Last updated on March 11th, 2013 at 03:38 pm

Bookkeeping and Accounting – What is the Difference?

As a small business owner you may be confused about the difference between the different types of bookkeeping and accounting, after all if you are keeping the financial books are you not doing the accounts?

Bookkeeping and Accounting

Both bookkeeping and accounting are of vital importance to the financial success of any business and may be carried out by the same person or by different people.

Bookkeeping is an important part of the accounting function and is the name given to the record keeping of the financial transactions, ie making a note of the money received and spent by the business.

Accounting, while incorporating the record keeping (bookkeeping)  also includes the presentation, interpretation and the financial control functions including interpreting the numbers that show the financial health of a business (the profit or loss made in the month/quarter/year).

Bookkeeping stems from the recording of financial transactions in a book or ledger, although now days it is more likely to be on a spreadsheet or done using bookkeeping software.

The task of a bookkeeper (which some businesses decide to outsource to bookkeepers or their accountants) is to record the the sales, purchases and cash/bank transactions. All small businesses do bookkeeping, or else how would they keep track of income and expenditure? Many then use the bookkeeping records as a basis for an accounting function to generate financial reports.

There are two main methods of bookkeeping and which is used tends to be dependent on the size and type of the business.

Double Entry Bookkeeping

This is mainly used by medium and larger businesses. The name double entry comes from the fact that every transaction has a double effect on the business ( comprising a debit and a balancing credit) as the simple examples below demonstrate :-

• A sale is made. For example, a customer buys a product and pays by cheque, this transaction results in your bank account being increased and the value of your stock being decreased.
• A sale is made on account.  In this case the transaction results in the debtors account (anyone that owes you money is called a debtor) being increased and the value of your stock being decreased.  This differs from the example above in that your bank account is not increased (you have not been paid yet).
• A customer pays an outstanding invoice.  In this case the transaction decreases the debtors account (remember in the example above we increased the debtors account) and increases your bank account.
• A purchase is made. For example, you buy a box of paper for your printer using money from your petty cash box, even though there is only one purchase, the transaction results in two accounts in the bookkeeping system being affected. In the above example the cash account balance would be reduced to show the amount of the purchase (your petty cash balance has gone down) and the stationery account would be increased to show that money has been spent in this category.
• A third type of transaction may be transfer of money between your bank account and your cash account – the petty cash box needs topping up.  The bookkeeping transactions in this case is a debit to the bank account and a credit to the cash account.

An advantage of double entry bookkeeping is that since every financial transaction has an equal and opposite entry in the books there has to be a mathematical check that both sides of the transactions add up to zero. This process is called a trial balance where both sides of the entries should be in agreement and is often the point at which the bookkeeping process is deemed to be complete.

Double entry bookkeeping is required for all businesses that require to produce a statement of its assets and liabilities (e.g. Ltd companies that have to produce annual accounts) . This statement of assets and liabilities is the total of all the balances from the trial balance and is called a balance sheet.

 Single Entry bookkeeping

Here in the UK the production of a balance sheet is optional for every self employed business (sole traders)  as it is not needed to complete the self assessment tax return form. A sole trader’s bookkeeping system doesn’t have to produce a balance sheet because the business effectively belongs to the owner and is that owners personal business and money for tax purposes.

Single entry can be as simple as making a list of the sales income and the purchase expenses. Such a bookkeeping system is often easier for the the smaller business owner as it requires little or no bookkeeping or accounting knowledge. This means that sole traders can produce their own accounts without the need for a bookkeeper or accountant particularly if they have access to either bookkeeping software or a spreadsheet.  Having said that you may decide that you would prefer to use an accountant to carry out your bookkeeping as they may be able to advise you about tax savings and other ways to save money.

If you do not have an accountant there are several ways to find them including this directory of local accountants, or this accountants blog that lists many accountants in different areas.  Alternatively you might find what you are looking for on our accountants for small businesses page.