Book keeping and Accounting

Bookkeeping is mainly associated toward identifying, measuring, and recording, financial transactions

Accounting is the progression of summarizing, interpreting, and communicating financial transactions which were classified in the ledger account

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    Decision

    Decision Making

    Management can't take a decision based on the records provided by bookkeeping

    Depending on the statistics provided by the accountants, the management can take critical business decisions


    Objective

    The self-determining of bookkeeping is to keep the records of all financial transactions proper and systematic The objective of accounting is to scheme the financial situation and further communicate the information to the relevant authorities


    Preparation of Financial Statements

    Financial declarations are not prepared as a part of this process

    Financial statements are prepared during the accounting process


    Skills Required

    Bookkeeping doesn't require any special skill sets

    Accounting needs special skills due to its analytical and complex nature


    Analysis

    The process of bookkeeping does not require any analysis

    Accounting uses bookkeeping information to analyze and interpret the data and then compiles it into reports


    Types

    There are two types of bookkeeping - Single entry and double entry bookkeeping

    The accounting department does preparations of a company's budgets and plans loan proposals

    Bookkeeping

    Bookkeepers and Accountants

    Bookkeepers are mandatory to be precise in their work and knowledgeable about financial topics. Bookkeepers work is usually overseen by an accountant

    Accountants with satisfactory experience and education can obtain the title of Certified Public Accountant (CPA) Book-keeping and accounting are different from each other. Bookkeeping is an important part of accounting. Accounting is broader than book-keeping. Accounting contains a design of accounting systems which book-keepers use for the preparation of financial statements, audits, cost studies, income-tax statements, etc.

    It also facilitates the interpretation of accounting information for both internal and external users for business decisions making. It requires skills and experience of an accountant.

    There is a difference between the two terms bookkeeping and accounting, let us understand what is bookkeeping and accounting, their processes and difference between the two.

    While doing Bookkeeping, we need to track the basic accounting concepts and accounting conventions.

    Bookkeeping is clerical in nature. Book-keeping is usually done by junior employees of the entity. Most of the entities nowadays usage computers for bookkeeping rather than recording them manually. Accounting of an entity depends on its book-keeping system.

    Book-keeping is the basis for accounting. It is because it is responsible for the proper recording of financial transactions. Whereas, Accounting involves classification, summarizing and reporting of financial transactions. It includes the groundwork of source documents for all the financial transactions of the entity.


    Process of Bookkeeping

    1. Identifying financial transactions
    2. Recording of financial transactions
    3. Preparation of ledger accounts
    4. Preparation of trial balance
    Accounting

    Accounting

    Accounting contains recording, classifying, summarizing financial transactions in a suitable manner. It deals with common financial measurement. It is thus a wider concept than bookkeeping. Bookkeeping is a part of accounting.

    Only financial transactions which can be expressed in terms of money are recorded. Thus, accounting enables stakeholders to know the financial position of an entity for the period. It is concerned with summarizing of the recorded financial transactions. Also, it enables management to prepare various types of reports.


    Process of Accounting

    1. Finding economic transactions
    2. Recording of economic transactions
    3. Preparing ledger accounts
    4. Preparation of trial balance
    5. Preparation of economic statements
    6. Analysis of economic statements
    Difference

    Difference between the two terms bookkeeping and accounting

    1. Bookkeeping is concerned with the recording of financial transactions whereas accounting involves recording, classifying and summarizing financial transactions.
    2. Bookkeeping is clerical in nature and usually is the junior staff performs this function whereas accounting requires skills of accountant and knowledge of various accounting policies.
    3. The Bookkeeping is the base for accounting. Accounting starts where the bookkeeping ends and is thus broader in scope than bookkeeping.
    4. Bookkeeping is in accordance with the accounting concepts and conventions. Whereas, the accounting methods and procedures for analyzing and interpreting the financial reports may vary from entity to entity.
    5. Financial statements do not form part of bookkeeping. Thus, these are prepared from the accounting process.
    6. The accounting reports help in ascertaining the financial position of an entity, however not bookkeeping records.

    Do They Work Together?

    Although the two are different entities, they dovetail really well and can contribute to the great success and organization of a business if carried out properly. Bookkeeping is just a segment of your whole accounting system. So, if your accounting is going to be as strong as it can be, your bookkeeping needs to be too.

