Bookkeeping vs Accounting: Key Differences You Need to Know

Finance is one of the most intricate parts of running your business. It’s possible to get along with ‘just good’ performances in other verticals, but recording and analyzing your economics always need to be absolute. After all, that’s the basis of all your current and future decisions. Here’s where bookkeeping and accounting come into the picture – regardless of the size, industry and type of your business, it’s mandatory to practice both of them. Often interchangeably used, these terms have entirely different functions in a business. As your business grows moving forward, it’s critical to understand what bookkeeping vs. accounting is in detail.

For every enterprise, recording the daily financial transactions is essential and it’s a part of bookkeeping. The books of record should be precise and up to date for the smooth functioning of organizations. Subsequently, accounting relies on the records maintained and published by bookkeepers. Summarizing the overall financial transactions of a  business entity is the main objective of accounting. It enables stakeholders to assess the periodic performance of a company.

While bookkeeping is an administrative practice involving the recording of transactions, accounting is a more subjective one – serving information about your business’s financial health.

In this blog, we will discuss everything you should know about bookkeeping and accounting, their differences, functions and how you can optimize your resource utilization when it comes to business finance. Stick around for a comprehensive insight!

What is Bookkeeping?

Bookkeeping is a practice involving the day-to-day handling of financial transactional records like purchases, receipts, sales, payments and more. The main objective is to consistently maintain an updated book of records which is also referred to as the book of entries. It comprises all the financial transactions, yes, but they have to be arranged in a chronological and systematic way. 

The primary objective of bookkeeping is to keep a thorough track of your business. However, updated transaction records also form the backbone of financial reports that further help businesses in crucial areas like tax auditing and measurement of business performance.

Here are the functionalities of bookkeeping:

  • Recording financial transactions
  • Updating debits and credits everyday
  • Releasing invoices
  • Maintaining and mapping current accounts, subsidiaries, ledgers and historical accounts
  • Managing payroll

Although the core principles of bookkeeping and ledger entry essentially remain the same as they were centuries ago, the way businesses do bookkeeping in the modern times has transformed. 

The business world has also moved from desktop-based bookkeeping to an online cloud-based model. 82% of small businesses and 58% of enterprises now use cloud bookkeeping – the reasons being higher flexibility and security. And it clearly works - businesses with cloud bookkeeping have registered 15% year-over-year revenue growth.

If you’re thinking about how cloud bookkeeping has managed to cover a huge market chunk in such a short period of time, here’s the thing – 21% of SMBs owners admit to not knowing enough about bookkeeping. No wonder why businesses need an easy and efficient solution to handle their bookkeeping. 

Why Do Businesses Need Bookkeeping?

From a top-level view – bookkeeping refers to sales and expense management, ledger maintenance and storing all the relevant supporting documents. But why do businesses need bookkeeping? Let’s have a look:

  1. Transaction Record for Future References 

The primary goal of bookkeeping is to keep a record of all financial transactions happening in an organization, you know this already. But why is this important? Maintaining a chronological record helps in numerous ways, the two most important reasons are – ensuring that you claim the right tax deductions and in case of any future discrepancies with your customers or vendors, you have accurate information to refer to.

  1. Pictures Your Business Positioning Accurately

 A number of financial transactions are happening constantly in your organization. How are they affecting your business? What is the cash flow that you are experiencing? Are your marginal goals being met? Shareholders and the management board need continuous access to all these figures. It helps them in making necessary and growth-oriented decisions. 

  1. Detect Errors and Frauds

No business exists which has absolutely zero errors in its functioning. Consistent and precise bookkeeping helps you detect any errors and frauds that are happening in the financial system of your organization and resolve them. You just need to keep your books up-to-date in a chronological manner. 

What is Accounting?

Accounting is the practice of explicating, summarizing and describing the financial transactions of a business. It basically covers the preparation of financial statements across a certain period of time. The aim of accounting statements is, to sum up, and provide a high-level view of a business’s financial position, cash flow, profitability and operations. 

This is an immensely critical part of the decision-making of a business as various stakeholders and executives monitor the reports published in accounting. Hence, efficient accounting involves serving information that is easily understandable for people who aren’t finance-savvy too!

