bookkeeping and accounting

When most people think about bookkeeping and accounting, they would be hard-pressed to describe the differences between each process. In this article, the functional differences between accounting and bookkeeping are explained, as well as the differences between the roles of bookkeepers and accountants.

While bookkeeping and accounting share common goals, they each make up a different stage of the financial cycle.

Let’s look at what each process is comprised of.

Bookkeeping

This is the process of recording day to day transactions on a regular basis – most bookkeepers’ will do this daily. In an entity with many transactions daily – this is the most effective way to keep everything accurate and up to date. If left, it can quickly get out of hand.

What is bookkeeping comprised of?

• Recording financial transactions
• Posting debits and credits
• Producing invoices
• Maintaining and balancing subsidiaries, general ledgers, and historical accounts
• Completing payroll

Maintaining a general ledger is one of the main components of bookkeeping. The general ledger is a basic document where a bookkeeper records the amounts from sale and expense receipts. This is referred to as posting and the more sales that are completed, the more often the ledger is posted. A ledger can be created with specialized software eg: Pastel or SageOne, a computer spreadsheet eg: excel, or simply a lined sheet of paper – old school! The complexity of a bookkeeping system often depends on the size of the business and the number of transactions that are completed daily, weekly, and monthly. All sales and purchases made by your business need to be recorded in the ledger, and certain items need supporting documents.

Shifting Landscapes

Since the technology of computers and the evolution of accounting software, some components of the accounting process have been absorbed into the bookkeeping process. An example is bookkeeping software is typically capable of building financial statements – blurring some of the traditional lines between the bookkeeping and accounting processes.

The Function of Accounting

Accounting is a high-level process that makes sense of information previously compiled, and produces financial models using that information. The process of accounting is more subjective than bookkeeping, which is largely made up of transactions.

The process of accounting includes:

• Preparing adjusting entries
• Preparing company financial statements
• Analyzing costs of operations
• Completing income tax returns

The process of accounting provides reports that bring key financial indicators together. The result is a better understanding of actual profitability and awareness of cash flow in the business. Accounting turns the information from the ledger into statements that reveal the bigger picture of the business, and the path the company is progressing on. Business owners will often look to accountants for help with strategic tax planning, financial forecasting, and tax filing.

The Bookkeeper Role vs. The Accountant Role

Understanding the difference between bookkeeping and accounting is empowering as a business owner. It’s also important to understand the kinds of credentials accountants and bookkeepers have in order to determine how or when to use each.

The Bookkeeper: Typically, bookkeepers are required to have between two and four years of experience or an associate’s degree. Bookkeepers need to be sticklers for accuracy, and knowledgeable about key financial topics. Usually, the bookkeeper’s work is overseen by either an accountant or the small business owner who they work for.

The Accountant: To qualify for the title of an accountant, generally an individual must have a bachelor’s degree in accounting. An accountant can perform the role of a bookkeeper but generally does not. Accountants often proceed to attain higher level qualifications, This will set them apart from other accountants. An example of this is a CA (Chartered Accountant) degree, a highly respected qualification worldwide. This qualification from attained in South Africa is recognised worldwide as one of the leading qualifications in accounting.

These additional qualifications enable the accountant to perform more complex tasks that someone without that qualification cannot perform. In South Africa, the CA (Chartered Accountant) can sign off financial statements where an accountant cannot. This happens within specific criteria.

The Bottom Line

Basically, an accountant picks up where the bookkeeper function ends but a successful marriage between bookkeeping and accounting will contribute to the long-term financial success of the business.

Organised financial records and properly balanced finances produced by the bookkeeping and accounting processes are both key factors to this success. Some business owners learn to manage their finances on their own, while others opt to outsource this function so that they can focus on the parts of their business that they really love.

Whichever option you choose, investing – whether it be time or money – into your business financials will only help your business grow.