    For an accountant to be able to organize financial records properly and balance finances accurately, the information provided by the bookkeeper also needs to be correct. Otherwise, figures won’t be recorded right, meaning that records and updates will also be inaccurate.

    A strong relationship between the two is necessary and can help your business really take things to the next level, especially with your organization and communication.

    Duties

    What Are the Duties of a Bookkeeper?

    The duties of a bookkeeper vary, depending on the company. Here is a breakdown of the responsibilities typically associated with a bookkeeping role:

    • Recommend, implement or manage accounting software for the development of a single or double entry system of accounting.
    • Recommend, implement and monitor bookkeeping policies and procedures.
    • Develop credit and debit accounts, including the assigning of expense categories.
    • Enter expenses and income into the software, including non-digital methods of payment such as cash and checks.
    • Handle banking activities including new deposits.
    • Train staff on the use of relevant bookkeeping software (such as how to enter expenses).
    • Verify recorded expenses are within company’s policies, and manage approvals.
    • Verify the accuracy of information and that the accounts balance (if a Double Entry system).
    • Maintain records, and backup and archive as necessary.
    • Assist the accountant in the preparation of financial statements (or depending on the type of statements required, prepare them himself).
    • Ensure bookkeeping adheres to accounting best practices and government regulations.
    • Assist with audits.
    • Flag discrepancies.

    A bookkeeper also has a duty to keep the information he processes confidential, as he will be privy to sensitive financial information, including payroll salaries.

    Duties of Accountant

    What Are the Duties of an Accountant?

    The duties of an accountant can be broken down into four areas:


    Data Management

    Overseeing how data is stored, managed and updated. For instance, a bookkeeper might recommend the software for a double entry system of accounting, but the accountant would approve it.


    Financial Analysis and Consultation

    Properly assessing data and advising management.


    Financial Reports

    Being able to generate the standard business reports and statements required by businesses and the IRS.


    Regulatory compliance

    Being up to date on government regulations and ensuring the company is following industry standards.


    Can Bookkeepers Call Themselves Accountants?

    An accountant typically has a degree and relevant work experience, however, there is no formal certification process for becoming an accountant. A bookkeeper could call himself an accountant but it would be inadvisable to do so unless he had the relevant education or some serious working experience that included the various facets of accounting (as listed above).

    A bookkeeper cannot call himself a CPA (Certified Public Accountant) unless he achieves the designation. A CPA is earned after completing specific educational and work requirements, and passing an exam. Qualifications for becoming a CPA vary from state to state.


    Do Accountants Do Bookkeeping?

    Yes, they can and do. Some small companies may not have an official bookkeeper, so an accountant will also take on the responsibilities of a bookkeeper too. Or the bookkeeping duties may be assigned to an accountant with less work experience.


    Objectives of Bookkeeping

    Understanding the bookkeeping objective will helps us to understand the methods and types easily. Absolute recording of transactions– It is concerned with a complete and permanent record of all transactions in a systematic and logical manner to show its financial effect on the business.

    Determining the financial effect on the business– It is concerned with the combined effect of all the transactions made during the accounting period upon the financial position of the business as a whole.

    Types

    Types of Bookkeeping system

    The single-entry and double-entry bookkeeping systems are the two methods commonly used. While each has its own advantage and disadvantage, the business has to choose the one which is most suitable for their business.

    Single Entry Bookkeeping System

    The single entry system of bookkeeping requires recording one entry for each financial activity or transaction.

    Single entry bookkeeping system is a basic system that a company might use to record daily receipts or generate a daily or weekly report of cash flow.

    Double Entry Bookkeeping System

    The double-entry system of bookkeeping requires a double entry for each financial transaction.

    The double entry system provides for checks and balances by recording a corresponding credit entry for each debit entry.

    The double-entry system of bookkeeping is not cash-based. Transactions are entered when a debt is incurred or revenue is earned.

    Methods of Bookkeeping

    Manual methodology of Bookkeeping

    It is a paper-based and traditional way of Bookkeeping.

    Transactions are recorded manually by hand using a paper book of accounts such as journal-register, ledger books etc.,

    Widely used by small businesses with less complex business transactions.

    Cheaper and easier to maintain but requires a lot of skill and time, sometimes turns out to be tedious task at hand.

    Computerized methodology of Bookkeeping

    A new innovative way of recording business transactions.

