29 Jan Are ‘bookkeeping’ and ‘accounting’ one and the same?
More often than not, ‘bookkeeping’ and ‘accounting’ are used interchangeably. The truth, however, is that there is a considerable difference between these two practices. So exactly how are they different from each other?
To better understand how these two terms vary, it is essential that we start right at the beginning – the basics. This way, you can learn about what they both entail:
Bookkeeping – what is it?
Bookkeeping simply means chronologically compiling transactions to report on various things such as cash flow, expenditure, and payroll – essentially every money-related activity that goes in and out of (business) bank accounts.
It involves managing payments and scrupulously entering data (in and out). Usually, this can be done either manually or digitally by use of special bookkeeping software. It is the initial stage of typical financial processes and is a necessity for the accountancy methods that follow.
Accounting – what is it?
Accounting entails interpreting, analysing, and studying financial data collated through the process of bookkeeping as mentioned above.
All the reports, statistics, and documents collected from accounting are then used for various purposes including offering insight into a business’s financial health and informing decisions relating to cost-saving, spending, and investment; not to mention collecting relevant information needed by external bodies like HRMC and stakeholders including VAT reports, year-end accounts, and audits among others.
How do they differ?
Undeniably, both bookkeeping and accounting are fundamental components of the process of financial reporting. Even so, it is safe to state that they both have a unique individual role.
In summary, you can categorise bookkeeping as the mechanical process that feeds in the details needed to perform more analytical tasks under the trade of accounting. It is the process of systematically organising resources relevant to accounting. These resources subsequently help in creating reports and documents that businesses use in managing their finances better.
Without accurate and thorough foundations as established through bookkeeping, accountancy practices become susceptible to errors or gaps; an occurrence that can, unfortunately, open the gap for trouble with HMRC or even poor business decisions.
In essence, despite their differences, both accounting and bookkeeping are co-dependent trades which when effectively coordinated can result in better financial management as well as a well-informed decision-making process in a business/organisation.