Many students and professionals generally have the concept that Bookkeeping and Accounting are synonymous. However they are not same and there is massive difference between Bookkeeping and Accounting. So get set as we will be learning the difference between Bookkeeping and Accounting in points in this article.
Also read: Debit Note and Credit Note: Meaning and Uses
What is Bookkeeping?
Bookkeeping is basically the task of recording the monetary transactions of a business in a systematic manner. In lucid terms, it deals with:
- classifying; and
monetary transactions of a business concern systematically.
Thus Bookkeeping helps in building a database of records on which the accounting information is based. It is the basic foundation or the first step of the process of accounting.
Also note that Bookkeeping is a clerical job which requires skill of intermediate level and can be performed by junior accountants.
What is Accounting?
Accounting is much wider in scope than bookkeeping. It is a term used to describe a wide range of activities.
Bookkeeping is an activity which is an integral part of Accounting. Accounting includes bookkeeping but is much wider in scope than bookkeeping
Accounting may be defined as:
- summarising; and
financial information to the stakeholders of the business.
Accounting is an information system designed to provide meaningful and correct financial information to the users of accounting information (i.e. stakeholders). This information generally relates to the resources and obligations of the organisation and the operating results (i.e profit or loss) in a given period of time.
Accounting information helps the management to take vital decisions for its growth and achieve its mission and vision.
Accounting is not a job of clerical nature. It requires specialised skill and knowledge of expert level. The job is also not routine in nature as accountants have to customise their reports as per the information seeked by stakeholders.
Difference Between Bookkeeping and Accounting
Take a look at the definition of Accounting reproduced below:
Here you will be able to differentiate the process of accounting from bookkeeping. You can clearly see above that bookkeeping is just a part of accounting.
If I speak in layman’s terms, the process of recording transactions till preparation of Trial Balance comes under the umbrella of Bookkeeping. Beyond preparation of Trial Balance, the main process of accounting starts (i.e. from the process of preparation of Final Accounts).
The difference between bookkeeping and accounting in points can be summarised below:
- Bookkeeping is essentially recording of financial transactions as and when they happen in a systematic manner. Accounting goes a step further to summarise these records and analyse and interpret their effect on the working of the business.
- Bookkeeping provides the initial records which serves as the food or input for financial information. Meaningful information is generated by accounting by using the database of records created in bookkeeping. Thus bookkeeping is an essential part of accounting.
- Bookkeeping is generally done by a bookkeeper who records the transactions. The job of bookkeeper is of routine type and clerical in nature. The job of an accountant goes beyond that of a bookkeeper. Accountant must possess specialised knowledge in his field. He has to process the records kept in bookkeeping and provide vital information to management. Management will use the information to make important decisions for the organisation.
- Accounting, as mentioned before, has a very wide scope and has many branches like Financial Accounting, Cost Accounting and Management Accounting. Bookkeeping has no branches and its scope is limited to recording business transactions.
Still confused? Don’t worry. Let me take a practical example to explain the concept further.
You may have seen that a businessman employs an accountant (full time) for recording his daily monetary transactions that happen in his business. The accountant keeps the records in books like Journal, Cash Book, Purchase Ledger, Sales Ledger etc. as and when they happen.
However, at the end of the accounting year, all the records kept by that accountant are handed over to an expert (e.g. Chartered Accountant) for preparation of Final Accounts and other reports (like the Cash Flow statement) for reporting and statutory purposes.
The person whom I referred to as ‘accountant’ in the first instance is the Bookkeeper. He just records the transactions as and when they happen in proper books. And the ‘expert’ is actually the person who is doing the accounting by using the records kept by the bookkeeper and converting them into meaningful information.
Now some of you may ask “What is meaningful information?”
I will answer this by using another example. Suppose the Sales Manager of a company asks the accountant for the percentage of increase in sales in the current period compared to the previous period. In this case the accountant can do 2 things:
- Hand over the Sales Ledger of the current and previous period to the Sales Manager; or
- Summarise the data of sales from the sales ledger of both the periods and prepare a comparison report showing the percentage increase in sales as asked by the Sales Manager.
So what according to you will serve the purpose of the Sales Manager better? Of course the summarised report as mentioned in point 2 above. This is meaningful information. The Sales Ledgers, even though they contain all the records of sales, will not serve any purpose to the Sales Manager.
In addition to what is discussed above, you must remember that there is no thumb rule to determine as to where the job of a bookkeeper ends and the accountant’s begins. In small businesses, the proprietor or the accountant of the business may himself record all the transactions and then summarise and analyse them to take business decisions.
Did this article help you in understanding the difference between bookkeeping and accounting? If yes please let me know in the comments below. Any suggestions and improvements via the comments are welcome.
Recommended Read: Meaning of Generally Accepted Accounting Principles (with Video Lecture)