Accounting information is leveraged by different parties involved in the business. While analyzing financial data compiled by bookkeepers to develop financial models is the primary functionality, let’s take a look at some more:

  • Adjusting the discrepancies like unrecorded expenses that haven’t been included in bookkeeping as an error
  • Creating and reviewing various financial statements of the company
  • Filing income tax returns 
  • Operational cost analysis
  • Helping business owners and managers understand the potential impact of different financial decisions

What do Accountants do?

Diving a bit deeper into financial analysis – accountants convert ledger entries into meaningful insights and patterns for business owners to see the bigger picture, which is difficult without experts. 

Accountants are responsible for the verification of records, checking for errors in the books and ensuring that the company’s financial operations are moving on smoothly and getting evaluated effectively.

Even managing the tax for an enterprise is a huge task in itself. Companies are almost dependent on expert accountants for strategic planning, financial decisions, forecasting, risk assessment and optimization of resources. 

So for understanding the key aspects of your business's financial health – where does it stand, what it means, and what you can and should do to improve it and grow your business in the near future, you need an expert accountant.

Lastly, don’t forget - certified accountants can also assist and defend you in case of any legal troubles. They have all the expertise and the authority to produce financial evidence or information to save your business. 

Bookkeeping vs Accounting: Which One to Choose?

It’s now time to address the elephant in the room: bookkeeping vs. accounting: how are they different and can small businesses choose to opt for one of them?

People often get consider bookkeeping as a part of accounting and use either of the terms without considering the crucial differences. Bookkeeping ends where accounting starts. A bookkeeper is responsible for recording transactions and ensuring that your business stays financially organized. Accountant, on the other hand, analyzes the records, consults and advises you on tax matters.

Although the skill requirements and expertise are absolutely different for bookkeeping and accounting, bookkeepers working for small businesses often do some accounting activities. So the overlap between the roles of accountants and bookkeepers exists, but it might vary for different types of businesses.

Differentiation Table

Choosing Between Accounting and Bookkeeping for Small Businesses

Small businesses usually do their accounting and bookkeeping by themselves. However, as your business turnover grows and you scale up, it would be too much of a hectic task. Especially looking at the criticality of keeping your books error-free and your business legally safe, you should make a decision to avoid:

  • Financial statement maintenance issues
  • Missing out on monthly or periodic reviews
  • Cash flow problems

When it comes to choosing between bookkeeping vs. accounting: you should first take a look at the scale of your business and corresponding requirements. A majority of small and medium businesses when in the transition stage like yours, start with delegating bookkeeping full-time and consult an expert accountant during the tax season. There are two reasons for this: accountants are expensive and you don’t really need a full-time employee as per your business requirements.

If you’re wondering how to make financial decisions without an in-house accountant – fret not. The financial statements generated in bookkeeping can be analyzed by the accountant that you consult periodically then you and make further decisions.

Also read: Does your business need an accountant? A bookkeeper? Or both?

Accounting/Bookkeeping Services: Alternative to hiring Accountants or Bookkeepers

Do you run a small business and are struggling with maintaining your books due to heavy workload? Are you struggling with bookkeeping all by yourself or don’t know where to begin?

The best alternative to hiring bookkeepers is to get bookkeeping services from expert teams.

Fincent provides you with end-to-end bookkeeping services with dedicated experts assigned personally to your business. Our platform also allows you to automate your bookkeeping and financial reports management. Just connect your business bank account and the rest is taken care of. Just set up your Fincent account and you’re good to focus on business growth rather than mundane bookkeeping tasks!

Conclusion

Accounting and Bookkeeping are the most necessary management functions of any business - no matter the scale of their business. The volume of bookkeeping requirements, however, depends on the size of the business. While people often use either of the terms for the same purpose – bookkeeping and accounting vary significantly. Small businesses need to optimize for cost and hence cannot afford full-time accountants. 

If you’re operating a small business, and constantly having a hard time keeping your books accurate – the optimal way to go is to sign up on a cloud-based financial management platform. It’ll enable you to delegate your entire bookkeeping needs while ensuring maximum accuracy, yet being highly economical.