Accounting is the process of summarizing information and communicating it to various stakeholders. Bookkeeping is one of the most fundamental processes that forms the basis for accounting. It involves recording transactions, preparing financial statements, and maintaining ledgers.
Accounting is a broader term that encompasses bookkeeping and more besides. And anyone can be an accountant – there are different types of accountants like public accountants, internal accountants, external accountants etc.
So what is the difference between bookkeeping and accounting? Accounting refers to a wide variety of functions associated with finances entail record keeping as well as communicating finance-related data to stakeholders; while bookkeeping refers specifically to maintaining records.
What is the Difference Between Bookkeeping and Accounting
- The primary purpose of accounting is the communication of information to the public, which is why accounting is considered a process with a customer focus. The primary purpose of bookkeeping, however, is to record business transactions and maintain financial records for internal use.
- The chart of accounts – or COA – is a list of all accounts and their corresponding account numbers used by an organization to record transactions. In addition to recording financial events, accounting includes managing and communicating this information through internal control systems, such as the COA.
Bookkeeping, on the other hand, involves maintaining records and preparing financial statements based on these records.
- All accounting is bookkeeping, but not all bookkeeping is considered accounting. Accounting includes not just financial transactions, but also the processes and activities that keep financial records up to date and relevant. Bookkeeping, on the other hand, is limited to keeping financial records up-to-date.
- Bookkeeping is an internal process and is used solely within the organization, whereas accounting is intended for the outside world. For example, public accounting involves communicating financial information to outside stakeholders.
- Accounts are considered inactive when they are no longer relevant to an organization’s business activities and transactions; inactive accounts should be removed from the COA, while inactive bookkeeping records should be retained by an organization.
- Bookkeeping encompasses a wide array of functions that includes recording financial transactions, preparing reports based on these records, and maintaining accounting records such as ledgers and journals; whereas accounting involves more functions including communicating these communication through internal controls such as the COA.
- Accounting is concerned with the organization, while bookkeeping is limited to an organization’s financial records and closed-loop control of the financial transactions occurring within the organization. The purpose of accounting is to minimize business risk and minimize the potential for fraud and error.
Bookkeeping, on the other hand, is for internal operation purposes only; it does not have any bearing on business decisions or how risk can be managed in the future.
- An accountant prepares financial reports, assesses business performance based on these reports, and communicates this information to stakeholders such as investors or credit evaluators.
Bookkeepers, on the other hand, are responsible for recording financial transactions and maintaining records. They evaluate performance based on the financial records they maintain.
- Both bookkeeping and accounting deal with financial transactions in an organization; however, application controls – or computer applications used to support accounting-related functions – do not fall within the scope of bookkeeping. Application controls are considered a part of accounting since they are concerned with communicating financial information outside of the organization, as well as maintaining internal controls such as data reliability and assurance. Bookkeeping is limited to creating, recording, and maintaining accounting-related documents like journals or ledgers.
- Accountants have the authority to make decisions and evaluate business performance, which involves communicating financial reports to various stakeholders (like investors or credit evaluators); in order to do this, accountants require the ability to analyze accounting data and prepare financial reports.
Bookkeepers, on the other hand, do not need analytical skills since they simply record transactions and maintain accounting ledgers at CPA accounting firm. So what is the difference between bookkeeping and accounting? While both bookkeepers and accountants prepare financial statements based on standard formulas that involve recording transactions; bookkeepers are not expected to use professional judgment in their analysis of the data. Learn more about accounting at Orange IQ.
