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Accounting vs. Bookkeeping

What is Bookkeeping?

Think of bookkeeping as the foundation of your financial data. Bookkeeping is the recording of daily transactions that follow a defined process in a cyclical manner. Bookkeeping is broken down into parts such as

  • Accounts Payable
  • Accounts Receivable
  • Payroll

Bookkeeping is really just what it sounds like: keeping the books. That includes every facet of recordkeeping, from writing a check to recording it to marking it off when it has been cashed to making sure it was cashed for the right amount. In fact, every time money is involved — even if it has not yet changed hands — there is something to record. Sometimes you have something to record even when there is no money involved, such as when two companies barter services instead of paying each other.

What is Accounting?

  • Accounting is the setting up of the Bookkeeping system, monitoring the system that it is working as it should and then interpreting the data produced by that system. Accountants usually oversee the Bookkeepers and guide them based on Accounting principles.
  • Accounting is much more subjective than transactional.
  • Accounting and bookkeeping are related in the same way as recipes and ingredients. Ingredients are the raw materials you need to create a meal; bookkeeping provides the raw materials you need to develop useful financial reports. A recipe takes that pile of ingredients and tells you how to transform it into that tasty meal; accounting helps you create reports that can help you make your business successful.
  • A bookkeeper will compile and record information. An accountant will analyze that information, and then present it in a more useful format (such as specialized reports), explaining what all the numbers mean, and also make future recommendations.

Why should you care about bookkeeping and accounting?

  • Most small business owners take the least amount of time and spend the least amount of resources (Money to pay for talent) on their bookkeeping. They are focused on the end result of getting money in. They are usually less focused on the process of bookkeeping and accounting.
  • Generally small business owners reach a point in their growth that collecting money and paying bills is no longer providing them with the answers they need to make business decisions.
  • A proper accounting can also help you qualify for bank financing, venture capital financing, line of credit, vendor contracts. All these aspects of business require that you have very clean financial records, and at times would also ask Accountant analysis and reports such as Assets & Liabilities statement, and Profit & Loss (P&L) statement.
  • Proper bookkeeping systems created by Accountants provide insight into how your business is doing. An accountant will be able to interpret this information to provide you with data to make informed business decisions. Accounting takes the guess work out of the question “So how’s business?”
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