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What Is the Difference Between Bookkeeping and Accounting?Bookkeeping and Accounting, on the surface, may seem like the same thing. In fact, while they are certainly related, they are really two different things that aim at a single goal. The goal, of course, is to find out if a business is making a profit. Every business has a purpose and the only way to fulfill that purpose is to make a profit so that the business can continue.
BookkeepingBookkeeping includes the following steps:
- Collecting day-to-day information about all the financial transactions a business will encounter on a timely and systematic basis.
- Organizing and categorizing that financial information.
- Recording the information in a way that is meaningful to and dependent upon the nature and purpose of the business. This is usually done in a set of books. A proper set of books will be set up to record the following:
- Cash receipts – the money a business collects from its customers
- Cash Disbursements – the money a business uses to pay its bills
- Invoices – the bills a business sends to its customers for the work done for them by the business
- Payables – the bills received by the business that must be paid for the goods and services it needs to operate.
- Ledger(s) – a summary of these items.
- Preparing timely reports, normally on at least a monthly basis (very large companies may do it daily or weekly), that summarize the results of a business’s operations and its financial health.
- Repeating the process.
AccountingAccounting normally involves the following duties:
- Creating the set of books.
- Managing the bookkeeping function.
- Taking the information generated by the bookkeeping function and preparing reports that are in a format that is generally accepted by internal users (ownership/management) and external users (entities outside the business who nonetheless have an interest in its finances).
What Does an Accountant Do?Let’s expand on the role of the accountant, beginning with the type of users they serve.
Ownership/ManagementOwnership and management rely on financial information in various formats that tell them how to best manage the business. Depending upon the size of the business, they may rely on an internal accountant (normally called a Controller) to design and produce reports tailored to meaningfully present this information, in addition to a wide range of other internal financial management duties. If the business is not large enough to hire a Controller, they should still use an outside accountant, who will do this for a number of businesses, to help with at least some of the reporting duties.The types of internal reports that a Controller or similar person within the business might prepare include:
- Budgets (including comparisons with actual performance)
- Cash flow analysis
- Inventory analysis
- Cost projections
- Specific, detailed information required by mangers of various departments
External UsersExternal users include creditors, investors, various government agencies including or in addition to the Internal Revenue Service and state taxing agencies or anybody else who may have an interest in the financial well-being of the business. For this purpose, an independent accountant is almost always utilized and the financial reports generated are always expected to be in a format that is generally accepted and therefore readily understood by any external user because they are prepared under certain standardized rules and procedures developed over many years. While not always required, this accountant is usually a Certified Public Accountant or CPA.A CPA has special training, has passed a rigorous examination, has met certain experience requirements and has been licensed by the state in which they operate. In addition, they must engage in a certain amount of hours of continuing education each year. The Controller, mentioned above, is very often a CPA as well, but since they are not independent of the business for whom they work, they cannot prepare reports that will be relied upon by external users. The reports issued by an independent CPA for external users are either compiled, reviewed or audited (a discussion of which is very much beyond the needs of most small businesses and therefore beyond the scope of this discussion).
The Language of BusinessRegardless of the type of user of financial information, all businesses benefit from a standard, generally accepted format for financial information. Generally this is reflected in three statements prepared by accountants from the bookkeeping information:
- Balance Sheet – shows the financial health of the business at any point in time.
- Income Statement (Profit or Loss) – shows the results of the operations of the business for a specified period of time (monthly, quarterly or annually) and determines whether or not the business is profitable and by how much.
- Statement of Cash Flows – shows the differences between profit and cash flow for a specified period of time (yes, in a properly run business they are not the same.)
- Does the business have enough capital to acquire assets that will promote the generation of profit?
- Are the assets protected by a strong system of internal controls?
- Is the business profitable?
- Is the business managing its cash flow?
- Is the business in a strong financial position (does it have more assets than liabilities)?
- Are taxes being legally minimized and are all filings up to date?
- Are there budgets in place and how is the company performing in relation to them?
- What plans are in place or can be made for exiting the business?