Interconnected Roles of Accounting and Bookkeeping
Bookkeeping and accounting are both processes of keeping records of business financial transactions, but there are differences and relationships between them. Bookkeeping is the collection and storage of information at the initial stage of transactions, and accounting is the analysis, interpretation and reporting of this information.
Relationship of Bookkeeping and Accounting:
Foundation for Accounting: Bookkeeping is the proper recording of daily financial transactions. Accounting functions are based on this information gathered through bookkeeping, such as creating ledger accounts, preparing trial balances, and preparing financial reports.
Example 01: In bookkeeping every transaction of purchase and sale of goods is recorded. Later these data are analyzed through accounting and profit and loss is calculated.
Initial and Final Stages: Bookkeeping is the process of initial recording of financial transactions, where each transaction is first recorded in a journal. Accounting is the final step, where these recorded data are analyzed and financial reports are prepared.
Example 02: A bookkeeper records the information about sales, purchases, expenses etc. in a journal. Then in the accounting process, the accountant uses this information to prepare the Income Statement, Balance Sheet and Cash Flow Statement.
Relationship of Trial Balance and Financial Statement: Ledgers are prepared through bookkeeping, from which trial balance is prepared. Trial balance is the initial stage of accounting. The financial report is then prepared based on the trial balance, which is the final step in accounting.
Example 03: Purchase, sale, expenditure etc. of goods are recorded through bookkeeping. In the accounting process ledgers are created, from which trial balances are created and financial statements are prepared using that.
Daily Operations vs Analysis: The function of bookkeeping is to accurately record the day to day transactions. Accounting works by analyzing these recorded transaction data, through which financial conditions can be interpreted and future plans can be made.
Example 04: In bookkeeping a bookkeeper keeps a record of electricity bill payment of $5,000. The accounting process analyzes that information to determine cost, profit, and balance sheet effects.
Examples of bookkeeping and accounting:
Bookkeeping Examples:
XYX Co. purchased a machine on January 1, 20XX for $10,000 and cash is paid. Bookkeeping: this transaction would be recorded in the journal:
Bookkeeping Entries: Date Particulars Debit ($) Credit ($)
——————————————————————-
01/01/20XX Machinery A/C Dr. $10,000
To Cash A/C Cr. $10,000
(Narration: Purchased machinery for cash)
Accounting Examples:
After this transaction is recorded through bookkeeping, it will be transferred to the ledger in the accounting process and later added to the trial balance. The accountant will then use this information to analyze the total assets and cash position of the business and create a balance sheet.
Reflection in Balance Sheet: Assets:
– Machinery: $10,000
– Cash: Reduction: $10,000
Key Differences between Bookkeeping and Accounting:
|
Book keeping |
Accounting |
|
A primary record of the transaction is kept |
Analysis and reporting of recorded data is done. |
|
Journals and ledgers are created. |
Financial statements (income statement, balance sheet) are prepared. |
|
Focuses on daily activities. |
Analyzes and evaluates the financial condition of the business. |
|
It is usually less complicated |
It is more complex and requires detailed analysis. |
Bookkeeping and accounting complement each other and help in making the entire process of business financial transactions efficient and accurate.
More Resources
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