    Uses accounting and bookkeeping software such as Tally.ERP 9 for recording transactions.

    An easier, faster and convenient way of recording business transactions.

    Eliminates the tedious tasks involved in manual bookkeeping. Reliable and accurate financial reports possible.

    Financial accounting

    This field is concerned with the aggregation of financial information into external reports. Financial accounting requires detailed knowledge of the accounting framework used by the reader of a company's financial statements, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Or, if a company is publicly-held, it requires a knowledge of the standards issued by the government entity responsible for public company reporting in a specific country (such as the Securities and Exchange Commission in the United States). There are several career tracks involved in financial accounting. There is a specialty in external reporting, which usually involves a detailed knowledge of accounting standards. There is also the controller track, which requires a combined knowledge of financial and management accounting.

    Public accounting

    This field investigates the financial statements and supporting accounting systems of client companies, to provide assurance that the financial statements assembled by clients fairly present their financial results and financial position. This field requires excellent knowledge of the relevant accounting framework, as well as an inquiring personality that can delve into client systems as needed. The career track here is to progress through various audit staff positions to become an audit partner.

    Government accounting

    This field uses a unique accounting framework to create and manage funds, from which cash is disbursed to pay for a number of expenditures related to the provision of services by a government entity. Government accounting requires such a different skill set that accountants tend to specialize within this area for their entire careers.

    Forensic accounting

    This field involves the reconstruction of financial information when a complete set of financial records is not available. This skill set can be used to reconstruct the records of a destroyed business, to reconstruct fraudulent records, to convert cash-basis accounting records to the accrual basis, and so forth. This career tends to attract auditors. It is usually a consulting position, since few businesses require the services of a full-time forensic accountant. Those in this field are more likely to be involved in the insurance industry, legal support, or within a specialty practice of an audit firm.

    Management accounting

    This field is concerned with the process of accumulating accounting information for internal operational reporting. It includes such areas as cost accounting and target costing. A career track in this area can eventually lead to the controller position, or can diverge into a number of specialty positions, such as cost accountant, billing clerk, payables clerk, and payroll clerk.

    Tax accounting

    This field is concerned with the proper compliance with tax regulations, tax filings, and tax planning to reduce a company's tax burden in the future. There are multiple tax specialties, tracking toward the tax manager position.

    Internal auditing

    This field is concerned with the examination of a company's systems and transactions to spot control weaknesses, fraud, waste, and mismanagement, and the reporting of these findings to management. The career track progresses from various internal auditor positions to the manager of internal audit. There are specialties available, such as the information systems auditor and the environmental auditor.

    What is an Accounting Method?

    Accounting methods refer to the different rules which are followed by the different companies for the purpose of recording and reporting the revenues and expenses incurred by the company over an accounting period, where the two primary methods include the cash method of accounting and accrual method of accounting.

    In simple words, it refers to the set of rules that determine when the revenues and expenses of a company are recognized in its books of accounts. Different methods lead to a diverse representation of a company’s financials, which method to choose is a vital decision.

    The two major types of accounting methods are the accrual method and the cash method. Let us discuss each one of them in detail.

    Accrual Accounting

    Under the accrual method, all revenues and expenses are recognized based on their occurrence, regardless of when they are received/paid. Revenues are thus recognized when they are earned, while expenses are recognized when incurred. For example, a car servicing company would record revenue when it provides car services to a customer, whether or not it receives payment against the service by then.

    As for expenses, if the company uses a rented garage for its operations, the rent cost would be recognized in the period for which the garage is rented. For a year’s rental, 12 months’ worth of rent would be recorded as an expense, even if less than 12 months have already been paid.

    The accrual method is based on the ‘matching principle’ which means expenses are matched (reported together) with the revenues for which they are incurred.

    Expenses that are not directly tied to any portion of revenue are to be recognized as and when they are incurred.

    Cash Accounting

    Under the cash method, transactions are recorded when money changes hands. Revenues are recognized when received, while expenses are recognized when paid.

    This method does not follow the matching principle due to the differences in the timings of receipts and payments.

    For example, a gymnasium would record revenues when it receives fee payments from its members. As for expenses, the gymnasium would record rent costs equivalent to the rent payments made to the landlord during the year.

    For more information on book keeping and accounting, consult Vyapar formations.
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