How Does Accounting Differ from Bookkeeping?There are 8 major differences between Accounting vs. Bookkeeping?
DefinitionBookkeeping is normally related to identification, measurement and recording of financial transactions. Accounting includes making a summary, interpretation and communication of financial transactions which are classified in the ledger account.
Making DecisionsBookkeeping data does not help management take decisions. However, crucial business decisions can be taken with the help of accounting data.
GoalThe primary goal of bookkeeping is to keep proper and systematic record of all financial transactions. Accounting aims to interpret a financial situation and communicate the observations to the relevant authorities.
Financial Statement PreparationBookkeeping does not deal with preparation of financial statements, while these statements are prepared in accounting.
Specific skillsThere are no specific skills required for bookkeeping. You need special skills for accounting as it is analytical in nature.
AnalysisThere is no analysis involved in bookkeeping. Bookkeeping information is used by accountants for data analysis and interpretation leading to compilation of reports.
CategoriesThere are 2 categories in bookkeeping namely single entry and double entry. The accounting department deals with planning of loan proposals and prepares the budget of the company.
QualificationBookkeeping involves accuracy at work and knowledge of financial topics. Accountants oversee the work done by bookkeepers. Accountants with sufficient experience can acquire the Certified Public Accountant (CPA) qualification. Professional payroll outsourcing companies like PaySquare with over 17 years of experience can take the responsibility of your accounting functions. They have a team of professionally qualified accountants who will provide the following services:
- Calculate and pay statutory dues
- Attend to auditor queries
- Comply with the latest tax regulations
- Prepare books of accounts
- Generate financial and operating MIS reports
- Regularly update the books of accounts
Why Is Bookkeeping Important for a Small Business?The major reasons why bookkeeping is important for small business are:
Taxes:As per the Income Tax Act regulations, you are required to maintain your books of accounts and report profits or losses so that they can estimate the tax payable by you. This information needs to be presented in a specific format and be in accordance with the requirements of the Act. If you don't comply with the regulations, you could face huge penalties which could spell disaster for your business.
Cash flow:You need to keep a tab on your cash flow and this is only possible if accurate records are kept and bookkeeping ensures that all the required records are properly maintained. You will be able to make provisions for any unexpected contingencies and protect your business from losses.
Expenses:When you incur expenses solely for the purpose of your business, this can be claimed as deductions for tax purposes. You need to ensure that the expenses are paid in cheque and submitted on a regular basis like monthly or quarterly. The bookkeeper can monitor expenses for tax and accounting purposes.
Profitability:It will be easier for you to determine whether your business is profitable or not and keep track of things. You will also be able to gauge the progress of the business on a year-on-year basis and find out areas which can generate more revenue and the areas where cost reduction is required. This analysis of your finances can help you avoid future problems.
What Does a Bookkeeper Do for a Small Business?There are 4 basic functions of a bookkeeper when it comes to maintaining records for a small business. They are:
1. Setting up and managing accountsA bookkeeper maintains records of a certain category of financial transactions like sales or payroll. Accounts can be classified into the following types:
- Assets: This refers to the cash and resources which the business owns such as accounts receivable or inventory.
- Liabilities: These refer to the debts or obligations owned by the business like accounts payable and loans.
- Revenues: This refers to the earnings of the business normally through the sales of products or services like sales and interest income.
- Expenditure: Payments for various services utilized by the business like salary or utilities are referred to as expenditure.
- Equity: This refers to the difference between assets and liabilities and represents the owner's share in the business like stock and retained earnings.
2. Recording of each financial transaction:The transactions under the bookkeeping system are usually entered on a double-entry accounting basis. According to this accounting system, for every transaction there are 2 simultaneous opposite entries in 2 accounts. There will be a debit or credit for every transaction.
3. Balancing and closing the books:Bookkeeping ends with balancing of the books. The total debits should tally with the total credits. At the end of the quarter or a year, these debits and credits should be posted to the accounts in the general ledger. At the end of posting entries in the journal and ledger, the following equation should hold good: Assets = Liabilities + Equity
4. Preparation of financial statements:The end of the bookkeeping process leads to the preparation of financial reports. The financial reports generated are:
- Balance Sheet: This is a snapshot of the assets, liabilities and equity on a given date. Your assets should equal your liabilities and equity. It gives you an indication of the financial health of your business.
- Profit & Loss Account: You get the complete picture of your revenues, costs and expenses for a certain period of time like a quarter. You can make projections about your future sales and expenses from this.
- Cash flow statement: You can determine your net cash situation (outflow/inflow) from this statement which shows the difference between revenues and expenditure. It indicates how solvent your business is.