a ledger by a bookkeeper. It uses this information to help business owners produce financial models.
It is a more subjective process than bookkeeping which is largely a transactional function. The accounting function includes the following:
• Preparation and adjustment of entries (recording expenses that have already taken place but have not yet been posted in the bookkeeping ledger)
• Preparation of financial statements
• Analysis of operation costs
• Completion of income tax returns
• Assisting a business owner to understand the impact of certain financial decisions
The accounting process serves to bring together the key financial indicators of a business. It helps business owners to have a better understanding and awareness of cash flow and actual profitability in the business. Information from the bookkeeping ledger is tuned into statements that reveal to business owners the path the business is embarking on and a bigger picture of the company’s future. Accountants are often consulted for advice with financial forecasting, strategic tax planning, and tax filing.
Bookkeeping Role vs Accounting Role
While bookkeepers and accounts generally do the same type of work, the main task of a bookkeeper is to record sales and purchase transactions that keep the business financially organized while accountants provide business owners with consultation, financial analyses, and more qualified advice on tax matters.
Generally, bookkeepers are not required to have any formal financial qualifications. In order to succeed bookkeepers are required to have general knowledge about key financial topics and be sticklers for accuracy. The work of a bookkeeper is usually overseen by an accountant, or the business owner if they are working for a small business. Bookkeepers can’t refer to themselves as accountants.
In order to qualify as an accountant, an individual must obtain a bachelor’s degree in accounting. Alternatively, there are finance degrees available that are considered adequate substitutes for those who do not have the required bachelor’s degree in accounting.
Unlike bookkeepers, accountants are eligible to acquire further professional accounting certifications to further their careers. For example, with sufficient education and experience accountants can obtain the title of CPA (Certified Public Accountant) which is one of the most common types of designations in accounting. In order to become a CPA, accountants must have worked as a qualified accountant and pass the Uniform Certified Public Accountant examinations.