Bookkeeping vs Accounting Differences

Jordan Macey

April 21, 2021

bookkeeping vs accounting guide

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Small Business Accounting

Bookkeeper vs Accountant

As a small business owner, having a good grasp of your business financials is key—even if you’ve hired an accountant.

While you can delegate your accounting tasks, understanding the basics will place you in a better position when it comes to discussing your business finances with your team members, financial professionals or potential investors.


Previously, we’ve explained about the top accounting terms and concepts you need to know. In today’s post, we’ll explain the differences between bookkeeping and accounting. While these two terms are often used interchangeably, they refer to two vastly distinct functions and roles.

What is Bookkeeping?

Bookkeeping is the process of keeping records of the financial affairs of a business.

It’s an important part of the process of accounting, and comprises of tasks such as:

  • Recording financial transactions
  • Recording debits and credits
  • Creating invoices
  • Tracking accounts payable and accounts receivable
  • Maintaining the general ledger
  • Managing payroll

One of the key components of bookkeeping is maintaining a general ledger, which is a record used to sort, store and summarise a company's transactions.

Depending on the size of your business and the number of transactions that are completed, the complexity of your ledger can vary from spreadsheets to accounting software.

What is Accounting?

Accounting is the process of recording, interpreting, analysing and reporting of financial information.

While bookkeepers are involved in the initial stages of the process—which serves as the foundation of the entire accounting cycle, accountants are involved in all steps of the process. Additionally, accounting is more subjective, whereas bookkeeping is more focused on objective financial tasks.

Typical accountancy tasks include:

  • Interpreting data to determine the financial health of the business
  • Preparing financial statements
  • Analysing costs of operations
  • Completing income tax returns
  • Helping small business owners understand the impact of financial decisions

The process of accounting generates reports that convey important financial information.

This allows small business owners to have a better understanding of the profitability and cash flow. Accounting converts information from the ledger into financial statements that indicate the financial health of the company, and how it is progressing on.

Business owners often look to accountants for help with the company formation process, financial forecasts, tax compliance and tax planning, tax filing, business loan applications and strategic planning.


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Bookkeeper vs Accountant Similarities & Differences

We’ve outlined the key differences between bookkeeping and accounting above.

For greater clarity, here’s a quick overview of the similarities and differences between these two functions:

Similarities:

  • They work with financial information, towards the objective of improving the financial position of your business
  • Both roles require knowledge of accounting fundamentals
  • Both are tax compliant

Differences:

1. Roles and responsibilities

Bookkeeper

  • Records financial transactions
  • Prepares the general ledger
  • Keeps track of income and expenses

Accountant

  • Analyses and interprets financial data
  • Uses information from the general ledger and accounting journal to prepare financial statements
  • Files tax returns

2. Credentials

Bookkeeping qualifications

While one needs to be knowledgeable about a wide range of financial topics and transactions, and possess an eye for details, they aren’t formal requirements to becoming a bookkeeper.

In most instances, a bookkeeper’s work is overseen by an accountant or small business owner.

Accounting qualifications

Generally, an accountant must have a bachelor’s degree in accounting or finance to qualify for the title.

Unlike bookkeepers, there are a range of different professional certifications that accountants may acquire. Examples include the AAT, ACA, ACCA and CIMA accountancy qualifications.

Bookkeeper vs Accountant Summary

Despite the overlaps in roles and responsibilities, accounting and bookkeeping are two distinct functions. We hope that our post helped to provide clarification on the similarities and differences.

Now that you’ve understood the differences, it’s time to decide on your next steps: should you manage your own finances, delegate the work to a financial professional or opt for an accounting software?

This decision is personal and depends on your business needs and objectives. If you need guidance, refer to our small business accounting resource hub for articles to guide you along, or reach out to our team at Forma with any questions you may have.


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What's Inside:

  • Allowable business expenses
  • Employee expenses
  • Travel expenses
  • Office & equipment expenses
  • Professional services expenses
  • General expenses
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Limited Company Expenses Guide

What's Inside:

  • Allowable business expenses
  • Employee expenses
  • Travel expenses
  • Office & equipment expenses
  • Professional services expenses
  • General expenses

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Whether you're self-employed or running a small business, you need to stay on top of your business finances.

