Although some people use these two terms interchangeably, they are two different terms. They are separate, but they work together for your overall financial health. Bookkeeping is where you record your business transactions in your ledger, and accounting is analyzing this information and gaining insight into your businesses finances. Take a look at each one and what they are.
When you start a business, you need to keep a general ledger where you record all of your sales, expenses, cash, and bank transactions. It needs to be accurate so that you have this information available when you do your taxes at the end of the year. In addition, your bookkeeper might pay invoices and do the payroll. There will be nine different accounts maintained by your bookkeeper.
- Cash: receipts and payments
- Accounts receivable
- Accounts payable
- Loans payable
- Payroll expenses
- Owner’s draw
You can use either single entry or double entry for your system. In a double entry system, every time money goes out, it should also come in. You need to show both. A single-entry system just shows each item individually. Bookkeepers need to be accurate and pay attention to details. When you have a larger business, the duties of a bookkeeper are greater.
Accounting is where you measure, process, and communicate all of your financial information. It helps you understand your finances, resources, and the financial health of your business. It provides a record of all of your financial information through interpretation of the information the bookkeeper enters into the ledger.
There are two different methods for accounting. One is based on how much cash you have and how much you have received. The other is called accrual basis accounting. If there is any chance that you will be audited, you need to use the latter. Cash based accounting is simple because you simply record revenues and payments. It is usually used by small businesses that are service oriented and do not have inventory.
The accrual basis accounting method is different because it is based on when the revenues are earned rather than when they are received. For example, when you make a purchase, you transfer value from your cash account to your equipment or supplies account. If you don’t have a lot of experience, you can hire an accountant to handle it for you.