Difference Between Bookkeeping and Accounting

Introduction:

Bookkeeping and accounting are often used on an interchangeable basis, but they vary from one another. Accounting is a wider and more analytical subject. It involves the design of accounting systems that the bookkeepers use, the preparation of financial statements, audits, cost and expense analysis, all work related to income tax, and the review and evaluation of accounting information for internal and external end-users as an aid to business decision-making. More skill, experience, and creativity are needed for this job. The bigger the business, the higher is the accountant’s obligation.

Bookkeeping does not provide a clear financial impression of a company’s state of affairs. If one has to make a decision about the company’s financial situation, it is important to examine and interpret the details found in the books of accounts. It is with the intention of supplying such information that accounting has come into being.

Difference between bookkeeping and accounting

The points of distinction between bookkeeping and accounting are as follows:

Key points of difference – Difference between bookkeeping and accounting

1. What they mean?

Business entities use accounting to maintain track of their monetary or financial transactions. A businessman who has invested money in his company would like to know if his company is making a profit or incurring a loss, the state of his assets and liabilities, and whether, over a certain period, his company’s capital has risen or decreased. The concept of accounting is clearly illustrated by the description provided by the American Institute of Certified Public Accountants (‘AICPA’). As per its definition, accounting is “the art of recording, classifying and summarizing in a significant manner, and in terms of money, transactions, and events which are, in part at least, of a financial character and interpreting the results thereof”.

Bookkeeping is primarily concerned with the necessary and orderly documentation of financial details related to business activities. It is concerned with the permanent record of all transactions in order to systematically illustrate the financial effects on the company. It includes procedural elements of accounting work and includes the role of record keeping. Bookkeeping is the science and art of properly documenting all those business transactions in the books of accounts that result in the transfer of money or money’s worth. Therefore, it tends to be mechanical and repetitive. The bookkeeping work is clerical in nature and is typically assigned to junior employees of the accounts department of a business house. Most of the bookkeeping work is performed nowadays using computers and other electronic devices.

Indeed, we can say that accounting is fully based on a systematic and efficient system of bookkeeping. The main aim of bookkeeping is to display the correct position for each head of revenue and expenditure, as well as assets and liabilities.

2. What they deal with?

Bookkeeping is associated with the recording of transactions. Accounting is concerned with the summarizing of the recorded transactions.

3. Nature of work

The job of bookkeeping is mostly repetitive and clerical in nature and is progressively being done by computers. On the other hand, higher levels of expertise, knowledge, logical understanding, and analytical skills are needed for the work of accountants.

4. Base

Bookkeeping forms the very basis for accounting and it is complementary to the accounting process. Accounting starts where bookkeeping ends.

5. Standards and procedures

Bookkeeping is performed in compliance with fundamental accounting principles and conventions. The methods and procedures of accounting for review and interpretation of financial reports can differ from firm to firm.

6. Do they cover financial statements?

Financial statements do not constitute a part of bookkeeping. However, financial statements are prepared in the process of accounting from the records maintained in bookkeeping.

7. Can they ascertain the entity’s financial position?

Bookkeeping records cannot ascertain the financial position of the business. On the other hand, the financial position of the business over a particular accounting period is ascertained on the basis of accounting reports.

8. What are their functions?

The key purpose of accounting is to provide stakeholders such as owners, management, creditors, investors, etc. with valuable information for decision-making. In the accounting process, various outcomes of business operations are calculated, such as expenses, rates, sales volume, value under ownership, return on investment, etc. All these accounting metrics are used by stakeholders (owners, customers, creditors/bankers, etc.) in the course of business activities. Thus, accounting is also known as the language of business. The main functions of accounting include the following:

  • To measure the past performance of the business concern and depict its current financial position
  • To forecast future performance and financial position of the business entity using past data
  • To provide relevant information to the users of accounts to aid rational decision-making
  • To measure the performance achieved in relation to targets and disclose information regarding accounting practices and contingent liabilities that play an important role in forecasting, comparing, and evaluating the financial results
  • To recognize weaknesses in the operating framework and provide reviews on the efficacy of steps taken to control those weaknesses
  • To provide the government with the requisite details to exert control over the company, as well as to raise tax revenues

Bookkeeping is a mechanical task concerned with recording and classifying financial data related to a company’s business operations in order of its occurrence. The main functions of bookkeeping include the following:

  • To collect the basic financial information
  • To identify the events and transactions with financial character, i.e., those economic transactions that need to be recorded in the books
  • To measure all the economic transactions in terms of money
  • To record the financial consequences of economic transactions in the order of their occurrence
  • To classify the effects of economic/business transactions
  • To prepare an organized statement known as trial balance

9. Output

The output of bookkeeping acts as an input for accounting processes. The output of accounting allows users of accounting information to make informed judgments and decisions.

10. What is their purpose?

Bookkeeping aims to keep a systematic record of financially important transactions and events in the order of occurrence. On the other hand, the purpose of accounting is to determine the results of business activities and to disclose the financial strength of the business.

11. Who performs it?

The function of bookkeeping is executed by junior staff. Accounting is performed by senior staff holding the necessary skill of analysis and interpretation.

12. Who supervises whom?

The book-keeper does not check or supervise the work done by an accountant. Contrary to this, the work done by a book-keeper needs to be checked and supervised by an accountant.

Comparison table – Difference between bookkeeping and accounting

Basis of differenceBookkeepingAccounting
ScopeTo record and maintain the books of accountsNot only recording and maintenance of books of accounts but also entails analysis, interpretation, and communication of information
StagePrimarySecondary
ObjectiveMaintaining systematic records of company transactionsEvaluating the net results of business operations
Kind of workClerical and routineAnalytical and executive
Performed byThe junior staff of the organizationSenior staff of the organization
OutputThe output of bookkeeping is an input for accounting.The output of accounting offers valuable information to internal and external users to aid in decision-making.
Financial positionCannot be ascertainedAscertained
ResponsibilityIt is the responsibility of the book-keeper to record all business transactions.An accountant’s responsibility also includes the work of a book-keeper. Accounting includes bookkeeping.
SupervisionA book-keeper does not check or supervise the work done by an accountant.Work done by a book-keeper is checked and supervised by an accountant.
BaseBookkeeping forms the very basis for accounting.  Accounting starts where bookkeeping ends.

Takeaway

The object of bookkeeping is to summarize the accumulated effect of all business transactions for a given period by keeping a permanent record of each business transaction with its proof and its financial impact on the accounting variable. On the contrary, the object of accounting is not only bookkeeping but also involves analyzing and interpreting the reported financial information to make informed decisions.

Also read: Angel Investment vs Venture Capital: How does it differ?

Ruchi Gandhi

The author enjoys to write informational content in the domain of company law and allied laws. She takes interest in doing thorough and analytical research on legal topics. She is a CA along with MBA (Fin) and M. Com.

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