While both accounting and bookkeeping are essential to any startup, you’d be hard pressed to find someone who can articulate the difference between the two. Though both share common goals, it’s important to distinguish between the two in order to understand how each supports your startup at different stages of the financial cycle.
To help you better understand the difference between bookkeeping and accounting, we’ve broken down the primary function of each. We’ve also outlined when both are necessary for the growth and success of any business.
The Function of Bookkeeping
Put simply, bookkeeping is the consistent recording, storing, and retrieving of daily financial transactions for a company, non-profit, individual, etc.. Of these responsibilities, perhaps the most important is maintaining the general ledger. A general ledger is a document that bookkeepers use to record the amounts from sale and expense receipts. This process can be done with paper, a spreadsheet, or specialized software. In short, bookkeeping can be summed up as the recording of financial data—a process that is largely systematic.
The Function of Accounting
On the other hand, accounting is a far more subjective process. At its core, accounting is a high-level process that takes financial information and produces financial models based on that data. In other words, accounting takes the information from a bookkeeper’s (or business owner’s) ledger and uses it to reveal the bigger financial picture. This is necessary for startup founders to better understand their profitability and cash flow, strategic tax planning, and forecasting the financial future of the business.
Why You Need Both
Ultimately, it’s clear that bookkeepers are primarily responsible for identifying, measuring, and recording financial transactions. On the other hand, accountants are focused on summarizing, interpreting, and communicating financial transactions. While these roles are very different, the two are highly interconnected. Without the meticulous records kept by bookkeepers, accountants could not produce their analytical evaluations and interpretations. Similarly, bookkeepers depend on the accountants to provide them with a clear idea of what information must be logged and the proper structure for keeping records.
As a result, many successful startups rely on both to keep their records organized and to direct their financial strategy. Of course, some small startups do learn to carry out some of these roles themselves, but when in doubt, you can never go wrong with a professional.