Difference Between Bookkeeping and Accounting

Bookkeeping and accounting are two essential components of managing financial records for businesses, but they serve distinct purposes and involve different tasks. While both disciplines involve the recording, classification, and analysis of financial transactions, they diverge in their scope and level of complexity.

Understanding the difference between bookkeeping and accounting is crucial for businesses to effectively manage their finances and make informed decisions. In this article, you will learn more about their differences and how they are interrelated in detail below.

Define Bookkeeping

Bookkeeping can be defined as the way of recording and maintaining financial transactions of an organization in the book of records. All the finance-related transactions like tax payments, sales revenue, interest income, payroll, etc., are maintained in the book of records.

The book of records created under bookkeeping needs to be updated regularly as it provides a basis for accounting operations. Maintaining the accuracy of a book of records is important for all the data used in accounting procedures.

Process of Bookkeeping

Bookkeeping is the process of recording, classifying, and summarizing financial transactions of a business. It involves recording income and expenses, assets and liabilities, equity, etc. Here is a general overview of the bookkeeping process:

Step 1: Transactions Recording: When any transaction occurs within the organization, it is recorded in the original book of records.

Step 2: Posting them in Ledger Account: Classify these transactions and post the information from several sections to the centralized ledger.

Step 3: Calculating the Total of Ledger Account: Once the ledger account is completed, you need to calculate the total of various ledger accounts.

Step 4: Balancing Accounts: In this step, it is ensured that the debit column in the ledger account is equal to the credit column’s total.

Define Accounting

Accounting is the procedure of analyzing, interpreting, and reporting an organization’s financial transactions. The financial statements created under accounting are the precise summary of all the transactions during an accounting period.

There are different types of financial statements like cash flow statement, Profit and Loss account, balance sheet, etc., that are used to analyze an organization’s financial position and cash flow.

Process of Accounting

Accounting goes beyond the simple recording of transactions like bookkeeping. It involves a more thorough analysis and interpretation of those transactions to provide a complete picture of a business’s financial health. Here’s a breakdown of the accounting process:

Step 1: Trial Balance Preparation: In the first step, trial balance is prepared from the available balance of different ledger accounts.

Step 2: Rectification Entries Pass Off: In case of data omission or error, related entries are passed from adjustment and rectification to the designated account.

Step 3: Income Statement Preparation: Next, an income statement is prepared out of the balances shown under the trial balance. The income statement would depict the financial status of the business.

Step 4: Balance Sheet Preparation: Once the profit and loss are determined, the firm’s balance sheet is prepared. This balance sheet would provide you with a clear picture of your organization’s capital, assets, and liabilities.

Major Differences Between Bookkeeping and Accounting

Bookkeeping focuses upon recording and managing financial data. Accounting refers to the interpretation and representation of this data to owners and stakeholders. Here is a detailed overview of difference between bookkeeping and accounting below:

Metrics	Bookkeeping	Accounting
Definition	Bookkeeping refers to the procedure of recording financial transactions.	Accounting is the procedure of summarizing and analyzing financial data.
Purpose	The main purpose of bookkeeping is to create original books of accounts	The main purpose of accounting is to record and analyze all financial transactions
Decision Making	Management cannot take decisions based on bookkeeping as it is only considered with maintaining books.	Management can take decisions based on the data provided by accountants.
Analysis	The data is only recorded under booking and is not analyzed.	Under accounting, analysis is done to gain actionable insights.
Skill Required	No special skills are required to record data under bookkeeping.	Special skills are required in accounting since it is analytical in nature.
Financial Statements	Financial statements are not prepared under the bookkeeping.	Financial statements are prepared under the bookkeeping.

Relationship Between Accounting and Bookkeeping

Bookkeeping is considered as the foundation of accounting. Accounting utilizes the data provided by bookkeeping to create financial statements and reports. Bookkeeping is one aspect of the entire accounting system and accounting starts when the task of bookkeeping is finished, i.e., recording financial transactions. Therefore, accounting has a broader function and scope than bookkeeping.

The relationship between these two is the finance-related activity which is important for every organization. Bookkeeping deals with recording financial transactions whereas accounting is involved in interpreting, classifying, summarizing, and analyzing financial data. This is a major factor that distinguishes accounting from bookkeeping.

How is Technology Changing the Accounting and Bookkeeping Industry?

Technology has revolutionized the business world by providing multiple cloud-based and artificial intelligence-powered accounting software. One of the major advancements in the accounting industry is the coming of computer-based accounting software.

This software automatically manages the procedure of record keeping, thereby removing the need for manual ledger management. Furthermore, the software also speeds up the process of tracking financial transactions in real-time.

Accounting software enables accountants to efficiently manage financial information and generate accurate financial reports. Moreover, it can automatically streamline key tasks such as billing, invoicing, tax planning, etc.

With the coming of the internet, accounting software has become more accessible on web. Web-based accounting tools enable accountants to work from remote locations, access financial data online, and collaborate in real-time with others.

Artificial intelligence and machine learning accounting software are also prominent these days. They can help accountants with data analysis and in getting more accurate financial forecasting.

Robotic Process Automation (RPA) tool is another important innovation in accounting. RPA helps a lot in automating repetitive tasks like data entry with the help of RPA bots.

Conclusion: Bookkeeping vs Accounting

While bookkeeping and accounting are closely related disciplines, they play distinct roles in the financial management of businesses. Bookkeeping focuses on recording and organizing financial transactions, while accounting involves the interpretation, analysis, and reporting of financial information to support decision-making.

Both functions are integral to the success of any organization, and a clear understanding of their differences is essential for ensuring accurate financial reporting and strategic planning.

Bookkeeping and Accounting: Frequently Asked Questions