If you are non-accountant and think that Accounting and bookkeeping are the same, that’s OK. I meant that is not your fault since people often stereotypes accounting as “bean counting” and call the accountant “bean counter.”
Those stereotypes come from the fact that, although not equivalent and not interchangeable, the accounting and bookkeeping are indeed of the same discipline.
So, again, that is fine as far as the stereotyping concern.
But if you are a business owner/manager and planning to hire a person whose capable of analyzing why you can’t pay the bills on time while making good sales and good profit, then you would need to know the difference between accounting and bookkeeping. By knowing the difference you can be sure whether you need a bookkeeper or an accountant or both, and this will definitely save you time and money.
If you are a student and not sure whether you want to become a bookkeeper or an accountant, after the graduation, then you would also need to know the difference between accounting and bookkeeping.
I am going to show you the exact difference between accounting and bookkeeping in this post. Not only distinguishing the two, you are also going to see the fact that accounting is much more than “bean counting” and becoming an accountant won’t end you up as a bean counter.
“So, what is the difference between accounting and bookkeeping?” You may ask.
1. The Scopes
Bookkeeping scope is much narrower than accounting. This is a major difference between bookkeeping and accounting.
For easier understanding, have a look at the following graphic:
- Red circle (in the middle), is the scope of bookkeeping, which is narrow.
- Black square (in the background), is the scope of accounting, which is much broader.
Let me explain a little bit more.
In within a company, the scope of bookkeeping is limited and exclusively focuses on keeping an accurate record of transactions (also called “economic events.”)
While, in a broader scope, accounting includes the following areas:
(1) Financial Accounting is an area of accounting that focuses on generating financial statements (i.e. income statements, balance sheet, and cash flow statements) for the external users.
(2) Managerial Accounting is an area of accounting that focuses on generating a specialized report called “management accounting report” for internal users (managers and directors.)
(3) Taxation is an area of accounting that focuses on generating tax report for the government agencies, the IRS in this case.
(4) Auditing is an area of accounting that focuses on giving users an objective opinion about truthfulness and completeness of financial statements issued by the company.
(Read: Who Uses Accounting Reports)
In short, bookkeeping is part of the accounting scope. This difference leads to the next differences. Read on.
2. The activities
With a narrower scope, bookkeeping only involves the following activities for every single transaction occurred in the business: identifying, counting, recording, classifying, and summarizing.
While accounting with a broader scope, in within the same company, involves lots of activities covering all areas of the accounting, as follows:
(1) Financial Accounting area involves the following activities for every economic event occurred in the business: bookkeeping (=identifying, counting, recording, classifying, summarizing), reporting, analyzing, and interpreting.
(2) Managerial Accounting area involves the following activities in within the operation of the business: costing, budgeting, reporting and analyzing.
(3) Taxation area involves two major activities as follows: tax planning and tax filing/reporting.
(4) Auditing area involves the following activities: internal controlling, internal auditing, external auditing, and forensic (in the case of an extraordinary fraud.)
In short, bookkeeping is part of the accounting activities.
That said, bookkeeping is not less important compare to any areas of the accounting, even to the accounting entirely. In contrary, at least in the small business environment, the existence of bookkeeping is more important compare to the accounting.
As seen in the above graphic, bookkeeping is in the center of the accounting’s scope.
Every single process made and every single report generated, in any areas of accounting, is made of the bookkeeping’s output; general ledger and account balance. This means that:
(a) the Financial Statements (in the Financial Accounting area) can’t be compiled and generated without the general ledgers and accounts balance generated in the bookkeeping area. Any statements analyses can’t be performed either.
(b) the Management Report (in the Managerial Accounting area) can’t be compiled and generated without the ledger and accounts balance generated in the bookkeeping area. Any cost analyses can’t be made either.
(c) the Tax Report (in the Taxation area) can’t be prepared and filed without the general ledger and accounts balance generated in the bookkeeping area. The Tax Planning can’t be made either.
(d) the audit (in the Auditing area) only can be conducted upon the availability of general ledger and accounts balance generated in the area of bookkeeping.
Bookkeeping activities are much fewer, but these are the core of accounting. I would say that accounting is not even existed without the existence of the bookkeeping.
By the way, an Accountant COULD actually live without the existence of a bookkeeper. Read on.
3. The Jobs
Those whose does bookkeeping is called a Bookkeeper. If you want to become one, you should be able to:
- identify transactions;
- count transactions;
- record transactions;
- classify transactions;
- summarize transactions;
- reconcile accounts; and
- maintain accurate general ledger;
on daily basis. Practically, in a mid-to-big size company, job description of a bookkeeper includes the followings:
- Developing bookkeeping policies and procedures;
- Developing and setting up chart of accounts;
- Maintaining subsidiary accounts by verifying, allocating, and posting transactions;
- Balancing subsidiary accounts by reconciling entries;
- Maintaining general ledger by transferring subsidiary account summaries;
- Balancing general ledger by preparing a trial balance; reconciling entries;
- Maintaining historical records by filing documents (hard papers and digital);
- Assisting and supporting the Accountant in preparing financial reports by collecting, analyzing, and summarizing account information.
