Maintaining your company's finances is one of the hardest things about running a business. You have to keep many records in doing so, and most startup business owners only know how to keep their books clean. But is bookkeeping the same as accounting?
Here's the difference between bookkeeping and accounting, the different types of bookkeeping and accounting, and how they can help your business.
Is Bookkeeping and Accounting the Same Thing?
Since they both involve caring for a company's finances, many mistake bookkeeping and accounting to be the same. However, they are vastly different. Bookkeeping is collecting and filing a business entity's financial transactions, while accounting is evaluating financial information for that entity or organization.
While both deal with records, bookkeeping and accounting are completely different tasks. Knowing the difference between bookkeeping and accounting will allow you to properly section your business’s financial records and provide reliable references when you need to make a decision.
If you’re running a business and struggling with your own bookkeeping and accounting, then it’s probably because you’re lacking a few steps to do those tasks properly. Here are the tasks that make up bookkeeping and accounting and how doing them can benefit your business.
Types of Accounting
Depending on your company's financial situation, you can perform accounting in two ways: cash-basis or accrual.
Cash-Basis
Cash-basis accounting is a type of accounting that bases the company's financial situation on its immediate transactions. In cash-basis accounting, you record how much money goes directly into your business and how much you spend on expenses, and figure out your net profit from there.
When accounting on a cash basis, you don't include delayed payments as part of your company's cash flow, making this method more limited than accrual accounting.
Accrual Accounting
Accrual accounting, on the other hand, is a type of accounting that accounts for all assets and liabilities of a company. In this type of accounting, sales that have not been fulfilled yet are also included in the cash flow while also keeping track of expenses that have not yet been fulfilled.
With accrual accounting, you are given the whole picture of your company's financial situation. And with fulfilled and unfulfilled payments included in your company's financial data, you can make long-term plans for your financial transactions and better understand your company's overall financial health.
Here are a few examples of accruals.
Accrued Revenues
Accrued revenue is the money companies are expected to receive even before payment. Once revenue has been earned, a company’s accounting considers it the company’s money.
Deferred Revenues
Deferred revenue is the money a company receives for goods or services even before they have fulfilled their client’s demands. When a business makes deferred revenues, the amount is usually postponed from being included in a company’s revenue until the client’s demands have been met.
Accrued Income
Accrued income is profit earned before payment. Unlike accrued revenue, accrued income is a company’s net profit. Accounting for accrued income does not include expenses attached to the sale of the goods or services that provided the income.
Accrued Expenses
Accrued expenses, on the other hand, is the amount of money a company owes. When companies make loans or make purchases with long-term payment schedules, the company logs these expenses regardless of whether or not they fit the same accounting period.
Accounts Receivable
Accounts receivable is the amount of money a company expects to be paid. What makes accounts receivable different from accrued income is that invoices have already been sent for the money in accounts receivable, giving the company a concrete timeframe of when they expect to get the money.
Accounts Payable
Accounts payable is the amount of money a company owes to other people or businesses when they make purchases from them (in the form of goods or services).
Accounting Tasks
Since bookkeeping and accounting are not the same, here are some tasks accountants do that are not part of a bookkeeper's day.
Financial Statements
One of an accountant's biggest responsibilities is to make financial statements. Financial statements provide the company with an overview of its finances, which help its owners to make important decisions.
Some financial statements are:
- Income statement
- Balance sheet
- Statement of financial position
- Statement of change in equity
- Cash flow statement
Forecasting
From the financial data, accountants then make forecasts of a company's projected financial position. Financial forecasts are valuable to business owners since it gives them a bigger idea of their company's financial standing, both in the present and moving forward.
Tax Returns
It is every business owner's legal obligation to pay their taxes, but not every business owner knows the ins and outs of tax policy. For this, you need the valuable expertise of accountants.
An accountant will be in charge of your tax preparation, tax filings, and eventually, your tax returns, so you can worry less about your business's standing with the government and focus more on growing your business.
Types of Bookkeeping
Even though bookkeeping is much simpler than accounting, there are still two ways to do it: single-entry and double-entry bookkeeping.
Single-Entry Bookkeeping
In the simplest sense, bookkeeping for startups can just mean jotting down expenses and evening them out at the end of the week with your sales. This type of bookkeeping is called single-entry bookkeeping, which tracks only how much money goes in and out of your company without diving into the specifics.
While acceptable for small business owners, single-entry bookkeeping can leave much room for error, especially in financial reports. For example, since it lacks data, single-entry bookkeeping cannot produce a balance sheet. You'll also have difficulty doing your taxes since the IRS does not allow single-entry bookkeeping to be used as a record for tax returns.
Double-Entry Bookkeeping
Double-entry bookkeeping is much more complicated, but it will be able to give you much more accurate financial reports. In double-entry bookkeeping, transactions are entered twice, once each for different accounting tools: debit and credit.
For example, if you make a loan, single-entry bookkeeping will label it as income. However, the interest attached to that loan will also become an expense. On the other hand, if you enter a loan in double-entry bookkeeping, the system will label it as a debit, which is a liability more than an asset.
Double-entry bookkeeping can provide you with much more accurate financial reports and, since it logs debit and credit, can also provide your company with a balance sheet.
Bookkeeping Tasks
Bookkeeping is a daily job; you must leave no financial transactions unrecorded. Otherwise, it could damage the integrity of your company's finances. Here are some bookkeeping tasks and how often you should do them.
Weekly Bookkeeping Tasks
Record Transactions
At the end of the week, you should log your company's transactions—any sales, expenses, and invoices—so you have a steady record coming into the next week. You can do this on a journal or spreadsheet, although it would be advisable to have your records on a computer rather than exposed in a ledger.
Label Transactions
Of course, it's not enough to count the money that goes in and out of the company; you'll have to label them, too. Marking which transactions are which can add context to your financial records, making it easier to double-check your financial records in hindsight.
File and Go Digital
Once you've logged your company's financial records for the week, you should file them properly. Most companies have storage rooms just for financial records since they pile up so quickly.
You should also consider going digital with your records since physical copies are easy to tamper with and could get destroyed. Once your financial records are damaged, lots of trouble could follow. This task is easier for ecommerce companies that usually get digital receipts.
Monthly Bookkeeping Tasks
Reconcile Accounts
Reconciling accounts is one good way of maintaining your company's financial integrity. Reconciling your accounts can fish out any inconsistencies in your company's accounting, which could single out any attempts of fraud or theft within a company.
Prepare and Follow Up Invoices
Once your business expands, it's normal not to have all payments land in your account at once. Sometimes you'll have to follow up. Every month, you must review your company's receivables and prepare payment invoices according to schedule. Other times, you'll have to follow up on customers so they pay your business.
Pay Bills
Of course, no business comes without any expenses. Since most bills come monthly, you'll have to close these accounts at a monthly period as well. Settle your bills regularly, so your company doesn't fall into debt.
Evaluate Finances
Once the dust has settled, it's important you take a look at your company's financial situation to make decisions moving forward. If you had made plans beforehand, take the most recent accounting into consideration and adjust your company's goals accordingly.
Leave Financial Management to Unloop
Having a rough time accounting for your company's finances is completely understandable. After all, as a business owner, you've got so much more on your mind—like the company itself. Spending all your efforts on just one part of the business would be a waste of time.
So leave the accounting to us; we offer all types of accounting services, such as bookkeeping, accounts payable, forecasting, payroll, and tax. Book a call now, and see how Unloop can keep your business on the right track!