Business 101: Difference Between Accounting and Bookkeeping

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Starting a business involves numerous transactions and finance-related activities, which makes accounting and bookkeeping necessary even for small business owners. Keeping track of where your money goes is essential for business growth.

Poor cash flow management can lead to big problems and even bankruptcy if not resolved immediately. Organizing your finances can set you up for success.


Bookkeeping vs. Accounting

New business owners may mistake bookkeeping and accounting as being synonymous, but this is not the case at all. Simply put, bookkeeping focuses on recording and organizing financial data, while accounting involves analyzing and creating a report based on said data.

Read on to get more in-depth information about the difference between bookkeeping and accounting.


Bookkeeping

As mentioned above, bookkeeping focuses on recording and organizing business transactions. This process is an ongoing task and should be updated regularly. The earlier you start your bookkeeping, the better and easier it will be for you.

You also need bookkeeping to qualify for loans, grants, etc. Applying for these services requires accurate and up-to-date bookkeeping records.


Basic Bookkeeping Items

Assets – things a business owns such as cash, inventory, equipment, etc.

Liabilities – things a business owes such as debts, wages owed, taxes owed. etc.

Revenue – business income from the sale of products or services.

Expenses – the cost of operations including the staff, inventory, rent, marketing, etc.

Net Income – business revenue after deducting expenses, taxes, and interest.

Equity – the net value of a company. You can compute this by deducting your liabilities from your company assets.


Accounting

Accounting puts the data gathered from bookkeeping to good use. It is the process of analyzing collected data that allows business owners to manage and understand their progress. 

Accounting can help owners understand the following:

  • Profitability of clients
  • The success rate of a business line
  • Need for new employees
  • Cash flow
  • Business forecast for the next 12 months


Working with a professional bookkeeper and accountant is definitely advisable, but it is understandable for new business owners to want to do this themselves for their startup company.


Here are the things you can do on your own:

  • Payroll – You need this to track employee time cards and salary.
  • Invoices – You need to send this so your business can get paid.
  • Cash management – You need this to keep track of your sales, transactions, and balance.


If you are a new business owner who plans on doing your own bookkeeping, then you can either choose to do it traditionally or with the help of technology. But keep in mind that not everything can be solved by apps and software.


Of course, you need to at least understand the basics of bookkeeping and accounting before you handle anything related to them. Trying to handle bookkeeping, accounting, and finances without basic knowledge on the matter is like piloting a plane with no training. You might crash and burn, and you’d bring your business with you.

Invest in educating yourself, AND invest in professionals. You can never go wrong with expanding your knowledge for your business.


Effective Ways to Organize Your Business Finances

Bookkeeping and accounting work together to organize your business finances. You want to keep your records as accurate and organized as possible. Here are some of the things you can do to ensure an efficient process:


Record every transaction.

There is no exception to this. Regardless of how big or small a transaction is, each financial activity is equally important in both bookkeeping and accounting. 

The sooner you start recording your transactions, the better it is for your business. It reduces the risk of missing some records and data.


Separate business and personal financial accounts and expenses.

You must draw the line between business and non-business finances. Doing so may be difficult for entrepreneurs, but it is necessary to ensure that your personal financial activities do not affect your company.

Make sure that what is meant for your business stays with the business.


Observe effective and regular communication with your bookkeeper and/or accountant.

Managing your finances is one of your most important responsibilities in your business. Your bookkeeper can record all they can, and your accountant can analyze as much as they want– but at the end of the day, your decisions regarding the data and reports presented to you matters the most.

Make sure that communication is clear between you and your bookkeeper or accountant– this ensures that you are making business decisions based on an accurate understanding of your financial situation. 


Check your books and compare them with your bank accounts.

Reconciling your books with your bank account is necessary to ensure that your bank account and your records are in-sync. Doing so is also a financial reality check.

You should reconcile your books with your bank account regularly as it also protects you from fraud.


Create a budget.

Your company is like your second home, and much like your actual home– you need to create a budget for it. Although new projects sound great, you need to put your existing resources into consideration.

Creating a budget for new projects allows you to determine their relative value compared to existing projects and other ongoing business investments. A budget gives you a better perspective on your finances.


Bottomline

Bookkeeping and accounting are two unique processes that work on the same goal of helping you understand your finances. The role of an accountant or a bookkeeper may vary from one business to another, but one thing is constant– and that is the fact that they can help you manage your business finances.

A bookkeeper will save you from the stress of collecting and organizing your financial data. On the other hand, an accountant can assist you with things like audits, records, business strategy, etc.

You can rely on these professionals to give you advice on your financial decisions for your company. Investing in professionals will help you grow and improve your business.

The information in this article is for general informational purposes and does not constitute financial or legal advice. Feel free to contact John Rooney CPA for specific advice for your business.