Accounting Versus Bookkeeping
Accounting and bookkeeping are related in the same way as recipes and ingredients. Ingredients are the raw materials you need to create a meal; bookkeeping provides the raw materials you need to develop useful financial reports. A recipe takes that pile of ingredients and tells you how to transform it into that tasty meal; accounting helps you create reports that can help you make your business successful.
In theory, there's a wide gap between bookkeepers and accountants, but in reality the lines are often blurry. By definition, a bookkeeper compiles and records information. An accountant analyzes that information, and then presents it in a more useful format (such as specialized reports), explains what all the numbers mean, and makes future recommendations. As more tasks are performed by computer programs, specific tasks become intertwined and harder to separate.
You cannot have accounting without bookkeeping; bookkeeping is a crucial part of the whole process. You can, however, have bookkeeping without accounting. Just as you can eat carrots without making soup, you can do bookkeeping without performing any full-blown accounting tasks.
The Ins and Outs of Bookkeeping
Bookkeeping is really just what it sounds like: keeping the books. That includes every facet of recordkeeping, from writing a check to recording it to marking it off when it has been cashed to making sure it was cashed for the right amount. In fact, every time money is involved — even if it has not yet changed hands — there is something to record. Sometimes you have something to record even when there is no money involved, such as when two companies barter services instead of paying each other.
Bookkeeping is by far the most labor-intensive and time-consuming part of accounting. It is also one of the most important parts, because without it there would be no way to keep track of your business finances, let alone see how well your company is really doing. Many new or small-business owners let bookkeeping slide (at least initially), maybe because it does take so much of their very precious time, or maybe because they just don't like working with numbers. Then, at the end of the year, they take huge sacks of paper over to the tax preparer and wait for him to tell them how the business is doing. The answer often is “not good,” and by then it can be too late to do anything about it.
Keeping your books thorough and current will help you avoid that scene, and it may also save you a lot of money at the end of the year. Yes, it takes time, and you probably do not have tons of time to spare. You can get around that by using some simple business bookkeeping software, or by hiring a part-time bookkeeper. At least in the very beginning, though, it's good to do some of it on your own, so you can get a good feel for how your business finances work and develop a better understanding of how everything fits together financially.
By starting with the small, clear steps of bookkeeping, you will be able to make the giant leaps of financial analysis and forecasting more easily. It's like starting out in the mailroom and working your way up to the president's office: you learn the ins and outs of everything along the way, giving you a better ability to understand virtually every facet of the company.
Accounting Ties It All Together
Accounting covers a lot of ground, from the framework supporting all the bookkeeping tasks to the final analysis of what all the numbers mean and what to do next. This science sets the rules for figuring out which events will be recorded by the bookkeepers, dictates exactly how and when that information will be set down, and most important, communicates all of this in a useful way to the people who need to know it.
That communication is both simple and complex. It includes standard reports, called financial statements, that everyone from business owners to bank managers can read. Accounting also provides the tools for analyzing those numbers — not just how they all add up, but what they mean and how they can be used to make a difference going forward.