– If you are a sole trader, partnership or limited company business, then the maintenance of your
numbers is usually achieved by a combination of
bookkeeping and accounting, for which many would appear
to be one of the same. But there is a clear difference
between the two functions. In this video, we will cover
what exactly is bookkeeping, what exactly is accounting, the difference between accounting records and financial statements, the three key differences between bookkeeping and accounting, and finally, can you do
your own bookkeeping? Before I get in to today's video, be sure to hit that subscribe button as well as the notification bell to make sure you're kept up-to-date with all of our latest content.
This really helps us to
produce more helpful videos, and to get you real quality advice from real qualified accountants. (upbeat music) So bookkeeping is the process
by which a business records its income and expenditure
in an organized format. The person who undertakes this role is known as a bookkeeper. This applies whether you are
a sole trader, partnership, limited company or LLP business. Before computers and software advancements simply find the process,
this was usually done by manually copying transaction details across from the bank statements into what is known as a cash book, which allow the bookkeeper to
categorize the transactions by type, before recording a monthly or weekly total for each
income and expense type.
This process would usually be repeated for different bank accounts
and any petty cash expenditure. The bookkeeping process was, and sometimes still is
a time consuming process which requires a methodical approach. To understand the difference between bookkeeping and accounting, we also need to take a look
at the accounting process. Although there is a single
entry cash book system for simplistic financial affairs, bookkeeping normally uses
a double entry system using debits and credits. This includes a ledger system and the use of journal entries. Before we continue with today's video, we're thrilled to be launching the Accounting and Tax Academy
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it's absolutely free to join. Head to the link in the
description box below to find out more. (upbeat music) Accounting is the process
of taking the numbers which have already been
organized by the bookkeeper, and presenting them using
standard accounting principles, and a format that is
suitable and understandable to stakeholders of the business.
Stakeholders of a business
normally start with HMRC, the tax man, as they
are often the creditor. In other words, a body or
business that will own taxes too. If you are a limited company, then companies house too, as your business will have a mandatory
compliance requirements. And as your business grows, stakeholders could include partners, private investors, other creditors, employees, clients, and so on. Accounting will involve
a good understanding of accounting standards
that determine how numbers and information needs to be
presented within the accounts, and will usually require the accountant to make a series of
adjustments to the accounts known as accounting entries.
When trying to understand the
need for accounting entries, it is good to remember
that there are a number of transactions that may not
appear on the bank statements, but still need to be represented in the financial statements. A few examples include,
asset depreciation, home office allowances,
provision for tax liabilities, accruals and prepayments. This is the process of
moving income and expenses from the accounting period
they were actually paid, into the accounting period
they actually relate to. It is also the job of the accountant to make the numbers more
understandable for the end user. This is usually done by
providing comparative numbers from the previous periods
that allow the reader to see where the business is doing well, and where it is not, as
well as giving commentary in the form of notes that
give further context.
This could be along the lines of administrative expenses for the year ending 31st of December, 2021 have increased 15% over the prior year. This is a result of replacing
small office equipment where the costs were not capitalized. These notes give the end user
a much better understanding of what's happening in the business, and assist them to
interpret the base numbers. In the UK, at least, accountants
need to also consider in what format HMRC required
the numbers to be presented. And when preparing accounts
for limited companies they will also need to consider
companies house as well. (upbeat music) The two terms are often
assumed to mean the same.
However, this is not the case. Accounting records is a general term which refers to paperwork
that support the numbers. This could refer to expense receipts, customer invoices, supplier
invoices, and bank statements as well as manual calculations
prepared by bookkeepers, and sometimes accountants. The financial statements
often referred to as accounts are the result of
compiling all the numbers from the accounting records, and presenting them in
a digestible format.
The financial statements usually cover a set period of time, normally 12 months, and can be used for both
internal or external uses. Financial statements for external use will usually need to be
paired in a particular format, which we will explore later. (upbeat music) Now, there are definitely
more than three differences between the two functions. However, we've summarized what we feel are the top three differences. Number one, the objective of bookkeeping is mainly of data entry and
the processing of raw data from source material such as your business
bank account transactions, whereas accounting is the adjusting of the already processed data to a standard and format
that is digestible, and acceptable for compliance purposes and third-party users.
Bookkeeping is the start of the process, and accounting begins where
bookkeeping normally ends. The accounting function cannot operate without the bookkeeping being completed, as it first needs the data to be organized in a way that can then be
adjusted and made presentable. Number two, bookkeeping tends
to organize the numbers more for internal preparation for the business owners and management, and is not necessarily
geared towards assisting you, the business owner
with decision-making. Accounting, on the other
hand, is often focused more on presenting the numbers
for external users for a true and fair view, such as company's house, HMRC investors, and your bank, and practically
any other stakeholder or interested party.
And it is normally geared
towards helping you, the business owner and
management to make decisions. And finally, number three,
accounting is generally regulated by the accounting bodies,
such as the ACCA and ICAEW here in the UK, and
requires specialist skills, training and qualifications. Whereas bookkeeping can be
done by good technicians who don't necessarily need to be qualified or regulated by a relevant body, and you could even do it yourself. (upbeat music) In short, yes you can. There's nothing to actually stop you. With powerful modern accounting software, such as Xero or QuickBooks, it gives you, the small business owner, the ability to do it yourself.
In fact, many of these software are becoming more intelligent and the software providers
themselves market their product towards a non-accountant, that
is you, the business owner. However, let me throw
in a word of caution. If I were to use an analogy,
there's nothing to stop you from changing the oil and
filter on your own car, or climbing up a ladder and cleaning out the
gutters in your own house. But any activity comes with its own risks and opportunity costs. If you change the oil and
filter of your own car and make a mistake along the way, or don't have the necessary tools to carry out the job effectively, then there could be consequences, not to mention the time, effort, and perhaps financial
cost you have expended. And certainly, if your
business starts to grow, the bookkeeping function
will need more time, energy and attention.
So, as a final thought,
always think carefully about how much your time and
energy is actually worth. (upbeat music) I hope this video has
helped you understand some of the key differences between bookkeeping and
accounting in a bit more detail, and taking you one step closer
to knowing your numbers. As always, let me know in the comments, your thoughts on today's video or if there are any topics you'd like us to cover in the future. Finally, be sure to like and subscribe, as this really does help us
to get our content out there.
This is Tony Dhanjal for the
Accounting and Tax Academy, thanks for tuning in. (upbeat music).