A common question is whether there is any difference between accounting and bookkeeping. We will begin with bookkeeping, since it is essentially a subset of the larger topic of accounting. Bookkeeping is the recordation of basic accounting transactions, such as:
- Issuing invoices to customers
- Recording invoices from suppliers
- Recording cash receipts from customers
- Paying suppliers
- Recording changes in inventory
- Processing payroll
- Processing petty cash transactions
These transactions are mechanical in nature; that is, the bookkeeper follows a prescribed set of procedures on a repetitive basis to record a common activity. These common bookkeeping tasks are entirely adequate for the accounting needs of a small business.
A bookkeeper could compile financial statements from the transactions just described. However, those financial statements would be incorrect to some extent, because they would not include the following additional actions that are usually handled by an accountant:
The broader field of accounting includes the use of these accruals. In addition, accounting encompasses the following activities:
- Creating the chart of accounts
- Setting up the general ledger
- Designing the financial statements
- Issuing customized management reports to address specific issues
- Altering the classification or recordation of transactions to meet certain accounting standards
- Creating a budget and comparing it to actual results
- Compiling tax returns from the financial information
- Creating a set of controls within which the financial system operates
- Designing a record keeping, archiving, and document destruction system
Usually, there is at least one trained accountant responsible for the accounting operations of a medium to large-sized business, and who sets up the procedures that are then followed by a larger number of bookkeepers.
In short, the difference between accounting and bookkeeping is that bookkeeping focuses on repetitive business transactions, and so is a subset of the much larger set of tasks that can be encompassed by accounting.
There are also significant differences between the bookkeeper and accountant positions. The bookkeeper role is broad-based, with one person typically handling all of the accounting transactions for a small business. The bookkeeper tends to be very experienced, but is more likely to be lacking in formal accounting training. A bookkeeper with a great deal of responsibility may be referred to as a full-charge bookkeeper. Conversely, the accountant is more likely to work exclusively on a specific area, such as fixed assets or the general ledger, and is more likely to have formal training in the accounting function. There is also a career path for accountants, which leads to the assistant controller and controller positions.