There are different types of business activities that an entrepreneur can undertake. These include manufacturing, servicing and trading activities. Each of the business activities undertaken by the business include monetary transactions. The goal of any business activity is to generate profits. The entrepreneur would therefore always aim to earn more than the expenses incurred to run any business activity.
Since, the number of transactions involved are large in number, it becomes difficult for the entrepreneur to keep track of each of the business transactions. Therefore, it would be necessary for any business to keep a record of the business transactions. This is irrespective of the fact that the business is making profits or incurring losses during a particular period.
This is where the recording of business transactions becomes extremely important. Thus, a business needs to have a systematic record of the various transactions undertaken over the course of a given period. If there is no such system, then it would never be able to know the outcome of its business activities.
Further, merely recording business transactions in a systematic manner does not help in understanding the direction in which the business is going. Therefore, one needs to analyze and interpret the business transactions. This is done to understand their impact on the financial position of the business. That is why both bookkeeping and accounting form an important part of recording and interpreting business transactions.
Bookkeeping and accounting are the finance practices that make it possible:
- to know how much money you make,
- where and how you spend it, and
- what you need to do to make your company successful financially
The two terms are often used interchangeably but each of them have their own essence and perform different functions. So, let’s understand the difference between bookkeeping and accounting.
What is Bookkeeping?
Bookkeeping is primarily associated with recording of the data related to business transactions in a systematic manner. The transactions, thus, need to be identified, accepted, classified and recorded. This should be done in such a way that the recorded transactions can be recovered and presented in the form of financial statements and other reports.
According to Carter,
“Bookkeeping is an art and science of correctly recording in books of accounts all those business transactions that result in transfer of money or money’s worth.”
There are various types of financial transactions that form part of a business. Some of these include:
- Purchasing office equipment
- Buying raw material on cash
- Purchasing raw material on credit
- Selling goods on cash basis
- Paying salary and wages to employees
- Buying office supplies on credit
- Borrowing money from bank
- Depositing cheque with bank
Bookkeeping In Early Days
Thus, Bookkeeping in the earlier days involved preparing various books of accounts to record the financial data associated with the business. It began with recording various business transactions into books of journal. Journal is the book in which business transactions are recorded for the first time. This is the reason why Journal is also known as the Book of Original Entry.
From Journal, the entries were posted into dedicated accounts included in the general ledger. The various accounts forming part of the general ledger included Cash account, Sales Account, Purchases Account, Wages Account etc. The closing balances of each of the accounts were calculated and were used in preparing various financial statements.
Since everything was done manually, the errors in recording transactions were inevitable. Bookkeepers used to prepare Trial Balance in order to identify the errors made by them in recording entries recorded in various books of accounts.
However, much of the bookkeeping and accounting work today has been removed due to the coming of the accounting softwares. QuickBooks is a cloud accounting software that powers your business on the on-the-go. This online accounting software helps you to generate accounting reports, create invoices, generate GST reports and do much more all at a click of a button. The sales invoices and vendor receipts are also directly uploaded. This further affects various accounts associated with the transactions automatically.
You May Also Read
8 Reasons To Use Cloud-Based Accounting Software
Nature of Bookkeeping/Role of a Bookkeeper
Bookkeeping as a task is clerical in nature which includes:
- Collecting financial data associated with the business
- Identifying various transactions that are economic in nature
- Measuring such transactions in terms of financial units, that is, money
- Recording such economic transactions in order of their occurrence
- Classifying each transaction into various heads such as sales, purchases etc
- Preparing Trial Balance to check for the accuracy of the recorded amounts
What is Accounting?
Business owners use accounting to record the financial transactions undertaken over the course of business. The ultimate goal of undertaking business activity is to generate profits. Thus, a business owner needs to know about the financial soundness of his business. In other words, he would want to know that the various business transactions undertaken would result into profits or losses during the course of business. This is where accounting helps a business owner in understanding the impact of various transactions on its business.
