Bookkeeping vs. Accounting: Differences and When to Use What

1. Bookkeeping vs. Accounting: Differences and When to Use What Bookkeeping and Accounting, both being closely connected are often used interchangeably. While this is fine for a layperson, someone who uses the services of accounting professionals should be aware of the difference. It must be remembered that both are entirely separate functions. While bookkeeping merely concerns itself with recording monetary transactions in a systematic way, accounting primarily includes analyzing, interpreting, classifying, and reporting financial data. Thus, bookkeeping is concerned with the preliminary aspect of a recording of financial transactions, while accounting is deriving a meaningful interpretation and preparation of the final accounts and financial statements. In a way, the former is the foundation, while the latter is the main structure. Let’s look at the main difference between the two concepts bookkeeping and accounting:

2. Focus area Bookkeeping helps prepare and maintain ledger accounts. Accounting attempts to derive the relevant totals of ledger accounts to be presented accurately and systematically in the financial statements like balance sheet, profit and loss account, etc Aid in decision making The top management can plan strategic decisions based on inputs from the accounting team. However, this is not possible in case of mere data from the bookkeeping department. Motive Bookkeeping aims to record financial data in a complete manner. However, accounting aims to evaluate the financial performance of a company. Thus, while bookkeeping results in data, accounting results in information. Skill level Bookkeeping is merely passing of debit and credit entries, without the need for specialized skill sets. Bookkeepers need to be alert, thorough and maintain the records in a systematic, complete and timely manner. For example, bookkeepers should be well versed with commerce concepts like the passing of journal entries, the closing of ledger accounts, the types of ledger accounts, the impact of passing these journal entries on the financial statements. Accounting requires advanced knowledge of accounting policies, accounting judgment about the classification of items as capital nature, extraordinary items or one-time events, etc. Accounting involves passing a professional examination and earning a professional degree. Accountants need to have analytical and quantitative skills, understand the financial implications of the accounting treatment of each item, interpret the financial statements and suggest ideas for improvement of business performance. Below are the various things that are involved in both bookkeeping and accounting, but at the same time have different functions with regards to each- 1.The analysis involved: Bookkeeping is a non-strategic, administrative role without the need for any analysis. Accounting uses the data from bookkeeping records to interpret the results and present the true picture. In other words, bookkeeping, though an important role is mostly delegated to the entry-level employees. Accounting, an equally important role is assigned to the mid-senior level employees. 2.Kinds of entries: Bookkeeping involves single entry and double-entry bookkeeping. The accounting department prepares budgets with projections for the future,

3. estimates of variances based on the actuals to understand the concern areas and take remedial action. 3.Educational background: Bookkeepers report to accountants and might hold a graduate or postgraduate degree in commerce. Accountants earn the Chartered Accountancy degree with finance as the core focus area. 4.Technological impact: The advent of technology and accounting software is gradually making bookkeeping function obsolete. The software would capture e- documentation, pass the entries, reconcile the bank records and perform all the other bookkeeping functions that would have been done manually. Accounting judgment requires careful study and evaluation and would be impossible to be replaced by machine learning. 5.Responsibility: Bookkeepers can cause financial fraud by manipulating the records at the time of passing journal entries. Accountants can indulge in fraud by window- dressing the financial statements. Thus, a thorough background check of both is important. 6.Process: Bookkeeping is concerned with the accounting process. Accounting is concerned with the implementation of adequate controls, best practices in financial reporting, adoption of suitable accounting policies to prevent the occurrence of fraud or error. 7.Software applications: Bookkeeping function would use the accounting ERP and MS Excel suite. Accounting function would make use of MS Excel, MS Powerpoint, Accounting ERP. 8.Daily role and functions: The main differences in the job role is as follows: Bookkeeping: 1.Passing of multiple journal entries 2.Reconciliation of ledgers and documents. For example preparation of bank reconciliation statement. 3.Maintenance of documentation and ensuring completeness, genuineness and accuracy of documents available. Also, being primarily a data collection role, it is a must that data is compiled on a timely basis, else it would lose its relevance. Accounting: 1.Co-ordination with in-house and external teams to obtain the relevant data 2.Preparing various strategic reports, MISs to highlight the business performance and financial position 3.Audit the books of accounts prepared and maintained by the bookkeeper 4.Preparing financial statements to be presented to the shareholders 5.Preparing budgets, projections, and models to help decide on the future strategy 6.Evaluate the variances i.e. actuals vs the budgeted values and ascertain the leakages

4. In conclusion, bookkeeping is the first step in accounting. Accounting is concerned with the macro picture of business performance while bookkeeping deals with the micro picture of each ledger account.