When most people think about bookkeeping and accounting, they would be hard-pressed to describe the differences between each role.
Whilst bookkeepers and accountants share common goals, they support your business in different stages of the financial cycle. Bookkeeping is more transactional and administrative, concerned with recording financial transactions accurately and efficiently. Accounting is more subjective, giving the business insights based on the transactional information.
In this article, we’ll explain the functional differences between accounting and bookkeeping, as well as the differences between the roles of bookkeepers and accountants.
The function of bookkeeping
Bookkeeping is the process of recording daily transactions in a consistent a key requirement to build any financially successful business.
Bookkeeping is comprised of:
- Recording financial transactions onto the accounting system
- Producing sales invoices
- Posting and allocating purchase invoices
- Maintaining and balancing general ledgers, and subsidiary ledgers, such as the purchase ledger and sales ledger.
- Bank payments
- Bank reconciliations
- Completing payroll
Maintaining a general ledger is one of the main components of bookkeeping. The general ledger is a system whereby a bookkeeper records both sales, expense, and banking transactions, along with other accounting entries. The detailed sales and purchasing transactions usually also feed into integrated modules such as the purchase ledger for purchases and the sales ledgers for sales transactions. These subsidiary ledgers are detailed records of what the business owes or is owed, whereas the general ledger is a more summarised view. These ledgers can be created with specialised software, a computer spreadsheet, or simply on paper.
The complexity of a bookkeeping system often depends on the size of the business and the number of transactions that are completed daily, weekly, and monthly. All sales and purchases made by your business should be recorded in a ledger and will likely need supporting documents for review by regulatory bodies such as HMRC. The onus is growing on business owners to hold such information in recognised accounting software and it is expected that in time tax authorities will require the ability to be able to access these records remotely and in real time under the Making Tax Digital initiative.
The function of accounting
An Accountant performs a higher-level role that uses financial information compiled by a bookkeeper of the business, and produces financial information using that data for a suite of purposes.
The process of accounting is more subjective than bookkeeping, and requires the accountant to interpret the data provided, which may result in adjustments to this data to generate more meaningful and accurate results.
Accounting is comprised of:
- Making adjusting entries (for example recording expenses that have occurred but have yet to be recorded in the bookkeeping process).
- Preparing management accounts, which are likely to be a detailed set of reports that assists business owners/ management to run their business. The frequency, complexity and nature of these reports will vary considerably from one business to another. These reports may incorporate KPI’s and dashboards to assist in this goal.
- Preparing company financial statements
- Analysing costs of operations and variances of both revenues and costs to budgets or forecasts.
- Analysing cash flow and preparing cash flow forecasts
- Aiding the business owner in understanding the impact of financial decisions
- Assisting in the compilation of a multitude of tax related returns (for example – Corporation Tax, VAT)
The accounting process provides reports that bring key financial indicators together. The result is a better understanding of actual profitability, and an awareness of cash flow in the business. Accounting turns the information from the ledgers into statements and reports that reveal the bigger picture of the business, and the path the company is progressing on. Business owners will often look to accountants for help with strategic tax planning and financial forecasting, as well as for compliance.
It is interesting to note that since the advent of accounting and bookkeeping software, some components of the accounting process have been absorbed into the bookkeeping process. For instance, bookkeeping software is typically capable of building financial statements—blurring some of the traditional lines between the bookkeeping and accounting processes.
Organised financial records and properly balanced finances produced by the bookkeeper, coupled with smart financial interpretation by the accountant, contribute directly to the long-term success of every business.
As your business grows, it’s essential to have trusted financial professionals managing your books and providing strategic financial advice. Some business owners learn to manage their finances on their own, while others opt to hire an outsourced professional so that they can focus on the parts of their business that they really love.
Our part-time and outsourced expertise will be tailored to the requirements of the business owner and may well only be for a handful of hours per month, but our team of experienced accountants will support you, saving your company time and money.
If you’re a business owner seeking a fresh set of eyes to assess your accounts or complete your payroll, the EFM Ireland team are here to help. Get in touch today via email or call 01442 8176 to set up your free one hour consultation.