What's the Difference Between Bookkeeping and Accounting?

What is bookkeeping vs. accounting? The main differences explained.

The main differences between bookkeeping and accounting lie in responsibilities, experience, and education. It's not uncommon for people to use the two interchangeably. And while the duties and responsibilities of bookkeepers and accountants may overlap, they are very different.

Bookkeeping is crucial to any financial management process, regardless of where you sell. It involves tracking and recording a business's financial transactions, including:

• Purchases.
• Sales.
• Receipts.
• Payments from an individual or organization.

Ultimately, an accounting professional may complete bookkeeping tasks with or without online bookkeeping or accounting software. But offering financial advice and tax planning typically fall under accounting.

Types of bookkeeping

There are two types of bookkeeping: single-entry bookkeeping and double-entry bookkeeping.

Single-entry bookkeeping is a simple system suitable for small businesses and start-ups. This method involves a single line entry for each transaction. It's like maintaining a check register.

In this system, you record incoming and outgoing cash, tax-deductible expenses, and income sources. However, it does not track assets or liabilities. So it only presents a partial picture of the business's financial health.

Double-entry bookkeeping is a more comprehensive approach many larger corporations and entities take. This method requires making two entries for every transaction: a debit in one account and a corresponding credit in another.

This system allows for a detailed financial analysis and ensures that the accounting equation (Assets = Liabilities + Equity) always balances. However, it is more complex and requires a deeper understanding of the accounting process.

By understanding the differences between these two types of bookkeeping, businesses can choose the method that best suits their needs and resources.

Bookkeeping tasks

Anyone who practices bookkeeping should be responsible for tasks that keep the business's financial affairs in order. These tasks typically include:

• Recording financial transactions.
• Posting debits and credits.
• Producing invoices.
• Managing payroll.
• Reporting financial activities and discrepancies.

Overall, bookkeeping involves organizing, categorizing, and tracking your financial activities. It's an essential part of any company’s operations. Without proper bookkeeping, it's impossible to have accurate and reliable financial records.

Required credentials for bookkeeping

To become a bookkeeper, an individual typically needs a high school diploma or equivalent. However, additional education can enhance job prospects, starting salary, and earning potential.

Many bookkeepers hold an associate's or bachelor's degree in accounting, finance, or a related field. Although formal education can provide the theoretical knowledge necessary for the role, practical experience is equally important.

Does bookkeeping count as accounting experience?

In terms of professional definition, bookkeeping is a subset of accounting. So you can consider bookkeeping experience to be accounting experience.

But note that bookkeeping, while crucial, only covers a part of the vast accounting field. While bookkeepers maintain records and track transactions, accountants interpret, classify, analyze, report, and summarize this financial data.

Is bookkeeping easier than accounting?

The complexity of bookkeeping versus accounting largely depends on the individual's level of education and experience in the field. But, generally, many consider bookkeeping to be less complex than accounting.

Bookkeeping primarily involves recording and organizing financial transactions, which, while intricate and detail-oriented, is a procedural task. On the other hand, accounting involves interpreting and analyzing financial data, planning and budgeting, and making strategic financial recommendations.

What is accounting?

Accounting is a multifaceted discipline that summarizes, analyses, and reports financial information. Whereas bookkeeping is about recording financial transactions accurately and systematically, accounting delves deeper, interpreting and making sense of the numbers.

Accountants analyze the financial data bookkeepers curate to provide strategic insights and financial forecasts as part of the accounting process. They help business owners understand their company's past performance, present financial status, and financial trajectory.

Types of accounting practices

There are five primary types of accounting practices, each serving a different purpose.

1. Financial accounting: This is the most common type of accounting that adheres to the Generally Accepted Accounting Principles (GAAP). It involves recording business transactions and preparing financial statements for external parties like investors and creditors. 

The main goal is to provide accurate and complete information about the company's financial performance and position.

2. Management accounting: Unlike financial accounting, management accounting provides information for internal parties, primarily the company's management. This type of accounting helps business leaders make strategic decisions by providing insights into cost and operational efficiency, budgeting, and performance.

3. Cost accounting: A subset of management accounting, cost accounting is concerned explicitly with production or service delivery costs. It involves determining the fixed and variable costs associated with business operations and providing valuable budgeting, pricing, and performance data.

4. Tax accounting: As the name suggests, tax accounting revolves preparing and filing tax returns, strategizing to minimize tax liability, and ensuring compliance with tax laws. Tax accountants must stay abreast of the ever-changing tax regulations and how they can impact the company's financial position.

