- If you are a sole trader,
partnership or limited company business,
then the maintenance of your numbers is usually achieved
by a combination of bookkeeping and accounting,
for which many would appear to be one of the same.
But there is a clear difference between the two functions.
In this video, we will cover what exactly is bookkeeping,
what exactly is accounting,
the difference between accounting records
and financial statements,
the three key differences
between bookkeeping and accounting,
and finally, can you do your own bookkeeping?
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So bookkeeping is the process by which a business records
its income and expenditure in an organized format.
The person who undertakes this role
is known as a bookkeeper.
This applies whether you are a sole trader, partnership,
limited company or LLP business.
Before computers and software advancements
simply find the process, this was usually done
by manually copying transaction details
across from the bank statements
into what is known as a cash book,
which allow the bookkeeper to categorize the transactions
by type, before recording a monthly
or weekly total for each income and expense type.
This process would usually be repeated
for different bank accounts and any petty cash expenditure.
The bookkeeping process was,
and sometimes still is a time consuming process
which requires a methodical approach.
To understand the difference
between bookkeeping and accounting,
we also need to take a look at the accounting process.
Although there is a single entry cash book system
for simplistic financial affairs,
bookkeeping normally uses a double entry system
using debits and credits.
This includes a ledger system
and the use of journal entries.
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Accounting is the process of taking the numbers
which have already been organized by the bookkeeper,
and presenting them using standard accounting principles,
and a format that is suitable and understandable
to stakeholders of the business.
Stakeholders of a business normally start with HMRC,
the tax man, as they are often the creditor.
In other words, a body or business that will own taxes too.
If you are a limited company,
then companies house too, as your business
will have a mandatory compliance requirements.
And as your business grows,
stakeholders could include partners,
private investors, other creditors,
employees, clients, and so on.
Accounting will involve a good understanding
of accounting standards that determine how numbers
and information needs to be presented within the accounts,
and will usually require the accountant
to make a series of adjustments to the accounts
known as accounting entries.
When trying to understand the need for accounting entries,
it is good to remember that there are a number
of transactions that may not appear on the bank statements,
but still need to be represented
in the financial statements.
A few examples include, asset depreciation,
home office allowances, provision for tax liabilities,
accruals and prepayments.
This is the process of moving income and expenses
from the accounting period they were actually paid,
into the accounting period they actually relate to.
It is also the job of the accountant
to make the numbers more understandable for the end user.
This is usually done by providing comparative numbers
from the previous periods that allow the reader
to see where the business is doing well,
and where it is not, as well as giving commentary
in the form of notes that give further context.
This could be along the lines
of administrative expenses
for the year ending 31st of December, 2021
have increased 15% over the prior year.
This is a result of replacing small office equipment
where the costs were not capitalized.
These notes give the end user a much better understanding
of what's happening in the business,
and assist them to interpret the base numbers.
In the UK, at least, accountants need to also consider
in what format HMRC required the numbers to be presented.
And when preparing accounts for limited companies
they will also need to consider companies house as well.
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The two terms are often assumed to mean the same.
However, this is not the case.
Accounting records is a general term
which refers to paperwork that support the numbers.
This could refer to expense receipts,
customer invoices, supplier invoices, and bank statements
as well as manual calculations prepared by bookkeepers,
and sometimes accountants.
The financial statements often referred to as accounts
are the result of compiling all the numbers
from the accounting records,
and presenting them in a digestible format.
The financial statements usually cover
a set period of time, normally 12 months,
and can be used for both internal or external uses.
Financial statements for external use
will usually need to be paired in a particular format,
which we will explore later.
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Now, there are definitely more than three differences
between the two functions.
However, we've summarized what we feel
are the top three differences.
Number one, the objective of bookkeeping
is mainly of data entry and the processing of raw data
from source material
such as your business bank account transactions,
whereas accounting is the adjusting
of the already processed data
to a standard and format that is digestible,
and acceptable for compliance purposes
and third-party users.
Bookkeeping is the start of the process,
and accounting begins where bookkeeping normally ends.
The accounting function cannot operate
without the bookkeeping being completed,
as it first needs the data to be organized
in a way that can then be adjusted and made presentable.
Number two, bookkeeping tends to organize the numbers more
for internal preparation
for the business owners and management,
and is not necessarily geared towards assisting
you, the business owner with decision-making.
Accounting, on the other hand, is often focused more
on presenting the numbers for external users
for a true and fair view,
such as company's house, HMRC investors,
and your bank, and practically any other stakeholder
or interested party.
And it is normally geared towards helping you,
the business owner and management to make decisions.
And finally, number three, accounting is generally regulated
by the accounting bodies, such as the ACCA and ICAEW
here in the UK, and requires specialist skills,
training and qualifications.
Whereas bookkeeping can be done by good technicians
who don't necessarily need to be qualified
or regulated by a relevant body,
and you could even do it yourself.
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In short, yes you can.
There's nothing to actually stop you.
With powerful modern accounting software,
such as Xero or QuickBooks,
it gives you, the small business owner,
the ability to do it yourself.
In fact, many of these software
are becoming more intelligent
and the software providers themselves market their product
towards a non-accountant, that is you, the business owner.
However, let me throw in a word of caution.
If I were to use an analogy, there's nothing to stop you
from changing the oil and filter on your own car,
or climbing up a ladder
and cleaning out the gutters in your own house.
But any activity comes with its own risks
and opportunity costs.
If you change the oil and filter of your own car
and make a mistake along the way,
or don't have the necessary tools
to carry out the job effectively,
then there could be consequences,
not to mention the time, effort,
and perhaps financial cost you have expended.
And certainly, if your business starts to grow,
the bookkeeping function will need more time,
energy and attention.
So, as a final thought, always think carefully
about how much your time and energy is actually worth.
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I hope this video has helped you understand
some of the key differences
between bookkeeping and accounting in a bit more detail,
and taking you one step closer to knowing your numbers.
As always, let me know in the comments,
your thoughts on today's video
or if there are any topics
you'd like us to cover in the future.
Finally, be sure to like and subscribe,
as this really does help us to get our content out there.
This is Tony Dhanjal for the Accounting and Tax Academy,
thanks for tuning in.
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