Taking good care of your money is one of the most important parts of running a strong business. From the very beginning, you need to keep very clear financial records, and you need to know how to use these records to make the best decisions for your business. This involves two steps: bookkeeping and accounting, but people often find it difficult to tell the difference between the two. And while they are similar, they are used at different points in the business cycle.
Understanding the difference between bookkeeping and accounting?
Both bookkeeping and accounting are used in the process of managing a business's money, but they do different things:
Bookkeeping in a nutshell
Bookkeeping is the process of writing down and keeping track of all of your financial information. This can mean taking care of payroll, tracking invoices and payments, and noting every single business transaction. Bookkeeping is just keeping track of all your financial information and ensuring it's all in order. This is an important daily task and includes maintaining the general ledger which lists the money a business makes from sales and expenses.
Accounting in a nutshell
Accounting digs deeper into all this financial information and makes sense of it. This means doing things like managing tax returns, creating budgets, generating financial reports for different time periods, and keeping a close eye on how well the business is doing financially. Accounting is less of a science and more of an art. Managing financial reports, which help businesses make decisions, is one of the most important parts of accounting. This helps business owners figure out how their money is coming in and going out. Accounting basically turns this information from the general ledger into information about how the business is doing in order to understand where it is headed.
How do accounting and bookkeeping work together?
So, while bookkeeping is more of an administrative task, accounting is more about figuring out how to structure the finances of the business. That said, accounting and bookkeeping are important parts of running a business. People think of bookkeeping as the beginning of accounting. It's all about making sure a business keeps accurate financial records, which is important for any business. This is needed to file tax returns, get investors, make decisions about investments, and get an overall picture of how a business is doing.
Bookkeeper vs. Accountant: Who does what?
There is some crossover in the work that bookkeepers and accountants do, but they do have different skills. In general, a bookkeeper's job is to keep track of transactions and keep your finances in order, while an accountant's job is to offer advice, understand when funding is required, do analysis, and know more about taxes.
Most of the time, bookkeepers don't need any formal and advanced education. Bookkeepers need to be very careful about the accuracy and know a lot about important financial topics in order to do their jobs well. To be a qualified accountant, a person needs a bachelor's degree in accounting. People who don't have a degree in accounting but do have a degree in finance are often seen as good enough to do the job well. The higher price of an accountant is partly based on these required credentials.
The bottom line
It's important to know the difference between bookkeeping and accounting if you want to keep your business's finances in good shape. Both steps are important, and you can't do one without the other. A business needs well-organized financial records and a strategic financial plan to be successful. Both bookkeeping and accounting need to work together to get this right. When done well, both processes will help the business continue to be successful.