What's the difference between bookkeeping and accounting?
Many people don’t understand the intricate differences between bookkeeping and accounting. Although both terms are used interchangeably, one is part of the other. Bookkeeping is the record-keeping aspect of accounting.
When you record sales and purchases in your business, you are bookkeeping. The same applies to recording receipts and payments made to your business by individuals or other companies. Bookkeeping involves preparing all source documents for every transaction, operation and any other event that takes place in your business.
The bookkeeping process
Every time a transaction takes place in your business, a document is produced. Sales and purchases produce documents like invoices and receipts. Some other documents can also be produced in the process like deposit slips issued when money is deposited into a bank account or cheques issued when making payments out of a bank account. Bookkeeping involves recording all the details about these source documents into special books.
Traditional bookkeeping books from when “Bob Cratchit scratched out Ebeneezer Scrooge's ledgers by candlelight”
1. Daybooks
Daybooks are diary-like books used to record day-to-day financial transactions descriptively and chronologically. There are several daybooks categorized according to the type of financial transaction. For instance, a sales daybook records sales invoices while a sales credit daybook records sales credit notes. Other types of daybooks include the general journal and cash daybooks. The general journal daybook records journal entries. The cash daybook or cash book records all received and paid out monies daily.
2. Petty cash book
This type of bookkeeping book records small-value purchases made from the petty cash. The book records minor expenses on stationery, hospitality, postage, etc. It is maintained by a cashier who receives reimbursement after providing a satisfactory explanation of the total expenditure.
3. Journals
Bookkeeping journals are formal and chronological records of financial transactions made before their value has been accounted for as debits or credits in a ledger. You can maintain one journal or several journals distinguishable by the activity being recorded (i.e., sales, receipts, revenue, cash, etc.). Journals are essential for summarizing transactions/referencing them later. Every credit journal entry must have an equivalent debit journal entry to ensure balanced accounting.
4. Ledgers
Ledgers are records of accounts. They are permanent summaries of amounts recorded in supporting journals which contain a list of dated individual transactions. Ledgers are recorded separately with a beginning/ending balance.
Ledgers are prepared from information contained in journals. The information is recorded into a corresponding account for all listed transactions. Ledgers also contain totals for every account. The information is transferred to financial statements. There are two main types of bookkeeping ledgers namely the sales and purchase ledger.
The sales ledger records financial transactions made by customers (accounts receivables) while the purchase ledger records purchase transactions by a company (accounts payables).
Now that you know the various types of books used in bookkeeping, let’s discuss the main bookkeeping methods.
Bookkeeping methods
There are two main entry systems in bookkeeping namely the single-entry and double-entry bookkeeping systems. Most small businesses use single-entry bookkeeping.
The method records income and expenses in a journal. Double-entry bookkeeping requires two or more accounting entries when documenting every financial transaction.
The entries are recorded on the asset, liability, expense, equity or revenue accounts.
Single entry vs. Double entry systems
In single entry bookkeeping, the main bookkeeping record is the cash book. All entries are recorded in several categories in the income and expense accounts. Accounts payable/receivable, petty cash and other relevant transactions like inventory and travel/transport expenses are recorded in separate account records.
In double-entry bookkeeping, every transaction changes two or more ledger accounts.
The method follows a different set of financial accounting rules when recording financial information. For instance, sales are recorded in a sales journal while cash payments are recorded in a cash payments journal.
Every column in every journal corresponds to a specific account. The single entry system records each transaction once.
After a specified period, every column in a double-entry bookkeeping system is totalled to offer a summary for the period. Journal summaries are then transferred (using double-entry rules) to respective ledger accounts. For instance, sales journal entries trigger debit entries in the accounts of respective customers indicating they owe the business money.
A credit entry can be made to show such activity has generated revenue for the business. The process of transferring individual transactions and summaries to the ledger is known as posting. Once the process is done, accounts maintained using the T-format are balanced.
A working document known as a trial balance is created to check if the posting process has been done correctly. If there is an error/s in the trial balance, they must be traced back to the journals or the posting process and rectified.
A trial balance contains debit and credit columns which must balance under double-entry accounting rules. Once balanced, a trial balance is used to make financial statements such as balance sheets, income statements, cash flow statements, etc.
Pros and cons: Single-entry versus Double-entry bookkeeping
Double-entry bookkeeping is better since every transaction is recorded. The method also allows the preparation of financial statements which are crucial for assessing the health of the business and taking the necessary steps. Lack of reconciliation with the single-entry method introduces risks like fraud.
Although double-entry bookkeeping is time-consuming and complex, it's a dependable method as opposed to single-entry bookkeeping which is used mostly by businesses to get by.
Of course, once you incorporate your business, you are required to use a double-entry bookkeeping system.
How bookkeepers and cloud-based software will help your business and bottom line
Benefits of a bookkeeper
Since double-entry bookkeeping is better but adds complexity, you’ll need the services of a bookkeeping professional. In ideal circumstances, bookkeeping should be done by a bookkeeper – a professional who is skilled and charged with the sole responsibility of recording day-to-day transactions of a business. However, some small to medium-sized businesses try to do their own bookkeeping.
This isn’t advisable.
Here are the main benefits of hiring a bookkeeper.
