Accounting and Bookkeeping – What’s the Difference and Why Are They Important for Every Business?

Bookkeeping and accounting are two functions that are extremely important for every business organization. Why? First off, you are mandated by law (CRA) to keep records of your business transactions, and secondly, it's the best way to give a true and accurate picture of how the business is doing. Let us look at what these two processes entail.

 Bookkeeping is responsible for handling the daily tasks of recording financial transactions in the business, such as sales receipts and invoices, purchases and payments. In contrast, accounting is to verify the financial transactions, analyze it, and use it to generate reports, perform audits, and prepare financial reporting records like tax returns, income statements, and balance sheets. An accountant's analysis can provide information for forecasts, business trends and opportunities for growth. 

Bookkeeping and accounting may appear to be the same work to an untrained onlooker. This is because both accounting and bookkeeping deal with financial data, require basic accounting knowledge, and classify and generate reports using the same financial data. However, both these processes are inherently different and have their own sets of advantages, as noted below.

Bookkeeping vs Accounting - The Differences

As we have established above, bookkeeping and accounting are considered to be the same task and hence, the terms are used interchangeably. Though they seem to be very similar, there are some striking differences between the two. To help with this confusion, we have analyzed some differences below: -

Definition

Bookkeeping is mainly related to general data about the activities of an organization

Accounting is the process of turning that data into information

Management can't make a decision based on the data provided by bookkeeping alone. Depending on the data provided by the accountants, the management can take critical business decisions

Objective

The objective of bookkeeping is to keep the records of all financial transactions proper and systematic

Accounting aims to gauge the financial situation and further communicate the information to the relevant authorities

Preparation of Financial Statements for both 

Financial statements are not prepared as a part of the bookkeeping process. While financial statements are required during accounting.

Skills Required

Bookkeeping doesn't require any unique skill sets.

However, accounting requires special skills due to its analytical and complex nature.

Analysis

The process of bookkeeping does not require any interpretation.

Accounting uses bookkeeping information to analyze and interpret the data and then compiles it into reports.

Bookkeepers and Accountants

Bookkeepers are required to be accurate in their work and knowledgeable about financial topics. An accountant usually oversees the bookkeepers' work.

Accountants with sufficient experience and education can obtain the title of Certified Public Accountant (CPA).

Note that there's also a difference between an accountant and a certified public accountant (CPA). Although both can prepare your tax returns, a CPA is more knowledgeable about tax codes and can represent you before the CRA/IRS if you're audited.

Whether to Hire an Accountant or a Bookkeeper

While many small businesses hire an accountant outside the company as a consultant, bookkeeping is more diverse. Some small business owners do their bookkeeping on software their accountant recommends or uses and then provides this information to the accountant on a weekly, monthly, or quarterly basis for action. 

Other small businesses are large enough to employ a bookkeeper or have a small accounting department with data entry clerks reporting to the bookkeeper. Whether you hire an accountant, a bookkeeper, or both, the individuals must be qualified by asking for client references, checking for certifications or running screening tests. Bookkeepers don't necessarily need to be certified, and so their skills will be more based on experience.

Merging of Bookkeeping and Accounting Functions

The line between accounting and bookkeeping is slowly diminishing. It is interesting to note that with the advent of accounting and bookkeeping software like QuickBooks desktop and QuickBooks Online, some parts of accounting are slowly absorbed into the bookkeeping process. Bookkeeping software is now capable of generating financial statements that were earlier part of the accounting process. However, while most businesses will still need a bookkeeper to keep the books, bookkeeping will become a lot more than just data entry, balancing bank ledgers, and reconciling bank statements. These functions will slowly diminish in the coming years and may even become obsolete, as cloud accounting software will handle most of the tasks. 

Technology

Newer technologies have persuaded bookkeepers and accountants to be open to technological advancements and explore emerging software options. It is an opportunity for bookkeepers to support their clients through this change, presenting value-added services such as payroll processing, credit card reconciliation, etc. with the help of the latest software.

Advent of Smartphones

More and more businesses are shifting their operations online, especially as smartphones and mobiles are becoming increasingly intuitive and readily available. Business owners want to access the data from anywhere in the world on different devices, and accounting and bookkeeping professionals are making sure the duly-generated reports are available online for their clients to access at all times.