According to The American Institute of Certified Public Accountants (AICPA), Accounting is defined as:
“the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of such information.”
Let’s understand the various aspects of the above definition.
1. Economic Events
An economic event means occurrences to a business organization comprising of transactions that can be measured in monetary terms. For instance, selling goods, purchasing raw material, purchasing machinery etc.
Identifying refers to discovering transactions which need to be recorded. In other words, this includes choosing those events that are of a financial nature and are associated with the business organization.
The term measurement means quantifying of business transactions into monetary units. Thus, the transactions that cannot be measured in monetary terms are not recorded in the books of accounts.
The term “recording” means making a note of the financial information in a systematic manner as per the well established rules and in order of occurrence.
The financial information so recorded is used by various stakeholders to take important decisions. These stakeholders include internal and external users of such information such CEO’s, CFO’s, creditors, tax authorities etc
6. Interested Users of Information
On identifying, measuring and recording the transactions in the order of their occurrence, they are communicated both to the management and other users of such information. Thus, accounting information is communicated to both internal and external users via various accounting reports.
Objectives of Accounting
There are various objectives of undertaking accounting as a practice. These include:
1. Maintaining Records of Business Transactions
Accounting as a practice is useful in maintaining systematic record of business transactions in books of accounts. It is not possible for a business owner to remember various transactions that take place over the course of business. Thus, accounting helps in keeping a record of such transactions in order of their occurrence.
Further, the online accounting has been a game changer. It helps in managing your accounts in the most efficient way possible. That is why, if you haven’t already done so, your bookkeeping and accounting processes should be managed online.
You May Also Read
Online accounting – the smarter way for SMBs to keep the books
2. Estimating Profit or Loss
The very purpose of undertaking accounting is to estimate the profit earned or losses incurred by a business during an accounting period. Business owners are keen to know the direction where the business is going. This can be done by recording expenses and incomes and preparing profit and loss statement for a particular period.
3. Showcasing The Financial Position
Accounting as a practice also helps the business owners to know the financial soundness of the business. This is done by recording the various resources owned by the business (assets) and the various liabilities that it owes for a particular accounting period. All of this information is showcased in balance sheet of the business entity.
4. Giving Accounting Information To Various Users
The accounting practice produces accounting information that is useful to the various stakeholders. As mentioned above, these can be categorized into internal and external users. Internal users may include managing directors, finance officers, managers etc. Whereas external users include tax authorities, regulators, government, creditors such as banks etc.
You May Also Read
Financial Statement Analysis: The Ultimate Guide
Points of Difference Between Bookkeeping and Accounting
|1.||Meaning||Bookkeeping is an activity that involves the recording of business transactions in an orderly manner||Accounting is an activity concerned with recording, interpreting and summarizing of business transactions.|
|2.||Nature||Bookkeeping is mechanical or clerical in nature. In other words, it is mostly done by computers in today’s world.||Accounting is analytical in nature as it involves knowledge, understanding and skill of the person or the accountant undertaking such an activity.|
|3.||Bookkeeping is the foundation of accounting.||Accounting starts where bookkeeping ends.|
|4.||Interpreting Financial Position||Bookkeeping cannot be used to determine the financial position of the business.||Financial information is determined on the basis of the accounting reports so generated.|
|5.||Preparing Financial Statements||Financial Statements are not a part of Bookkeeping.||Financial Statements are prepared using financial data recorded in books of accounting.|
|6.||Bookkeeping is undertaken according to the basic accounting concepts and conventions.||Various methods of analyzing and interpreting financial statements differ from business from business.|
|7.||Decision Making||Bookkeeping does not help in decision making.||Accounting records help various stakeholders in taking business decisions.|
|8.||Methods/Disciplines||Single Entry and Double Entry Bookkeeping are the various methods used for recording transactions by various businesses.||Various disciplines of accounting include Financial Accounting, Cost Accounting and Management Accounting|
|9.||Tools||Journal, Ledger and Trial Balance||Profit and Loss Statement, Balance Sheet and Cash Flow Statement|