During your ecommerce business operations, you may have wondered about the difference between bookkeeping and accounting. You have probably used the terms interchangeably during the course of your business activities, especially during the times you and your financial consultant were trying to figure out missing payments or tax remittances.
But despite the frequent use of these terms, people are still confused about whether bookkeeping and accounting are the same. Let Unloop answer that question so you can distinguish what they are and how to use each for your business's growth.
What Is the Difference Between Accounting and Bookkeeping?
Many new business owners need clarification on bookkeeping and accounting. They interchange the terms and think they mean the same thing, but they differ in many ways.
Bookkeeping as a Discipline
Bookkeeping focuses on the activity of recording financial transactions. It's a rigorous accounting process that needs attention to detail and patience.
The discipline of bookkeeping follows the accounting cycle when recording business transactions.
Charting
Charting helps bookkeepers establish the recordkeeping system of a business by identifying the labels of each business transaction. In most cases, bookkeepers can proceed to recordkeeping if your company already has accounting and bookkeeping software with a preset Chart of Accounts (COA). On the other hand, in the absence of software, bookkeepers can create a COA for you.
Journal Entries
After the bookkeeper identifies or charts the accounts, they can use them to record business transactions in a journal. Bookkeepers use a double-entry method for each journal entry, which includes the accounts debited and credited and a given amount.
Ledger Recording
To bookkeepers, the ledger is another book they maintain containing all the debit and credit transactions of a given account. They often record the amount on the ledger on a given period and calculate its net total (i.e., debit minus credit).
Trial Balance
After getting the net totals of all the ledger accounts, the bookkeeper can proceed with a trial balance. This activity aims to ensure every transaction amount is accurate and corresponds with one another. Consequently, a trial balance also helps bookkeepers find recording errors and fix them before they generate reports.
Financial Statement Generation
Once everything is balanced and set, the bookkeeper can prepare an accurate financial statement. The business owner or the accountant will then use these reports for decision-making or tax purposes.
Closing Books
At the end of the business period—usually every 12 months—the bookkeeper is also in charge of closing the books and carrying over the real account balances, the accounts showing in the balance sheet, and their corresponding amounts, to the new business period.
Accounting as a Discipline
Accounting is broader in scope in which bookkeeping plays an essential role. While professional accountants also study bookkeeping, the bulk of what they learn from accounting helps them read and interpret financial reports and create accounting standard procedures customized to the industry or business.
Accounting branches into different subdisciplines.
Financial
This is the process of interpreting and analyzing financial statements made by the bookkeeper. Financial accounting is big-picture accounting that applies to any enterprise, whether corporate or a small business. It is concerned with profit maximization, general management policies, and increasing shareholder value.
Cost
This branch of accounting deals with production and manufacturing. Cost accounting takes a thorough approach to costing raw materials and production processes to ensure they are priced appropriately, which is important when pricing the finished product.
Managerial
Just like financial accounting, the managerial approach uses the same financial data the bookkeeper records. What makes managerial accounting different is how it uses information.
Aside from a monthly financial statement report, managerial accounting also uses financial records to generate other internal reports used by business decision-makers. Managerial accountants audit these reports and govern the system that produces them, while business owners and managers use the information to help with day-to-day business operations.
Tax
Tax accounting focuses on the specific knowledge of tax rules and regulations. This subdiscipline helps tax accounting practitioners to comply but, more importantly, allows them to maneuver the taxation system and make efficient tax decisions for the business's benefit.
Understanding tax accounting benefits a business tremendously and is highly valued. A professional who has mastered tax accounting can build the most beneficial accounting processes, methods, and business structures that result in paying less in tax liabilities.
Bookkeeping and Accounting: Differences in Job Function
Aside from discipline, the job of bookkeepers and accountants also differ. Bookkeepers can either be accountants or non-accountants, but the job functions that involve the accounting discipline will require a professional with a degree.
The Bookkeeper
Bookkeepers are the ones in charge of recordkeeping. Their functions can be considered back office and involve a lot of paperwork and file organization. Here are several highlights of a bookkeeping job.
Record Financial Transactions
The primary job function of a bookkeeper is to record transactions in line with generally accepted accounting practices. They follow the accounting cycle when recording daily business trades.
Find and Fix Recording Errors
Bookkeepers are well-equipped to identify and find errors in the books they maintain. They start with a trial balance and work their way into the ledgers, journals, and financial records to find and fix records.
Prepare Financial Reports
All the recording eventually leads to the creation of financial statements. The bookkeepers will prepare an income statement, balance sheet, and cash flow statement for the business owner or accountant's review.
Work With Accountants and Managers
In day-to-day tasks, bookkeepers coordinate with business managers to give them the financial data they need to make decisions. They also aid accountants during tax season and allow them to access records for consulting or auditing purposes.
The Accountant
An accountant is any professional with a degree in accountancy. They can be licensed as a certified public accountant (CPA) and hold other certifications in a given specialty. But they can also be a non-licensed practitioner employed by a business. Here are the broad strokes of their job function.
Report Analysis and Interpretation
Accountants analyze financial statements and other reports to find areas where the business can improve. They also interpret financial data and make reports of their own. From there, they can recommend policies or managerial actions to benefit the business financially.
Audit Processes and Financial Records
In some cases, bookkeepers record transactions using different principles and techniques, which alters the numbers in financial statements and other reports. For example, a bookkeeper may choose to register a huge expense as is, or they can capitalize it; this can affect the bottom line of an income statement. In this case, it's the auditor's job to check whether these choices are sound and correct them if needed.
Accountants are primarily internal auditors. They check the recordkeeping processes of a business. But some large financial firms and tax institutions hire external auditors to review companies' books.
Controller
A controller oversees and directs different accounting and financial systems of a business. They help ensure a business's accounting and financial processes are running smoothly. So they help plan and manage the business's budget and supervise accurate payroll disbursement.
Consulting
Non-certified and certified public accountants can offer consulting services to big and small businesses. They can help establish accounting processes for newly established companies or provide actionable steps to reduce cost, maximize profit, or efficiently use the business's assets.
You Need Bookkeeping and Accounting Services for Your Business
Knowing the functions of bookkeeping and accounting will teach you one thing—you need both to run a successful business. If you're participating in a fast-paced, highly competitive ecommerce marketplace, you'll also need to learn these disciplines quickly if you're going to do it yourself. This will be a challenge if you're in the thick of things.Your best option is to get both bookkeeping and accounting services. Our team at Unloop is composed of professional accountants who know how to do bookkeeping. If you still need an accountant, we can help connect you with one. So book a call for a consultation or check out our bookkeeping services now.