5. Project accounting: This type of accounting tracks the financial progress of specific projects or contracts. It involves monitoring each project's costs, revenue, and profitability to ensure that they stay profitable and within budget. Project accountants must be detail-oriented and have strong analytical skills to track project finances accurately.

By understanding the different accounting practices, businesses can allocate resources effectively and ensure that their financial records are accurate, reliable, and valuable.

Accounting tasks

Accounting encompasses a variety of tasks that have an impact on a company's overall financial health. These tasks include financial reporting, tax preparation, auditing, budgeting, forecasting, financial analysis, and compliance management.

• Financial reporting: Accountants are responsible for preparing crucial financial statements such as the income statement, balance sheet, and cash flow statement. These reports offer a comprehensive view of the company's financial status and performance over a specific period.
• Tax preparation: One of the critical roles of an accountant is to ensure that the company complies with local, state, and federal tax laws. This accounting task involves preparing and filing tax returns with the IRS, identifying tax-saving opportunities, and staying informed on the latest tax regulations.
• Auditing: This involves thoroughly reviewing the company's financial statements to ensure accuracy and compliance with accounting standards. An accounting professional may conduct audits to identify financial irregularities or risks.
• Budgeting and forecasting: Accountants play a crucial role in predicting a company's financial future. Using historical data and industry trends, they prepare budgets and financial forecasts that aid in strategic planning and decision-making.
• Financial analysis and advice: Accountants analyze financial data to identify trends, performance metrics, and potential issues. Based on these analyses, they provide valuable advice to company management on financial decisions, such as investments, cost control, and profitability optimization.
• Compliance and regulation management: Accountants ensure the company adheres to financial laws and regulations. They stay abreast of changes in legislation that may impact the company and implement necessary adjustments to maintain compliance.

In essence, accounting tasks extend far beyond basic bookkeeping and serve as the backbone of solid financial management and strategic planning within a company.

Required credentials for accounting

To practice accounting, one typically needs a minimum of a bachelor's degree in accounting or a related field. Some educational institutions may also offer specialized degrees in areas like forensic accounting, international accounting, or internal auditing.

Apart from formal education, becoming a Certified Public Accountant (CPA) can significantly enhance an accountant's prospects. To achieve this certification, candidates must pass the Uniform CPA Examination administered by the American Institute of Certified Public Accountants (AICPA).

Key differences between bookkeeping and accounting

While bookkeeping and accounting are fundamental aspects of a company's financial management system, they serve different functions and require different skill sets.

1. Record-keeping: Bookkeeping involves recording daily transactions consistently, which is a basis for the financial accounting process. Accounting involves interpreting, classifying, analyzing, reporting, and summarizing financial data.

2. Decision-making: Bookkeepers are responsible for maintaining accurate records of financial transactions. But, typically, they don't analyze this information. In contrast, accountants often participate in business decision-making processes because they interpret and analyze financial information.

3. Skills required: Bookkeeping requires less expertise and education than accounting. Most of the work requires basic math skills and attention to detail. Accounting, on the other hand, often requires advanced education and professional certifications.

4. Financial statement preparation: Bookkeepers prepare initial reports of business transactions. Accountants take these reports and create financial statements, such as balance sheets and income statements, which provide a more comprehensive view of the company’s financial health.

5. Regulatory compliance: Bookkeepers may assist with some tax-related duties, but accountants are responsible for ensuring that a company's tax documents and financial statements comply with applicable laws and regulations.

Understanding bookkeeping versus accounting can help your business make better financial decisions. Companies may hire an accounting firm and have a bookkeeper, each playing a crucial role during tax season and in day-to-day financial management.

Should I start with bookkeeping or accounting for my small business?

Typically, small business owners start with bookkeeping by taking on basic tasks or hiring a bookkeeping professional.

Bookkeeping is the foundation of your financial system. As a business owner, it’s crucial that you have a clear and accurate understanding of all your financial transactions, including income from sales, expenses from purchases, and payments made or received.

Accounting is where you take the information from your bookkeeping records and use it to make sense of your financial situation. It involves activities like preparing financial statements, analyzing costs, filing tax returns, and advising on financial decisions.

A small business owner should begin with online bookkeeping and then progress to accounting. This ensures that they have a strong, accurate foundation of financial data from which they can extract meaningful insights and make sound business decisions.