The Difference Between Accounting and Bookkeeping

There is often a confusion over the difference between accounting and bookkeeping.  This is because both activities have an interrelatedness that is sometimes difficult to ascertain.

It comes down to financial analysis versus creating and recording transactions.

“Bookkeeping is a technical aspect of recording, classifying, and summarizing a transaction.  It means that bookkeeping does not use any analysis during these stages of recording,” as excerpted from http://simplestudies.com.

Let me give you a scenario:

You (Owner of Business) have a stack of receipts, bills from vendors, deposit tickets from the deposits you have made to the bank and periodical bank statements.  You may be thinking about expanding your business, purchasing another business, selling, or getting a bank loan, or any other myriad of reasons, for which you need a set of Financial Statements.

You choose to bring your documents to an “accounting” office for them to prepare a set of financial statements.  Someone will perform the following duties and provide a set of Financial Statements when finished.

  1. Organize purchase orders with vendor bills;
  2. Enter these vendor bills;
  3. Organize purchase orders from customers;
  4. And, then with bills of lading (shipping documents) and make-ready for billing
  5. Create invoices to your customers;
  6. Receive monies from your customers;
  7. Prepare bank deposits and take to the bank;
  8. Pay vendor bills
  9. Reconcile the bank account.

Along the way, if the bookkeeper has questions, they will typically refer you to a tax preparer/an Accountant, or a Certified Public Accountant to provide the “Design” of this “System of Record.”

Hence, the task of recording transactions is typically “Bookkeeping.”

The Accountant takes over where the Bookkeeper leaves off and generates a set of Financial Statements: Balance Sheet, Profit and Loss, and Cash Flow Statement, and analyzes them for completeness and interprets them, and provides you (the Owner) information for your decision-making.  Financial analysis, such as Gross Profit Margin, Current Ratio, etc.  These are the further in-depth functions of an Accountant.