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1. What's the difference between bookkeeping and accounting?

2. Accounting vs bookkeeping
3. What happens if I don't stay on top of my accounts?

What is the difference between bookkeeping and accounting?

July 9, 2021

This article was updated on 18th July 2022.Accounting might not be the most exciting part of running a business, but you need to have some knowledge of it in order to be a success.Knowing exactly how much money is coming in and going out, whether you’re managing to cover all of your costs and if you’re making a profit can help you make important financial decisions for the future.You've likely heard of the phrase 'balancing the books' when it comes to staying on top of your finances, but how does this tie into accounting? Bookkeeping is an essential part of handling your accounts, especially as a small business owner looking to grow – but what is the difference between accounting and bookkeeping?In this guide, we'll cover the differences between accounting and bookkeeping, and how both are a fundamental component for your business's success.

What's the difference between bookkeeping and accounting?

While bookkeeping refers to the recording financial statements and the organisation of business transactions, accounting covers everything from analysing financial data to carrying out audits to preparing reports for the tax office.We've broken down the main responsibilities of bookkeepers and accountants in the table below:

Bookkeeping	Accounting
Record financial statements and categorise transactions	Prepare adjusting entries
Send invoices and records transactions	Analyse operation costs
Conduct bank reconciliations every month	Making financial decisions based on data
Generate monthly financial statements	Review and analyse financial statements
Process payroll	Assess financial health to map financial forecasts
Prepare books for accounting analysis	Run audits
Generate year-end financials and tax documents	File tax returns, conduct tax planning and provide tax advice

As mentioned above, bookkeeping and accounting take place at different stages in the financial cycle — but where do they come into play?Bookkeeping primarily oversees the work at the beginning of the financial cycle, such as sending invoices to clients, categorising transactions and conducting bank reconciliations, where your business accounts are compared against your bank statements.After the business's financial information has been collated and recorded, the next stage of the financial cycle focuses on accounting. This focuses on analysis the company's financial position, producing data that can then be used to establish the business's next steps.

What is bookkeeping?

💡Bookkeeping is the process of gathering, recording and organising the company's financial information to provide an accurate and up-to-date understanding of the company's transactional history.Some typical bookkeeping responsibilities include:

Recording financial transactions

Posting debits and credits

Issuing invoices and recording payments made

Conducting bank reconciliation to avoid mistakes, incorrect payments and fraud

Preparing financial reports, such as balance sheets, cash flow statements and income statements

Tracking the how much money the business owes (accounts payable) and how much it's owed (accounts receivable)

Running payroll

Maintaining and balancing subsidiaries, general ledgers and historical accounts

A general ledger — otherwise known as a general journal or GL — summarises your business's financial information, tracking your incomings and expenses to paint a picture of your business's financial position. Historically, a ledger was a book where financial transactions were recorded by hand, but with some businesses having up to thousands of transactions a day, most business owners now opt to use accounting software.

Two types of bookkeeping

Single-entry bookkeeping

Typically adopted by small businesses with few transactions, single-entry bookkeeping focuses on recording transaction accounts against either an income account or an expense account. Since each transaction is recorded as a single entry, it's the easiest of the two bookkeeping options available to business owners.

Double-entry bookkeeping

The more complicated approach to bookkeeping of the two, double-entry bookkeeping consists of recording a transaction in two accounts: a debit to one account and a credit to another. When it comes to bank reconciliation, the total debits and credits must balance out.To give an example, if you spend £100 on office supplies as a business expense, your liability account, alongside your credit, increases by £100 since you're £100 out of pocket. However, you've also gained £100 worth of office supplies, so your asset account — and your debit — increases by £100. As a result, you easily track the transactions that pass through your business, as well as making it easier to establish how much your company has in assets and in cash.

What is accounting?

💡Accounting is the process of using financial data to create the financial models that determine a business's next steps.Since accounting relies on the data compiled in the bookkeeping phase, the two are crucial for creating a clear picture of the business's financial health. However, at this stage in the financial cycle, the focus shifts from preparation to analysis, such as compiling financial reports, conducting audits and writing financial forecasts.Accounting also encompasses the financial obligations you have as a business owner. To ensure you send HM Revenue and Customs (HMRC) the information needed to calculate your tax bills correctly, you'll need to compile the relevant expenses and file them using accounting software. Accountants can also use their expertise to offer tax optimisation advice, helping business owners to lower the amount of tax they owe through various tax reliefs.Other accounting responsibilities include:

Ensuring all financial documents are accurate and compliant with the law

Compiling and updating financial reports

Preparing and submitting tax returns correctly

Monitoring spending and budget

Writing financial forecasts and analysing risks

Conducting audits to determine the overall financial health of the company

Keeping account books and systems up to date

Three types of accounting

Accounting is a broad topic, so breaking it down into smaller, more concentrated topics can make it easier to keep on top of your obligations.

Managerial accounting

Managerial accounting identifies, analyses and communicates financial information to managers and other senior staff.The documents prepared are typically for internal use, designed to help management make well-informed business decisions while minimising spend. Managerial accounting is used for forecasting, rather than giving evidence of financial progress.

Cost accounting

Even subcategories within accounting have their overlaps, with cost accounting and managerial accounting having a lot in common. Cost accounting focuses on how much money is spent on purchasing and labour costs, enabling managers to create budgets accordingly. Like managerial accounting, this information is intended for company use only, so it’s not necessary to stick to the strict standards that apply when supplying financial information to external parties.

Finance accounting

Otherwise known as financial accounting, this area of accounting focuses on preparing financial documents to show to external parties.For example, investors deciding whether they should invest in a business will want to see balance sheets, income statements and cash flows before finalising their decisions. Similarly, businesses deciding whether to extend credit to another company will want to have an understanding of the company's financial health before settling on an appropriate interest rate.

Accounting vs bookkeeping

If you're pressed for time, we've summarised the main differences between accounting and bookkeeping below:

	Accounting	Bookkeeping
Role overview	Record all business financial transactions	Analysing financial data to generate reports that can be used to make business decisions
Responsibility	Keep transaction information accurate and up to date	Monitor the company's financial health & stay on top of business owner obligations
Stage	Beginning of the financial cycle	End of the financial cycle

What happens if I don't stay on top of my accounts?

Whether you fail to correctly record your transactions or lose a few receipts in the bookkeeping stage, you might find yourself facing the following consequences:

Overspending – If you’re unaware of how much you’ve got coming in and going out of your business, you’re more likely to spend money you don’t have. Getting into debt could limit how long your business can operate for, which is why it’s so important to draw up a realistic budget and stick to it.

Stress when filing your tax return – It can be all too easy to put taxes to the back of your mind, but if it gets to the end of the year and you don’t have a record of your financial information, you could find yourself in hot water with HMRC.

Fines for missing important deadlines – If you miss a VAT payment deadline, you risk facing a hefty fine that could be detrimental to the financial health of your company.

Fines for submitting incorrect information – Even if this is done unintentionally, submitting the wrong information to HMRC can mean mistakes on your final tax bill, which can result in your business not paying enough tax. As a result, not only will you need to make up the difference, but you'll also need to pay the fine on top of your outstanding amounts.

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