When you first get started in a small business, you may hear the terms bookkeeping and accounting thrown around almost interchangeably. However, these terms do not mean the same thing. Small businesses have both bookkeeping and accounting functions, and they are synergistic. Organized financial records and balanced finances are central to a small business’ success.
Bookkeeping is the process of the daily record-keeping of all financial transactions of the company. Bookkeepers record the sales, expenses, and cash/bank transactions of the company in the general ledger, which is central to the finances of your company. Recording these transactions is referred to as posting. A bookkeeper may also generate invoices and/or complete payroll. The complexity of the bookkeeping process depends on the size of your business and the number of transactions conducted daily, weekly and monthly.
The two methods of bookkeeping are single entry and double entry.
Most businesses use the double-entry bookkeeping system where every entry to an account requires a corresponding and opposite entry to a different account. For instance, earnings of $10 would require posting two entries: a debit entry of $10 to an account called “Cash” and a $10 credit entry to an account called “Revenue”.
Bookkeeping can be done on a spreadsheet or a lined piece of paper, but much of the bookkeeping process is automated now, and the software also intertwines some components of the accounting process.
One of the best traits a bookkeeper can bring to their job is being a stickler for accuracy and completeness. The software doesn’t know if something is missing. A bookkeeper usually works under the direction of the accountant.
Accounting has been called the language of business. It is the process of measuring, processing and communication financial information about, in this case, your business. Accounting provides you, the business owner, with information on your resources, the financing of those resources and the results your business achieves through their use.
The accounting function prepares a record of the financial affairs of the company. Accounting also includes the interpretation of the numbers prepared by the bookkeeper to determine the financial health of the firm. It also includes the presentation and financial health and control functions of the company, and the preparation of tax and other required financial materials.
Accountants are trained, licensed professionals. Certified Public Accountant (CPA) is one of the common titles. CPAs must pass the Uniform Certified Public Accountant exam and have experience as a professional accountant.
In most businesses, the bookkeeping clerks operate under the accountant. In small businesses, the accountant may be the owner or Chief Financial Officer (CFO) or the accounting function may be outsourced. In some small businesses, both the bookkeeping and accounting functions are both outsourced.
Even if you, as a small business owner, outsource either or both your bookkeeping and accounting functions, it’s important that you maintain some understanding and control over both of them yourself. You need to understand the process of bookkeeping and accounting in your company.