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Financial Basics: Accounting and Bookkeeping Functions

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Financial Basics: Accounting and Bookkeeping Functions

Although there is a difference between accounting and bookkeeping, they are generally used interchangeably. Anyone new in business would constantly hear the words accounting and bookkeeping. Because they are synergistic, small companies usually have both accounting and bookkeeping functions.

In bookkeeping, a general ledger is used to post every business transaction. The ledger has all the financial transactions of a company from its inception.

In accounting, all the information in the ledger is used as insights to develop financial plans and decisions.

Bookkeeping

Bookkeeping is a daily record-keeping of all the financial transactions of a company. Small business accounting and bookkeeping are essential; it has to start even if your company is just a start-up. Before considering this financial service, do not wait till your company becomes a big corporation. Check out this page to learn more about bookkeeping services.

Posting is the term for recording all financial transactions or accounts. Bookkeeping tracks all the following accounts for financial statements and tax purposes.

  • Asset Accounts – include both tangible and intangible items that your company owns. Tangible assets may consist of laptops, vehicles, machinery, property, or buildings. While intangible assets may include copyrights, logos, or trademarks.
  • Expense Accounts – can consist of firm acquisitions to help create additional income. Maybe services or products. In addition, expenses might be rentals, ads, and staff member salaries.
  • Income Accounts – or revenue, records all the cash made from selling your product and services. It can also count the returns from other financial investments.
  • Liability Accounts – can include business loans, unpaid utility bills, outstanding debts, payment obligations to lenders, and other payables.
  • Equity Accounts – shows the current worth or firm or business valuation. A simple formula is subtracting a firm’s liabilities from its assets.

Bookkeeping Methods

A quality that stands out in bookkeeping is a stickler for accuracy. Even the most detailed bookkeeper can commit blunders; that’s why they typically work under an accountant’s guidance unless the business is very small. Studies found that having external accounting such as Dedicated Solutions bookkeeping services is a big help with your business.

The two bookkeeping methods are:

  • Single-Entry System – involves a single entry of all business transactions in the general ledger. This system works best with small firms with less revenue.
  • Double-Entry System – is the golden standard of record-keeping commonly used by most business owners, accountants, and bookkeepers. This system is more thorough and complex than single-entry.

Accounting

Accounting provides the business owner with pertinent data concerning the business’s financial standing. It is a process that consists of measuring, processing, and communicating financial information. Furthermore, accounting also manages tax preparation and other needed financial materials.

The accounting function can be outsourced to a private accounting firm. Even in some small companies, outsourcing accounting and bookkeeping functions is very common.

Accounting Methods

  • Cash Accounting – this type is prevalent among local business owners. The only transactions posted in cash accounting are cash spent or cash received. A sale is posted when the payment is received, and an expense is posted when the bill is paid.
  • Accrual Accounting – under this process, transactions are posted when they are incurred instead of awaiting payment. The same goes with expenses, even if no payment is made yet.

Conclusion

Although accounting and bookkeeping are different, there are more similarities than differences. They work on a common objective of improving the business’ financial situation. Both are tax compliant and have many overlapping roles, especially in small businesses.

Accounting professionals can take the role of bookkeepers; however, bookkeepers can not be called an accountant unless with the proper education and accreditation. Nevertheless, accounting knowledge is required in both disciplines.

Finally, a business of any size can considerably benefit from the services of an accountant or bookkeeper.