The Differences Between Bookkeeping and Accounting
While many people may confuse bookkeeping and accounting, they are not the same thing. The primary difference between the two is that bookkeeping is the process of recording business transactions, while accounting is the process of analyzing financial information that is used to support financial decisions.
That said, both bookkeeping and accounting are essential to businesses. If you are curious to know more about how the two concepts are different, keep reading below.
As we mentioned, bookkeeping is the process of recording (posting) all the transactions that affect the company's finances. To get into the detail of what should be posted during bookkeeping, the following are included: accounts receivable and payable, cash, inventory, sales, loans payable, purchases, payroll expenses, and withdrawals made by the owner. These accounts are to be recorded in general ledgers and software.
Put simply, bookkeeping involves recording all the expenses, cash, sales, and any bank transactions pertinent to the business.
The methods of bookkeeping
When it comes to recording the above, there are generally two methods known as the single-entry method as well as the double-entry method.
While the single-entry bookkeeping method is straightforward (only one entry is required for the account), a double-entry bookkeeping method is generally practised by most businesses to record accurate information. For instance, when one transaction is done, the entry will have an opposite entry as well on a different account. For example, when you earn $100 from selling a product, you will enter $100 into the cash account as well as the revenue account.
Accounting, on the other hand, is the processing of financial data to provide information about the financial status of the entity. The information that can be expected to be produced out of accounting includes current business financial health, statements, and performance indicators. This kind of information allows the business owner to make well-informed decisions without putting the company at financial risk. It is also through accounting that other financial materials are calculated, such as tax.
The methods of accounting
Just like bookkeeping, accounting has two different methods, known as cash-based accounting and accrual-based accounting.
In cash-based accounting, all you do is record entries when the transfer of money occurs. For instance, you will only record revenue once a sale has been completed and the money is received.
However, for businesses with inventory, accrual-based accounting makes much more sense. Here, revenue is recorded when earned rather than when received. In other words, once an agreement is completed and the inventory sold, it is recorded under revenue, even if money has not been exchanged yet.
While bookkeeping and accounting function differently in a business, they both deal with your finances. As such, both are vital to ensure that the flow of money in your company is carefully tracked and that you can make sound decisions based on your current financial status.
That said, keeping track of both accounting and bookkeeping is a lot of work, and if you are a small business, outsourcing both to a third-party service provider is an excellent investment. Not only will they carry out the job professionally, but you open up more of your time for other vital business functions to grow your business.
New Wave offers accountants and business advisors that will help your business start on the right foot in the world of accounting. If you are looking for accountants at the Gold Coast, get in touch with us today!