Bookkeeping vs. accounting: Everything you ever wanted to know, but were afraid to ask
Although bookkeeping and accounting go hand in hand, it is important to understand that each plays a different and important role in an organization. Tax compliance and financial affairs are intimidating topics for most freelancers and business owners alike, and rightly so. In the early stages of their business journey, many entrepreneurs venture into running their own finances to minimize costs. However, this can lead to unfortunate situations that can easily be prevented with the guidance of a professional in the field. So, who do you trust with one of the most precious aspects of your business, a bookkeeper or an accountant? Scroll down to find out!
Hold on a sec!
Before we get into the nitty gritties of bookkeeping and accounting, it is worth going over two important terms, in broad strokes:
Book (a.k.a Ledger)
What does ‘book’ mean in accounting?
This is a digital record that contains all of a company's financial information and transactions.
These are some of the items that can be recorded in this book:
Value of the transaction:
Expense (a.k.a. debit)
Income (a.k.a. credit)
How many types of books of accounts are there?
There are two types of books of accounts: ledgers and journals.
In journals, bookkeepers record the company’s transactions in chronological order.
The ledger can be considered as an extension of the journal. In it, bookkeepers enter data pertinent to the accounts of a company such as:
What are 'accounts' in accounting?
To keep track of your business expenses and income, it is recommended that you divide the entries in your ledger by accounts. This will help you create reports easily and delimit budgets for different purposes.
Although there are several types, here are the most common accounts:
These accounts refer to the economic value of a company.
They are divided as follows:
Inventory: set of goods or items that the company has to trade.
Accounts receivable: money owed to you for a service rendered
Checking: account that belongs to the company and is available to be used by wire transfer, check or to deposit to employees.
These relate to the amount of money a company spends over a certain period of time:
Insurance: amount a company spends to make this benefit available.
Cost of goods sold: all expenses related to the manufacture of a certain product.
Payroll: financial record of the list of employees who receive compensation which includes relevant deductions for taxes, social benefits and also discounts.
These accounts are related to the obligations you have as a company, in other words, the money you may owe:
Accounts Payable (AP): also known as 'payables,' refers to immediate expenses or debts payable by the company.
Sales Tax Collected: tax related money that you have to collect from your customers to submit to the government tax office.
Payroll Tax Liability: taxes collected by you from your employees to be submitted to the collecting agency.
Now that these important terms have been clarified, let's get down to business.
What is bookkeeping?
Bookkeeping is usually the way many accountants start their careers.
It is only one part of a company's accounting, and can be defined as the process of keeping a record of the financial affairs of a business.
This is by no means a recent practice.
Its beginnings date back to ancient Greece with the systematic recording of farm produce.
In Germany, for example, bookkeepers (Buchhalter) do not need a special certification to ply their trade.
Although the regulation of this activity may vary from country to country; it is safe to say that, generally, bookkeepers don’t require a high degree of education as in the case of accountants.
What does a bookkeeper do?
A bookkeeper is a key player in the smooth running of any organization.
Their responsibilities include, but are not limited to:
writing entries of expenses and income for each account
keeping a chronological record of all financial activities of each accounting period
In some companies, bookkeepers are also in charge of:
preparing reports and financial statements
The work of a bookkeeper is essential as it allows accountants to gather the necessary information to prepare detailed reports and present them to the company.
What are the two types of bookkeeping systems?
There are two types of bookkeeping systems: single-entry and double-entry.
Single Entry Bookkeeping (Einnahme-Überschuss-Rechnung)
This refers to the simple listing, recording, or daily reporting of receipts or cash flow.
This entry system is very popular among freelancers or companies registered as sole traders.
Double Entry Bookkeeping (Betriebsvermögensvergleich)
As the name implies, this is a system in which a company's debit and credit are double-entered.
In essence, this is what has to be recorded for each transaction:
the method of payment
the reason why the payment was made
What is accounting?
Unlike bookkeeping, accounting focuses on the financial, administrative, and compliance aspects of an organization.
It is a science that governs the timely and accurate control and recording of expenses, income and other financial operations of a company.
What does an accountant do?
As mentioned previously, accountants, unlike bookkeepers, are in charge of auditing accounts, preparing tax reports, and verifying that all records and data gathered by bookkeepers are accurate and financially compliant with laws and regulations.
In addition, accountants need to prove that they have a Bachelor's degree in Accounting to practice their profession.
Who is responsible for invoices in a company?
This may vary, but generally the Accounts Payable department is responsible for processing invoices.
The title these professionals receive is billing or invoice clerk.
So, should you get a bookkeeper or an accountant for your business?
As you can see, both roles are essential to the well-being of any company.
In the end, it all comes down to the size and budget of your business.
Whether you decide for one or the other, we advise you to look for professionals who have a long experience in your niche and who know in depth the regulations of the country where your business is registered to avoid unpleasant surprises.
If you are interested in learning more about invoice management and how to streamline your company's spend, book a demo now.
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