When most people think about bookkeeping and accounting, they would be hard-pressed to describe the differences between each process. While bookkeepers and accountants share common goals, they support your business in different stages of the financial cycle.
Bookkeeping is more transactional and administrative, concerned with recording financial transactions. Accounting is more subjective, giving you business insights based on bookkeeping information.
Bookkeeping is the process of recording daily transactions in a consistent way and is a key component to building a financially successful business.
Recording financial transactionsPosting debits and creditsProducing invoicesMaintaining and balancing subsidiaries, general ledgers, and historical accountsCompleting payroll
The complexity of a bookkeeping system often depends on the size of the business and the number of transactions that are completed daily, weekly, and monthly. All sales and purchases made by your business need to be recorded in the ledger, and certain items need supporting documents.
Accounting is a high-level process that uses financial information compiled by a bookkeeper or business owner, and produces financial models using that information.
The process of accounting is more subjective than bookkeeping, which is largely transactional.
Preparing adjusting entries (recording expenses that have occurred but aren’t yet recorded in the bookkeeping process)Preparing company financial statementsAnalyzing costs of operationsAiding the business owner in understanding the impact of financial decisionsPreparing budgets and financial models
The process of accounting provides reports that bring key financial indicators together. The result is a better understanding of actual profitability, and an awareness of cash flow in the business. Accounting turns the information from the ledger into statements that reveal the bigger picture of the business. Business owners will often look to accountants for help with strategic planning, financial forecasting, and tax preparation.
The bookkeeper role vs the accountant roleBookkeepers and accountants sometimes do the same work. But in general, a bookkeeper’s first task is to record transactions and keep you financially organized, while accountants provide consultation, analysis, and are more qualified to advise on financial matters.
Not to worry- UltraPrecise Bookkeeping gives you both!
The difference between cash and accrual accounting lies in the timing of when sales and purchases are recorded in your accounts. Cash accounting recognizes revenue and expenses only when money changes hands, but accrual accounting recognizes revenue when it's earned, and expenses when they're billed (but not paid). Its all about timing!
The Cash MethodRevenue is reported on the income statement only when cash is received. Expenses are only recorded when cash is paid out. The cash method is mostly used by small businesses and for personal finances.
The Accrual MethodRevenue is accounted for when it is earned. Typically, revenue is recorded before any money changes hands. Unlike the cash method, the accrual method records revenue when a product or service is delivered to a customer with the expectation that money will be paid in the future. Expenses of goods and services are recorded despite no cash being paid out yet for those expenses.
Both methods have advantages and disadvantages.
The Cash MethodThe advantages of the cash method include its simplicity since it only accounts for cash paid or received. Tracking cash flow of a company is also easier with the cash method.
A disadvantage of the cash method is that it might overstate the health of a company that is cash-rich but has large sums of accounts payables that far exceed the cash on the books and the company's current revenue stream. An investor might conclude the company is making a profit when, in reality, the company is losing money.
The Accrual MethodThe advantage of the accrual method is that it includes accounts receivables and payables and, as a result, is a more accurate picture of the profitability of a company, particularly in the long term. The reason for this is that the accrual method records all revenues when they are earned and all expenses when they are incurred.
The disadvantage of the accrual method is that it doesn't track cash flow and, as a result, might not account for a company with a major cash shortage in the short term, despite looking profitable in the long term. Another disadvantage of the accrual method is that it can be more complicated to implement since it's necessary to account for items like unearned revenue and prepaid expenses.
The Bottom LineThe accrual method is most commonly used by companies. One reason for the accrual method's popularity is that it smooths out earnings over time since it accounts for all revenues and expenses as they're generated instead of being recorded intermittently under the cash-basis method.
While the accounting system and financial reporting method you choose for your small business is ultimately a management decision, it also depends on your business goals, the resources you have available, and your organization’s financial requirements.
Unless your company makes more than $25 million in gross annual sales, you’re free to adopt whichever method makes more sense for you.
However, keep in mind that the IRS requires companies to use and maintain the same accounting method to report taxable income for a year — so no changing halfway through the tax year.
UltraPrecise can support both methods!