While you can delegate your company's financial affairs to your accountant, it's still important to have a good grasp of the essentials-such as basic accounting terms and concepts. With this knowledge, you'll be better able to communicate with financial professionals, team members and potential investors.

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Accounts payable (AP)

This refers to money owed to the business by its creditors (suppliers, vendors and other service providers). These are recorded as a liability on the balance sheet.

Accounts receivable (AR)-

This refers to money owed to the business by its debtors (clients and customers). The amounts are recorded as an asset on the balance sheet.

Accruals

Accruals are amounts that are unaccounted for at the end of the accounting period. These can be expenses that have been incurred or revenue that has been earned, but aren't yet recorded in the accounts.

Assets

Any resource that is owned by a company. There are two main types of assets: current assets and non-current assets. Current assets are expected to be consumed within a year, while non-current assets are expected to be held for longer than a year.

Balance sheet-

The balance sheet shows how much a business owns (assets), owes (liabilities) and the amount that is left over for its owners (owner's equity) at a point in time.

Cash flow

Cash flow refers to the total amount of money that is moving in and out of your business.

Chart of accounts

The chart of accounts is a listing of all the accounts used in the general ledger of the business.

Cost of goods sold (COGS)-

The total of all costs associated with producing your products or services.

Credit

An accounting entry that increases a liability or owner's equity account, or decreases an asset or expense account. The term may also be used to refer to an entry on the right side of a T-account.

Debit

An accounting entry that increases an asset or expense account, or decreases a liability or owner's equity account. The term may also be used to refer to an entry on the left side of a T-account.

Depreciation

The measurement of the decline in the worth of an asset.

Common methods of depreciation include: straight line, units of production, sum-of-years-digits and double-declining balance.

Dividends-

Dividends are a payment of profit that a limited company distributes to its shareholders.

It is the money remaining after all business expenses and liabilities, as well as outstanding taxes (including VAT and Corporation Tax) have been paid off.

Generally Accepted Accounting Principles (GAAP):

In the UK, the GAAP is a set of accounting standards published by the UK's Financial Reporting Council (FRC) for reporting financial information.

General ledger

A record of all the accounts that a business uses.

The accounts are classified into three categories: assets, liabilities and equity accounts.

Profit & loss (P&L)

The P&L is a financial statement that shows how much money your business has made or lost.

Liabilities

Debts and obligations of a company.

There are two main types of liabilities: current liabilities and non-current liabilities. Current liabilities (otherwise known as short-term liabilities) are due within a year, while non-current liabilities are due after a year.

Equity

Equity can have several meanings in accounting.

Firstly, it refers to the net amount of finances an owner has invested in the company.It can also refer to the residual value of assets less liabilities, as represented by the accounting equation ‘Equity = Assets - Liabilities'.

Expenses

Costs incurred by a company for revenue generation.

A few common types of expenses a business may incur are:

  • Fixed expenses: The total amount of the expense doesn't change over the short-term, despite changes in sales volume or other business activities. Examples include lease and rent payments.
  • Variable expenses: As its name suggests, the total amount of the expense varies in proportion to changes in sales, production or other business activities. Examples include salaries, utility expenses or costs of raw materials.
  • Operating expenses: Expenses incurred for activities that aren't directly related to the production of goods or services. Examples include administrative expenses, or legal and financial fees.

Net income

Otherwise known as net profit, net income refers to a business' financial position when the total revenue is more than the total expenses.

Present value (PV)

Present value is a calculation that measures the current value of a sum or stream of money to be received in the future, through adjusting for inflation and interest.

Return of investment (ROI)

A metric of profitability used to measure the gain or loss that an investment generates, relative to the sum of money invested.

Revenue

The amount of money a company receives from selling its goods or providing its services.

It refers to the amount earned before expenses are deducted.

Trial balance

A trial balance is a report that lists the balances of all general ledger accounts of a business at a specific point in time.

An expense should be recorded in the same period that the related revenue is earned.

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