What is the Difference Between Bookkeeping and Accounting?

What is the Difference Between Bookkeeping and Accounting?

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Jaya
Jaya Sharma
Assistant Manager - Content
Updated on Jan 15, 2024 18:50 IST

Bookkeeping is a process of recording financial transactions whereas accounting is the process of analyzing and reporting these transactions in the form of financial statements. While bookkeeping is the first step, accounting is the final step

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In this article, we will discuss the difference between bookkeeping and accounting, along with the two systems in detail.

Table of Contents

Difference Between Bookkeeping and Accounting

Let us learn the difference between accounting and bookkeeping through the following table:

Parameter Bookkeeping Accounting
Purpose Identifying and recording financial transactions Summarising, interpreting and reporting financial data of an organisation
Decision making Not sufficient to make business-related decisions Sufficient for making business-related decisions
Financial statements Not prepared in bookkeeping Prepared in accounting
Analysis requirement No analysis Thorough analysis is done
Skillset Basic accounting skills are required Advanced knowledge and certifications are required

What is bookkeeping?

Bookkeeping is the process of recording financial transactions such as sales, purchases, payments and receipts. Bookkeeping aims to understand the impact of these transactions and how the business is performing. Professionals who perform bookkeeping are known as bookkeepers. They regularly summarize financial activities in reports, prepare invoices, pay bills, prepare tax returns and monitor key performance indicators to provide strategic advice.

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Types of Bookkeeping

There are two main types of bookkeeping:

  1. Single-entry Bookkeeping: It is a straightforward method of bookkeeping where every transaction is recorded as a single entry in a journal. This cash-based method relies on one-sided accounting entry for maintaining financial information. A cash book is used as the primary bookkeeping record in this method. 
  2. Double-entry Bookkeeping:  It is a bookkeeping method in which an entry is recorded in at least two accounts as credit or debit. The amounts should match for error-free transactions. This means that the amount recorded as credits must be equal to the amounts that are recorded as debits. 

Documents Used in Bookkeeping

The following documents are used in single and double entry-bookkeeping.

  1. Cash register: It is a device that registers and calculates transactions at point-of-sale.
  2. Ledger: This is a book of final entries in which transactions are recorded and divided into separate accounts.
  3. Journal: It is a formal record of financial transactions in chronological order. The transactions are recorded in separate accounts. 
  4. Trial balance: It is a bookkeeping worksheet that maintains the accuracy of transactions arithmetically. It reflects both the credit and debit balance of ledger accounts. 
 

What is Accounting?

Accounting is a system of recording financial and non-financial transactions and analyzing, verifying, and reporting results. It measures the result of economic activities. Bookkeepers and accountants handle simple accounting tasks. CPAs and CMAs are professionals who can handle complex and advanced accounting tasks. Accounting aims at ensuring that industry guidelines are being followed. Through this method, businesses can keep track of the cash inflow and outflow. Experts can assess the financial situation of a business entity. 

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Types of Accounting

Cost accounting: This branch of accounting deals with the total cost of production. Input and output costs are compared, which helps in assessing the financial performance to make business-related decisions. Activity-based accounting, lean accounting, marginal costing, and standard costing are different types of cost accounting.

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Financial accounting: This branch of accounting is sometimes synonymously used as accounting. It is the method that records, summarizes, and reports financial transactions. In this method, established accounting principles are used based on the business’s regulatory and financial reporting requirements. Accrual and cash methods are the two types of financial accounting.

Managerial accounting: This branch of accounting is meant for internal purposes. Financial statements, reports, and documents are created for the management. Through these reports, management can create trend charts, decide on budgets and make business-related decisions. The types of management accounting are cash flow analysis, inventory turnover analysis, product costing, AR, financial leverage metrics, constraint analysis, and budgeting. 

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Documents Used in Accounting

The following documents are used in accounting:

  1. Cash memo: It is a document in which every transaction related to cash purchase and sales are recorded. 
  2. Receipt: This is an evidence that indicates that the payment on account of any business transaction is made. 
  3. Pay in slip: It also serves as a piece of evidence that specific amount has been deposited in the bank on a particular date.
  4. Cheque: It is a financial instrument that is drawn upon bankers and is payable on demand.
  5. Debit note: This note shows that a business enterprise has raised debt against a party to whom the debit note is sent.
  6. Credit Note: This note shows that a business enterprise has given credit to a party to whom this note is being sent in regards of business transaction other than credit purchase. 
  7. Invoice: This is a document that records credit transactions of sale and purchase. Sale invoice is prepared when goods are sold by business enterprise on credit.

Conclusion

There are many differences between bookkeeping and accounting. However, both are important for understanding the complete financial situation of a business. While bookkeeping records financial transactions, accounting summarizes, interprets, and reports them through financial statements. 

FAQs

Why is bookkeeping essential for accounting?

Bookkeeping provides the foundational data. Without accurate bookkeeping, accounting processes, such as financial statement preparation and financial analysis, would be challenging.

Is the use of software more prevalent in bookkeeping or accounting?

Software is widely used in both fields. However, bookkeeping software often focuses on recording transactions, while accounting software may offer more comprehensive features, including analysis and reporting.

Which profession requires more formal education, bookkeeping or accounting?

Typically, accounting requires more formal education, with many accountants holding degrees and certifications, such as CPA (Certified Public Accountant).

Can an accountant perform bookkeeping tasks?

Yes, an accountant can perform bookkeeping tasks, but it's often more efficient for businesses to have dedicated bookkeepers for daily transactional activities.

How does Accounting add value to a business?

Accounting provides insights into the financial health of a business, helping owners and managers make informed decisions. Accountants can offer recommendations on operations, spending, tax issues, and other financial concerns based on their analysis.

About the Author
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Jaya Sharma
Assistant Manager - Content

Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio