Oftentimes accountants are seen recording business transactions, handling payroll and keeping track of all business documents. At the same time they use the word “bookkeeping” to tag some of these tasks, and other times they use the term “accounting”. For business owners, this might be a little confusing as some may mistake accounting and bookkeeping as the same thing.
Bookkeeping is the process to record and organise financial transactions while accounting is the process of interpreting information for decision-making. Both of them are important for companies as it allows the management to understand the real business situation. Companies would find professional accounting firms to help them handle both bookkeeping and accounting tasks. A professional accountant will provide financial insights to business owners to improve business operations and make a strategic move.
What You Will Learn
What Is Bookkeeping?
Bookkeeping is a process of recording and organising all financial transactions of the business and doing so will help companies track every information on its books to make important operating, investing and financing decisions.
It’s important to have accurate and up-to-date financial transactions in order to make strategic decisions for its revenue and income goals.
Examples of what’s recorded are:
Invoices serve an important purpose for both the business sending the invoice and the client receiving it.
An invoice helps expedite the payment process by giving clients a notification of the payment that’s due while for clients, invoices provide a record of an expense with details and can help with record keeping.
- Receipts and bills
Receipts are printed or digital documents that confirms the seller received money in exchange of a product or service and they are important since without the receipt and the accurate information it contains, there is no official record of a purchase or a request for a refund or exchange.
Bills are invoices that the supplier gives you which you will have to pay and it’s important since they serve as evidence when necessary, helps with bookkeeping and helps businesses stay legally compliant.
- Recording business transactions
Transactions must be recorded as it can help with business processes, such as tax returns which must be kept for a minimum of 7 years. It’s important to efficiently record and store details of all the transactions as you can refer back to them if any legal problems arise in the future.
- Payroll & Wages
The process of paying wages to employees for the work they perform and you will need to maintain records of work time, overtime, attendance and bonus to make it accurate.
It affects employee morale and reflects a business’s financial stability and reputation because employees rely on their paychecks, errors or untimely payment can create a lack of trust. There are also laws and regulations that need to be complied to ensure your employees are paid properly and on time.
What Is Accounting?
Accounting is the process of detailed recording and consolidating financial transactions, performance and cash flows. A proper understanding and application of accounting standards would improve the reliability and usability of financial statements, which include the income statement, balance sheet, cash flow statement and the statement of retained earnings. Other areas that accounting usually will cover are:
Financial statements and reports
Financial statements are written summarised reports that showcase the business activities and financial performance of a company. Financial statements are audited by accountants and firms to ensure accuracy for tax, financing or investing purposes.
They are important because they provide details on the performance of the business and help make informed future business decisions.The government may impose fines if the statements are not filed on time.
Budgets help plan and track when and how you earn or spend money. It allows you to oversee and better understand whether your business has enough revenue to pay its expenses.
Using a budget can help determine in advance whether you will have enough money to do the things you need to do or would like to do and make more informed financial decisions.
- Tax returns
Tax returns is a government form, which taxpayers use to report income, expenses and include a variety of deductions and exemptions to arrive at their tax liability.
This is important because one of the most important uses of your financial records is to help you comply with tax laws and prepare tax returns. Keeping good records and operating your business professionally should help you find tax compliances quite easy.
- Analysing business performance
It includes analysis and interpretation of financial statements in such a way that identifies the strengths and weaknesses of the company by establishing the relationship between the item of balance sheet and profit and loss account.
How Does Bookkeeping Differ From Accounting?
Bookkeeping and accounting doesn’t seem different when people think about the two functions and whilst they do share common goals, they support your business in different stages of the financial cycle.
Bookkeeping is more administrative and is responsible for recording financial transactions on a day to day basis. The bookkeeper maintains and records the books of accounts that need to be up to date. It’s important for the bookkeeping to be accurate as it determines the accuracy of the accounting procedure.
Accounting is more subjective as it’s responsible for interpreting, classifying, analysing, reporting and summarising financial data to give you insights into your business’ financial health. The accountant maintains and compiles records of the company’s daily transactions into the financial statements to assess the company’s performance.
The main difference between accounting and bookkeeping：
What Is A Good Accountant Capable To Do
- Make better business decisions
Analysing and communicating their findings from the financial statement helps companies steer in the right direction financially like coming up with strategies that include cost reduction or alternative revenue sources for revenue improvisation.
- Stay with the law
In Hong Kong, you can expect a lot of compliant requirements however it’s time consuming hence why an accountant will remind owners to act early, prevent suffering from any government penalties and comply with reporting standards and compliant requirements.