Better cash management: A bookkeeper’s sole responsibility is to record and account for every cent your business receives and spends. The importance of having a financial paper trail in your business can’t be overlooked. Some of the benefits you stand to enjoy include; the ability to track payments and deposits as well as manage customer and supplier accounts. Proper cash management also enables you to create a business budget which is crucial for your business to succeed.
Better business decisions:
A bookkeeper ensures all financial records are in order which is the “key” to making smart business decisions. Proper bookkeeping allows you to identify business opportunities, avoid cash flow problems and find clever ways of boosting income and/or decreasing spending. For instance, your bookkeeping records can help you know which product/service sells better.
Unbiased opinion: Doing bookkeeping in-house (assigning bookkeeping tasks to one of your employees) usually creates a conflict of interest since the person has an interest in the business. For instance, an employee may want to "paint" a positive picture to save their job or benefit in other ways. External bookkeepers have no reason to be biased. They offer an accurate picture which is what you need to get your business to the next level.
Compliance benefits: Complying with business tax laws among other mandatory business laws is crucial regardless of the type of business you operate. Bookkeepers make it possible to comply with sales tax, payroll tax, workers’ compensation tax among other important laws for operating a business legally. When you have proper bookkeeping records, you’ll be less worried facing a CRA audit. Bookkeeping records are crucial during tax compliance exercises. You’ll have all the records you need like receipts, cancelled cheques and tax returns that accountants need to ensure you comply with existing laws. Bookkeepers also tend to be more informed about compliance issues than in-house staff.
Reduced risk: Proper business records also increase your ability to detect fraud/embezzlement. There’s always the risk of being defrauded by your employees or business partners. A bookkeeper can identify suspicious business transactions fast and easy.
The benefits of hiring a bookkeeper clearly outweigh the cost. Without a bookkeeper, a business would have problems preparing a trial balance, a crucial accounting document used by accountants to prepare accurate financial statements.
How cloud-based bookkeeping software will help your business and bottom-line
Traditional bookkeeping software requires a lot of business time and effort to run. The software no longer adds value in today’s highly competitive business environment. Cloud-based software is the answer to this problem. Cloud-based software is accessible online at any time, anywhere and from any device.
Some of the main problems of traditional bookkeeping software include;
- Constantly out-dated information
- Centralized data which introduces data security and reliability risks.
- Costly computing resources to manage (computing devices and customer support).
- Time-consuming and challenging software upgrades.
Top benefits of cloud-based bookkeeping software
Your business can enjoy the benefits of cloud computing and having a bookkeeper at once with cloud-based bookkeeping software.
The most notable benefits include;
a. Collaboration and accessibility
The immediate and most obvious benefit of cloud computing bookkeeping software is the speed and financial data access levels you enjoy from anywhere. The software simplifies a rather complicated process which typically requires a lot of resources. It’s incredibly easy for the relevant persons in the business to access important information and collaborate on the same without business data accuracy and security concerns.
When your business financials are on a physical computer or server, access and collaboration is a huge problem in case these computing devices get compromised, fail or get lost.
b. Flexibility and scalability
Physical servers limit a business that is growing fast. Cloud computing allows your business to upscale with ease to meet evolving requirements. You can upscale or downscale your business suddenly without having to incur huge hardware expenses or losses. Running and maintaining computing infrastructure costs money and time. Manual in-house bookkeeping takes your attention from other important business tasks. Cloud-based bookkeeping frees up precious time and resources without compromising any aspect of your business financials.
c. Agility and competitive advantage
Cloud computing also reduces the capability gap between small/medium-sized businesses and multinational companies. Small and medium-sized businesses can enjoy the resource benefits available to large companies at little cost. In fact, small businesses have an advantage over large competitors. Cloud computing makes small businesses leaner, faster and better placed to take advantage of new developments. Cloud-based accounting software has equalized the playing field. The resources of a business no longer limit access to the best software and professionals.
d. Paperless benefits
Traditional bookkeeping is cumbersome. Maintaining paperwork is challenging. It is tiresome and exposes business data to unauthorized third parties. You/your bookkeeper are also bound to make manual errors. A cloud-based system eliminates such risks offering a faster, more accurate and efficient way of staying “on top” of your financials.
Main cloud-based bookkeeping software
Small and medium-sized businesses today are spoilt for choice regarding cloud-based bookkeeping software. Here are some of the best picks;
Xero
Xero offers real-time views of your cash flow online via any device. The software is made for business owners keen on running their businesses on the go. The software comes with a mobile app and impressive features like the ability to invoice/create expense claims from anywhere. You can also reconcile transactions in seconds. Other notable features include; the ability to manage inventory, manage bills/expenses, and connect with other bookkeeping/accounting tools (i.e. time tracking, payroll, and reporting/payment tools). Xero can be integrated with over 700 business apps offering unique point-of-sale and e-commerce solutions. Most importantly, you can add your bookkeeper and accountant as Xero users.
Hubdoc
Hubdoc is another great bookkeeping software. Hubdoc allows you to automatically import all your business financials and export them into usable data. You can import receipts, statements, bills, and emails among other paperwork before converting it into usable data. The software fetches bills and gets rid of data entry (a tedious traditional bookkeeping process). You can also sync the software with your business accounting. Hubdoc has incredible add-ons like bookkeepers and accountants as well as other useful applications like Xero, bills.com, and QuickBooks.