Please note this article is not financial advice. The purpose of our blog is purely educational, so please consult a professional accountant or financial advisor before making any financial decision.
Dealing with numbers is a headache. Whenever you're bookkeeping your business transactions, you're always faced with it. You collect, add and subtract these numbers. It looks easy, and the arithmetic is simple, but the logic and principle make these numbers challenging.
The same thing goes when dealing with terms. For example, we think of bookkeeping and accounting as the same thing. We say accounting when we mean bookkeeping, when they’re two distinct subjects. We want to be rid of all the complications!
Let's unloop the confusion. We're here to give a no-numbers explanation of terms and offer a solution to take the complication of number-crunching off your head and hands.
Bookkeeping vs. Accounting
Non-accountants and newbies think that bookkeeping and accounting are two similar things. They are mistaken. We are here to give a proper explanation for the two terms to shed knowledge and separate the two.
Bookkeeping is something a person does as part of accounting whether it’s on the cloud or on paper. This is the activity of collecting business financial data and transactions and recording them.
The main purpose of bookkeeping is to ensure all transactions with a monetary equivalent that are either acquired or sold by the business are recorded timely and accurately.
Bookkeepers are the ones in charge of doing the bookkeeping. Whether they operate on a fiscal or calendar year, they always follow what is known as the accounting cycle, which we'll elaborate on in a bit.
Accounting is broader in scope. From the word itself, it encompasses all activities that make sure every business transaction is accounted for.
Accounting is not bookkeeping. Accounting uses bookkeeping to make sure all numbers are appropriated accordingly. Accounting also makes sure that the taxes allocated for the government are paid. But the main discipline of financial accounting involves the generation and analysis of financial statements for analysis.
Accounting vs. bookkeeping is out of the question for accountants because these professionals understand every aspect of accounting and how bookkeeping plays a role in it.
The Bookkeeper's Process: The Accounting Cycle
Bookkeeping is all about following the accounting cycle. In both traditional and eCommerce bookkeeping, the bookkeeper must take a series of steps to ensure that everything is done correctly and according to generally accepted accounting principles. Here's the accounting cycle:
Chart of Account Creation
This step involves planning and labeling each possible incoming and outgoing transaction of a business, coding them, and placing them on a chart for the bookkeeper and accountant's reference.
Journal Entry Logging
Once all the business transaction data have been collected, the bookkeeper will sort it according to date from earliest to latest and log them all in the journal using the double-entry method.
Subsequently or after logging in journal entries, the bookkeeper will list down all the transactions that occurred in each label (called accounts). The bookkeeper will total the debits and credits under that label to arrive at the net amount.
Trial Balance Testing
Once everything is totaled, a practice called trial balance will come next. Totals of each account are lined up and placed in either debit or credit column depending on which side the net amount falls on. The ending sum of both the debit and credit sides of the trial balance must have identical amounts. This means that every transaction has been recorded accurately.
Financial Statement Creation
Once everything is balanced, the figure is classified as either nominal or real accounts, and financial statements are generated accordingly. The bookkeeper usually creates the financial statements, and the accountant or the business owner interprets them.
Book Closing and Opening
Once everything is sorted out at the end of the fiscal or calendar year, the bookkeeper will close the books, carry over the ongoing transactions in the new books for the new fiscal year and repeat the cycle.
Accountant's Tools: Financial Statements
A financial accountant's tool in making sure the business is kept financially sound and tax adherent is the financial statements.
These reports are read to recommend business decisions. An accountant can read and analyze financial statements for these purposes: advising on where to cut costs, where to invest, and where to increase spending. But, most importantly, accountants use these statements for tax filing.
Financial statements are composed of three kinds. We'll give you an overview of each.
Bookkeepers take all the nominal accounts and make an income statement. This financial report comprises a year's worth of revenue and expenses coming from the cost of producing the product and the day-to-day business operations.
An income statement is essential for determining the ratio between income and spending of a business and is also an important tool for filing tax returns.
All real accounts end up on the balance sheet and reflect the current standing of your business's worth. It gives you a snapshot of how your business is doing regarding what it owns and what it owes. Most importantly, it lets you know if your capital investment is growing.
Accountants use the balance sheet to analyze your business's health and make recommendations on what steps need to be taken to maximize profitability.
Cash Flow Statement
Cash flow statements benefit business managers and accountants alike. It tells them how the money moves, and in the context of business, it can only move into three activities: operations, financing, and investing.
The importance of the cash flow statement can be summed up into this: it helps you determine whether the business has enough money to conduct its day-to-day activities whether it’s an online market like Amazon, or a brick-and-mortar shop.
Keep a No-Numbers Policy and Let Unloop Handle It
Business becomes complicated when there are numbers involved. The process of recording them can be tedious and confusing. So if you want to keep yourself from working on numbers, let Unloop handle it for you. Just hand us over your business financial data, and we'll take care of the bookkeeping and the financial reporting, because the only number you should be concerned with is the number of hours you save from having your accounting system taken care of by professionals. Call us at 877-421-7270 or browse our service offerings here.