While accounting and bookkeeping seem like interchangeable terms, each serves a different purpose: Bookkeepers record financial transactions, and accountants interpret what this information reveals about the business.
Understanding the difference between bookkeeping and accounting is important for the small business owner, as both are essential for informed decision-making.
What Is Bookkeeping?
According to Inc., bookkeeping is the process of recording daily transactions in the financial records of the company.
It includes such activities as:
- Posting debits and credits from transactions to the general ledger
- Balancing and maintaining subsidiary ledgers and historical accounts
- Producing invoices
- Paying suppliers
- Calculating and preparing payroll checks
Why Is Bookkeeping Important?
Bookkeeping is the foundation of the accounting process that produces the data used by accountants for financial analysis and preparation of reports.
Business owners rely on the integrity of these financial statements to make decisions. If the data entered by the bookkeepers is faulty or inconsistent, managers could end up making poor decisions.
What Is Accounting?
Accountants analyze information prepared by bookkeepers to create statements, financial metrics, and reports that provide insights about the company’s operations.
Some basic accounting activities include:
- Preparation of financial statements for the company
- Analysis of costs of operation
- Calculation of performance metrics
- Completion of tax returns
- Guiding the business owner in making informed financial decisions
Why Is Accounting Important?
Financial statements, performance metrics and reports from accounting give the business owner a better understanding of the company’s actual profits and cash flow. Owners depend on accountants for more than reporting numbers, though. They also rely on their accountant’s expert advice for financial forecasting to help make critical business decisions.
Bookkeeping vs. Accounting
A lot of people ask, “What is the difference between bookkeeping and accounting?” The concise answer is that bookkeeping involves the recording of data and financial information while accounting involves analyzing, classifying and interpreting this data. Because of accounting’s analytical and complex nature, accountants require more formal education and training than bookkeepers.