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Every business needs to have a bookkeeping and accounting process to prepare the financial records at the end of a year/quarter. In addition, bookkeeping and accounting help the business evaluate its worth and take future decisions.
Many times bookkeeping and accounting are used interchangeably. Though bookkeeping and accounting are inseparable, there is a thin line to distinguish between them. Bookkeeping is part of accounting, and accounting has a broader scope than bookkeeping.
Bookkeeping is the process of maintaining and recording all financial transactions in the original books of entry of a business. The bookkeeping process involves summarising and organising all the company’s financial transactions chronologically in a systematic manner.
Bookkeeping focuses on the day-to-day financial activities and transactions of a business. The bookkeepers maintain and record the books of accounts. All the financial transactions such as payment of taxes, sales revenue, loans, interest income, payroll and other operational expenses, investments, etc., are recorded in the original books of accounts.
The books of account need to be up-to-date as it is the basis for accounting. The accuracy of bookkeeping determines the accuracy of the accounting process followed by a business.
Accounting is the process of interpreting, analysing, summarising and reporting the financial transactions of a business. The financial statements prepared in accounting are a precise summary of financial transactions over an accounting period. These statements summarise a company’s financial position, operations, and cash flows.
Accounting consolidates financial information to make it understandable and clear for all stakeholders. It helps businesses to maintain timely and accurate records of their finances.
The accountant maintains and compiles the records of a company’s daily transactions into financial statements such as the income statement, statement of cash flows and balance sheet. The financial statements help to assess the performance of a company by all stakeholders.
Following are the differences between bookkeeping and accounting:
|Bookkeeping is a foundation/base of accounting.||Accounting uses the information provided by bookkeeping to prepare financial reports and statements.|
|Bookkeeping is one segment of the whole accounting system.||Accounting starts where the bookkeeping ends and has a broader scope than bookkeeping.|
|The result of the bookkeeping process is providing input for accounting.||The result of accounting is preparing financial statements for making informed decisions and judgments.|
|The purpose of bookkeeping is to maintain a systematic record of financial activities and transactions chronologically.||The purpose of accounting is to report the financial strength and obtain the results of the operating activity of a business.|
|The objective of bookkeeping is to summarise the effect of all financial transactions of a business for a given period.||The objective of accounting is to interpret and analyse financial information for informed decisions.|
|The person responsible for bookkeeping is called a bookkeeper.||The person responsible for accounting is called an accountant.|
|Bookkeeping is clerical in nature. The bookkeepers do not require any special knowledge or skill.||Accounting requires the skills of an accountant and knowledge of various accounting practices and policies.|
|The financial statements are not a part of the bookkeeping process.||The financial reports and statements are prepared under the accounting process.|
|The bookkeeping process is in accordance with the accounting conventions and concepts.||Accounting procedures and methods for interpreting and analysing financial reports can vary from one entity to another.|