To be able to do these, you have to be pretty good, at least, in the followings:
- Accounting equation (assets = liabilities + equities);
- Accounts and chart of accounts;
- ‘Double-entry’ technique (the debit and credit procedures);
- Accounting principles and assumptions;
- Vouching; and
And to have all of these skills, you do not need a bachelor degree in accounting. High school plus courses in bookkeeping is just enough. Of course, a one or two-year college in accounting program would be better. And many organizations offer a Certified Bookkeeper program, such as the American Institute of Professional Bookkeepers (AIPB,) once you passed two years working experience in bookkeeping.
Those whose masters the works of accounting is called an Accountant. If you want to become an accountant, you have to be extremely good in the followings, conceptually and practically:
- Bookkeeping (see above);
- Financial reporting (compiling and generating financial statements);
- Analyzing and interpreting contents of the financial statements;
- Cost control and analyses;
- Management reporting (compiling and generating management reports);
- Interpreting and analyzing contents of the management reports;
- Budgeting (financial and non-financial);
- Tax planning;
- Tax filing/reporting;
- Internal Control (accounting procedures and policies);
But not all accountants are equal. While all of them surely have completed a degree in accounting and have accumulated a minimum 2-years working experience in the field thus have been extremely good in bookkeeping and accounting, they could be specialized differently, as follows:
(a) Certified Management Accountant (CMA), a credential for an accountant that is specialized and certified in the area of managerial accounting after having a special training and passing CMA exam. In addition to the bookkeeping and financial reporting skills, CMAs expert in managerial accounting. They are extremely smart in costing, pricing, budgeting, forecasting, performance management, cost management, internal control, risk management, and making a strategic business decision based on financial information. Though CMAs are also capable of doing financial reporting, taxation, and auditing, but not as good as managerial accounting. Most accountants working inside a company (either permanently or temporary outsource from a Trusted Business Advisor) are CMAs.
(b) Certified Public Accountant (CPA), a credential for an accountant that is specialized and certified in the area of financial accounting after having a special training and passing CPA Exam. CPAs expert in financial accounting. They are extremely good in bookkeeping, financial reporting, financial statement analyses, internal control, auditing, and compliance matter such as accounting standard, tax codes, and security exchange rules. Though they are also capable of doing managerial accounting such as costing, budgeting, forecasting, but not as good as financial accounting. In most cases, CPAs work outside of the company and are independent.
To become an accountant, you must have a degree in accounting, accumulated a minimum 2-years working experience in the field, had specialization training either in financial or managerial accounting or both, and passed the special exam conducted by an accounting body such as American Institute of Certified Public Accountant (AICPA) and Institute of Management Accountants (IMA.)
With much more work and advance function, the responsibility of an accountant is much bigger compared to a bookkeeper. In within a mid-to-big company, an accountant supervises and oversees a bookkeeper and all data entry staffs. The accountant wants to speed up the reporting process by minimizing the numbers of correction entry prior to the closing date.
This nature could be a little bit different in a small business. Let’s move on to the next paragraph.
Accounting and Bookkeeping in the Small Businesses Environment
Small businesses have small capital. They use most of the money for working capital such as raw material, wages, finished goods, and services that matter most to the business. While operating expense such as salary for administrative staff is kept as small as possible.
So, rather than hiring a full-time accountant that are willing to do the bookkeeping function, they would prefer to hire a bookkeeper that is capable of generating financial statements. This makes sense as a bookkeeper is usually paid less than an accountant.
Consequently, the accounting functions are not fully covered. No costing, no budgeting (except daily cash,) no cost analyses, no tax planning, no auditing, no procedures and policies, and no internal control in place.
Small businesses rarely make a strategic decision based on financial information and they miss the competitive advantage of making use the full power of accounting.
Before summing it up, allow me to ask you a question: Up to this point, does the accounting still sound like “bean counting”?
Not sure about others. As a CPA myself, YES, I deal with numbers a lot and tediously but, I don’t do clerical works as the bookkeepers have done that for me. Instead, I spend most of my time in controlling activities such as reviewing, analyzing, providing the managers and directors with recommendations about what to fix and what to improve to achieve the company’s goal.
To me, accounting is a useful tool that every single business decision should be based on OR the business will be at a disadvantage.
1. Accounting and bookkeeping come from the same discipline but they are not equal so are not interchangeable.
2. The scope of bookkeeping is narrower than accounting. In fact, bookkeeping is part of the accounting scope.
3. The bookkeeping involves fewer activities but, it is not less important than accounting. In contrary, bookkeeping is the core of accounting. Without the existence of bookkeeping, the accounting will not even exist.
4. Someone whose does bookkeeping is called a bookkeeper and whose masters the works of accounting is called an accountant. Certified Bookkeeper is the top credential for a bookkeeper, while Certified Public Accountants (CPA) and Certified Management Accountant (CMA) are top credentials for an accountant.
5. You need no degree in accounting to become a bookkeeper, but you must have one if you want to become an accountant. In addition to the accounting degree, to become an accountant you must also accumulate a 2-years working experience in the field, have completed a special training and passed a special exam.
6. Small businesses rarely hire a full-time accountant since they couldn’t afford it. Instead, they may hire a bookkeeper that is capable of generating financial statements with a cost of having a little to no accounting functions on the place and miss the competitive advantage of making use accounting information as a basis for strategic business decisions.