The Difference Between Bookkeeping and Accounting (And Why it Matters)

February 23, 2018 Lydia Adams

By: Megan Weis, VP & General Manager, FAO

Most people would be hard-pressed to explain the difference between bookkeeping and accounting. And while bookkeepers and accountants share common goals, their roles support your organization in different stages of the financial cycle.

Bookkeeping is primarily transactional and administrative. These resources are concerned with accurately recording financial transactions in a timely manner. Accounting is more subjective, providing an organization with business insights based on the data gathered from the bookkeeper’s ledgers.

In this short post, I’ll explain the functional differences between accounting and bookkeeping, as well as the differences between the roles of bookkeepers and accountants. Both are necessary components of a well-run finance and accounting organization, and both can be successfully outsourced for cost savings and/or to provide your retained organization the time to provide more value-add work throughout the day.

The Bookkeeping Function

Bookkeeping is the process of recording daily transactions in an accurate and timely fashion and is a key component to building a financially successful business. In general, bookkeeping is comprised of the following:

  • Recording financial transactions
  • Posting debits and credits
  • Producing invoices
  • Paying vendors
  • Maintaining general ledgers
  • Reconciling accounts
  • Completing payroll
  • Applying cash

The complexity of a bookkeeping system often depends on the size of the business and the number of transactions that are completed daily, weekly and monthly. All sales and purchases made by a business need to be recorded in the general ledger, and certain items require supporting documents to be retained and preferably stored as an attachment to the transaction and its history.

The Accounting Function

Accounting is a high-level process that uses financial information compiled by a bookkeeper or business owner and produces financial models using that information. The process of accounting is more subjective than bookkeeping, which is largely transactional. Accounting is comprised of:

  • Preparing adjusting entries
  • Preparing company financial statements
  • Analyzing costs of operations
  • Completing income tax returns
  • Aiding the business in understanding the impact of financial decisions

The process of accounting provides reports that bring key financial indicators together. The result is a better understanding of actual profitability and an awareness of cash flow in the business. Accounting turns the information from the ledger into statements that reveal the bigger picture of the business, and the path the company is progressing on. Organizations often look to accountants for help with strategic tax planning and analysis, financial forecasting and budgeting, and tax filing.

Blurring the lines

It is interesting to note that as technology progresses and financial platforms become more advanced, some components of the accounting process have been absorbed into the bookkeeping process. For example, bookkeeping software is typically capable of building financial statements—blurring some of the traditional lines between the bookkeeping and accounting processes and making end-to-end finance and accounting possible.

A Bookkeeper Vs. An Accountant

Understanding the difference between bookkeeping and accounting is important for organizations. Transactional processes are time-consuming and add little value to the business. These processes, if not managed properly can quickly bog down an organization and lead to high turnover, resulting in an F&A department that has little time to add value to the business. It is also important to understand the kinds of credentials accountants and bookkeepers have in order to determine how or when to use each.

Typically, bookkeepers are required to have between two and four years of experience or an associate’s degree. To be successful in their work, bookkeepers need to be sticklers for detail and accuracy, and knowledgeable about key financial topics that impact the processes for which they are responsible, such as accounts receivable. Usually, the bookkeeper’s work is extremely repetitive in nature, which can lead to an unmanageable turnover if these resources aren’t provided opportunities for value-added work as their career progresses. These roles are oftentimes easily scripted and make prime candidates for outsourcing.

To qualify for the title of accountant, generally, an individual must have a bachelor’s degree in accounting. For those that don’t have a specific degree in accounting, finance degrees are often considered an adequate substitute. Accountants, unlike bookkeepers, are also eligible to acquire additional professional certifications. For example, accountants with sufficient experience and education can obtain the title of Certified Public Accountant (CPA), one of the most common types of accounting designations. To become a CPA, an accountant must pass the Uniform Certified Public Accountant exam and possess experience as a professional accountant.

The Bottom Line

Organized financial records and properly balanced finances produced by the bookkeeper, coupled with smart financial strategy and accurate financial reports and tax filings by the accountant, contribute directly to the long-term success of every business.

Some business organizations choose to manage their finances on their own, while others opt to hire a service provider so that they can focus on the parts of their business that are core to their overall strategy.

If you choose to outsource, Personiv can help to both alleviate your organization of its transactional processes, as well as help support your knowledge-based accounting processes. Personiv utilizes hand-picked, college-educated resources with accounting degrees and relevant experience. Our Manila resources are all trained in generally accepted accounting principles (GAAP), the same principles we use here in the U.S., and many have CPAs, so whether you’re trying to outsource your entire accounts payable function, or provide support for your most strategic accounting processes, Personiv is here to help.

 

 

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