Bookkeeping vs Accounting: Key Differences

A company registered under the Companies Act 2013 must maintain bookkeeping as well as accounting records. Both bookkeeping and accounting are important for the company’s financial management. On one hand, bookkeeping focuses on recording financial transactions. On the other, accounting involves interpreting, analyzing and reporting on that data. In this blog post, we shall discuss the difference between bookkeeping and accounting. 

What is Bookkeeping?

Bookkeeping definition can be explained as a process of recording and organizing all the financial transactions that happen as a part of running a business. It is an integral part of the accounting process and mainly focuses on tracking the company’s daily financial activities. 

This includes everything from sales and revenue to tax payments, interest income, payroll, operational expenses, loans, and investments. All these transactions are documented in the business’s books of accounts. How well bookkeeping is handled directly affects the accuracy of your overall accounting. In short, we can say that bookkeeping helps ensure your financial records are not only up-to-date but also accurate.

We can think of bookkeeping as the foundation of all financial reports. Just like a report requires data to be created, accounting relies on bookkeeping to provide the data it needs. Since bookkeeping records all your financial transactions, it forms your accounting process’ base. If there is no bookkeeping, it means there can be no accounting. 

It is crucial for every business, whether big or small, to have a proper bookkeeping system in place. Businesses that maintain accurate and up-to-date records of financial transactions do so through an organized bookkeeping.

What is Accounting?

Accounting definition can be explained as a process of recording financial transactions relating to a company. The accounting process includes summarizing, analyzing and reporting these transactions to the government authorities. 

In the process of accounting, bookkeeping forms the basis by recording the financial transactions. Only after this, it is possible to summarize and report those transactions to create financial statements. If there is no bookkeeping done, there would be no data for the accountants to analyze and report. 

For almost any business, accounting tends to be one of the major functions. At a small firm, a bookkeeper or accountant may do this work. In case of larger companies, sizable finance departments might exist that are led by dozens of employees to do the accounting work. 

To help the management make informed and wise decisions, the reports that are generated by various accounting streams like cost accounting and managerial accounting are quintessential. 

Difference between Bookkeeping and Accounting

For a business, both bookkeeping and accounting are necessary. Sometimes, the bookkeeping and accounting tasks tend to overlap. However, there are certain differences between the two of them. 

One of the primary differences between bookkeeping vs accounting lies in their overall function. While the overall function of bookkeeping is to keep accurate up-to-date records of all the financial transactions, accounting’s overall function is to use the information that the bookkeeping provides in order to determine the registered company’s financial position.

Another difference lies in their purpose. In bookkeeping, the bookkeeper maintains a systematic and chronological record of all the financial activities as well as transactions. On the other hand, when it comes to accounting, the accountant has to analyze and interpret data, make financial forecasts and advise the business owners regarding financial decisions.

Bookkeeping purpose is to provide the necessary information and data that are essential for the accounting process. Accounting purpose is to prepare and analyze financial statements required to make informed decisions.

A bookkeeper must be someone who is good at ensuring accuracy and has sufficient knowledge about bookkeeping. Their work is reviewed by internal/external accountants. Compared to bookkeepers, the accountants are able to understand more complex financial matters and interpret data for the registered company owners. 

Typical tasks performed by the bookkeeper include posting journal entries, sending invoices, recording payments, managing payroll and reconciling accounts. An accountant, however, has to prepare adjusting entries, analyzing costs, performing audits, preparing and filing tax returns, advising business owners and providing tax planning. 

Conclusion

Bookkeeping and accounting have different functions in financial management even though they have a close relationship. Accounting offers a more thorough analysis of those records to support strategic business decisions, while bookkeeping establishes the foundation by keeping reliable records. Businesses can make better use of their financial data, maintain compliance, and spur growth by being aware of these distinctions. Depending on your company's size, growth, and your comfort level with numbers, it can be worthwhile to hire an accountant, bookkeeper, or both to guarantee its financial success. 

For assistance in bookkeeping and accounting, feel free to contact Registrationwala consultants!

Frequently Asked Questions (FAQs)

Q1. Is it mandatory for a business to maintain books of accounts under the Companies Act, 2013?

A. Yes, as per Section 338 of the Companies Act, 2013, every business is required to maintain books of accounts that accurately reflect its financial status and operations. This is important for ensuring compliance with legal requirements.

Q2. Who is required to maintain books of accounts under the Income Tax Act?

A. Individuals or HUFs must maintain books of accounts if their turnover exceeds Rs. 25,00,000 or if their income from business or profession exceeds Rs. 2,50,000 in any of the three preceding financial years.

Q3. What are the penalties for not maintaining books of accounts?

A. Failure to maintain books of accounts can lead to a penalty of Rs. 25,000 under Section 271A of the Income Tax Act. If the books are incomplete or incorrect, the penalty can go up to Rs. 1,50,000.

Q4. How long should books of accounts be preserved?
A. Books of accounts and relevant documents must be maintained for at least 8 years from the end of the relevant financial year.

Q5. What is the difference between accounting and bookkeeping?

A. The difference between accounting and bookkeeping is that bookkeeping involves the systematic recording of financial transactions, while accounting consists of interpretation, analysis, classification, reporting, and summarization of that financial data. Bookkeeping is basically the foundation upon which accounting is built. Without bookkeeping, there cannot be accounting.

Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.