Bookkeeping

Bookkeeping is the process of collecting, recording, organising and analysing all the financial transactions of a business. Bookkeeping is an essential part of accounting, and it focuses mainly on tracking a company’s day-to-day financial transactions. All the transactions are recorded in the books of accounts, including sales revenue, tax payments, interest earned, payroll as well as other operational expenses, investments, loans and so on. The accuracy of the total accounting process in a business is determined by how well bookkeeping is managed. As a result, bookkeeping guarantees that financial transaction records are up to date and, more crucially, accurate.

Importance of Bookkeeping

Proper bookkeeping provides a credible measure of a company’s performance. It also serves as a guide for making strategic decisions and sets a benchmark for the company’s revenue and profit targets. In short, once a company is up and operating, it is necessary to devote more time and resources to preserving accurate records. It also helps in better financial analysis and management of cash flow. Proper tracking of all transactions helps in fulfilling tax obligations efficiently as it provides ample time to strategize on saving taxes and focusing on other finance management activities.

Methods of Bookkeeping

Before a company starts bookkeeping it has to decide which method it wants to follow. The approach adopted by large and small has to be different as both cater to different needs. A more complex approach may create hassles for small organisations and a simple approach may not provide enough information a large organisation may need. Therefore, it becomes important for a business entity to decide on the best suitable approach for their operation. There are two main methods of bookkeeping, namely:

1.Single entry bookkeeping

2.Double entry bookkeeping

Definition of Bookkeeping

Accounting is the process of recording, storing, retrieval, summarizing, and presenting financial transactions and position of a business in various reports and analysis. Accounting is a subject of study and a profession that focuses on performing the above-mentioned tasks. The data is mostly financial and expressed in monetary terms. Accounting is a measurement and communication process that is used to report on the actions of profit-making businesses. Accounting provides information that allows users of the data to make informed judgements and decisions relating to the activities of the business.

Types of Accounting

1. Financial Accounting

Financial accounting data appears in financial statements that are primarily intended for stakeholders (but the management also use them for certain internal decisions). Outside parties who require financial accounting information include stockholders and creditors. These external parties make decisions that affect the entire firm, such as whether or not to invest further in a company or whether or not to give credit to a corporation.

2. Managerial Accounting

Managerial accounting is for internal use only and gives detailed information to the company’s managers. Managers may utilise the data for a variety of uses ranging from broad, long-term planning to comprehensive explanations of why actual expenses differed from forecasts. Cost Accountants are the employees of a business who conduct these managerial accounting functions. Managerial accounting is more concerned with creating forward-looking estimates and making decisions that will affect the organization’s future unlike financial accounting that is concerned with historical recording and compliance. Because there are no reporting standards like GAAP, managerial accounting reports will vary greatly in scope and content. Furthermore, much of the data gathered by managerial accountants is classified and not intended for the external stakeholders of the company. 

3. Cost Accounting

Cost accounting is a type of accounting which focuses on cost computation, cost control, and cost reduction. Cost accounting’s major goal is to figure out the production costs and keep track of it. It aids a company’s ability to stay within budget. It’s possible to think of it as a subset of larger management accounting. Cost accounting is not dependent on management accounting to be executed successfully. As a result, the performance of cost accounting is contingent on the success of management accounting. Cost accounting is mainly employed by management, shareholders, and vendors, among other people.

Difference between Bookkeeping and Accounting

For any business, bookkeeping and accounting are two of the most essential functions. Simply put, bookkeeping’s function is documenting financial transactions, whereas accounting deals with evaluating, classifying, analysing, reporting, and summarizing financial data.

To the uninformed eye, bookkeeping and accounting may appear to be the same. This is because both bookkeeping and accounting deal with financial information, require basic accounting knowledge, and use financial transactions to classify and generate reports. At the same time, both of these methods are fundamentally different and offer distinct benefits.

Conclusion

Bookkeeping and accounting in essence perform similar functions of recording financial transactions yet accounting is a more complex process than bookkeeping. Bookkeeping is the first step in the process of maintaining financial records and therefore it has to be accurate as all other accounting activities depend on it. Accounting is mainly the next step which involves analysing and presenting data so as to enable the management and external stakeholders to make strategic decisions concerning the business.