- Projection on future budgets and target
Preparing an overall plan by evaluating and providing facts about the cost of services and types of operations that generate the most profits. This helps owners avoid losing money for less profitable work and stick to more profitable operations. An accountant analyses a report of the previous year to inform how to decrease costs and how to increase revenue for the next year.
- Cash Flow management
This helps you monitor outgoings like bills, salaries and property costs etc. and track money coming into your business. An accountant can inform the complete picture of what costs and revenues you have and make sure that you have enough funds to pay your bills whilst still maintaining a profit.
- Evaluating Business Performance
- Identify areas that needs to improve and help consider how to sort them out
- Help clean and keep records up to date to help you track expenses, gross margin and possible debt
- Compare your current data with the previous records and allocate your budget
This helps reassess your business goals, plan effectively for improving the business and prevent businesses from failing due to poor financial management.
- Produce financial statements
Producing financial statements can help accurately reflect the business performance and financial position of the company. It also helps companies make informed economic decisions by comparing past and current performances and predicting future performance and growth.
Bookkeeper or accountant: Which do you need?
Now that we know the difference between a bookkeeper and an accountant, you may wonder whether you need both of them to help you out in your business’ finances or only one and if it’s only one then which one is it?
Here is a list of pros and cons to see which one would be more beneficial for you!
Cloud Accounting & Cloud Bookkeeping solution
- Brief intro on Xero accounting software
Xero is a cloud based accounting software that allows small-business owners to manage their finances and collaborate with their accountant or bookkeeper from anywhere. The software can easily help grow your business whether your business only has a few transactions per month as well as those with around a large amount of transactions and staff.
- Automate accounting and bookkeeping process
Doing administrative tasks and inputting data manually over and over can be quite time consuming for many owners as it takes them away from the core business yet it’s a job that can’t be rushed since there shouldn’t be any mistakes to ensure accuracy to rely on the information.
You will notice Xero’s automated accounting and bookkeeping can help you zoom through these tasks, helping your clients to understand their business more easily while giving you an opportunity to offer other services.
- Access data regardless time and place
It’s accessible and available anywhere and any time on any device you will use, which is different to old times where softwares was mainly accessible on the computer and you needed to pay extra to use it on other computers too.
Xero removes the limitation of users allowed to work on the accounts, protects all the data inputted and allows you to use Xero on any device.
- Real time data updates
Xero doesn’t require any updates, which is a relief for owners since keeping up with software updates until something breaks and a third party would be required to help assist can be both time and money consuming.
The software automatically updates in the background on its servers and they have an IT team that ensures the platform is running smoothly all the time.
- Easy scales to fit business needs
Different businesses have different business needs and luckily the software is flexible enough to help owners achieve their aims as it has different types of features to satisfy each sector and industries’ needs.
- Integration with powerful add ons
With a huge variety of different add-on applications, you can create a totally customised Xero experience that suits your business’s needs. You can view these available add-ons in the Xero Marketplace and new add-ons are being developed all the time. This helps improve productivity and efficiency to speed up tasks such as inventory management, invoicing, time tracking and expenses claims.
- Paperless environment
Xero aims to go paperless as they have many advantages for the business such as it’s cost effective, flexibility to run your business from anywhere and get the information you need online. It also removes the hassle of physically storing paperwork and can help you save money when office space isn’t cheap.
How can FastLane help?
As a professional accounting firm, we utilise technology to help clients to finish both their bookkeeping and accounting work. As Xero Platinum Champion partner, we helped thousands of businesses to achieve business success through the cloud accounting software – Xero.
We provide a wide range of services for SMEs, such as Xero setup and implementation, Xero training, Xero accounting, auditing , tax filing services, as well as company secretary and formation services.
Our years of knowledge and experience in accounting, auditing and bookkeeping services will ensure that your business is up and running successfully and help you achieve your financial goals you aim to achieve.
To conclude, bookkeeping and accounting both help the company with its finance and financial decisions hence go hand in hand however bookkeeping is the initial stage of accounting and as it’s the base, it must be perfect in order for the accounting part to be perfect too.
Whilst both go hand in hand and are both important for a company, the biggest difference between accounting and bookkeeping is the analysing and interpreting the financial data so we hope that our article has helped you to differentiate them better. They are important concepts but somehow we easily overlook their importance in the real business world. If you handle your accounting and tax filing yourself, feel free to check out our detailed explanation on the profit tax return.