Defining Accounting & Defining bookkeeping
The term accounting is much broader, going into the realm of designing the bookkeeping system, establishing controls to make sure the system is working well, and analyzing and verifying the recorded information. Accountants give orders; bookkeepers follow them.
Accounting encompasses the problems in measuring the financial effects of economic activity. Furthermore, accounting includes the function of financial reporting of values and performance measures to those that need the information. Business managers, investors, and many others depend on financial reports for information about the performance and condition of the entity.
Bookkeeping is an indispensable subset of accounting. Bookkeeping refers to the process of accumulating, organizing, storing, and accessing the financial information base of an entity, which is needed for two basic purposes:
- Facilitating the day-to-day operations of the entity
- Preparing financial statements, tax returns, and internal reports to managers
Bookkeeping (also called recordkeeping) can be thought of as the financial information infrastructure of an entity. The financial information base should be complete, accurate, and timely. Every recordkeeping system needs quality controls built into it, which are called internal controls.
A common question is whether there is any difference between accounting and bookkeeping. We will begin with bookkeeping, since it is essentially a subset of the larger topic of accounting. Bookkeeping is the recordation of basic accounting transactions, such as:
- Issuing invoices to customers
- Recording invoices from suppliers
- Recording cash receipts from customers
- Paying suppliers
- Recording changes in inventory
- Processing payroll
- Processing petty cash transactions
These transactions are mechanical in nature; that is, the bookkeeper follows a prescribed set of procedures on a repetitive basis to record a common activity. These common bookkeeping tasks are entirely adequate for the accounting needs of a small business.
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