When you first get started in a small business, you may hear the terms bookkeeping and accounting thrown around almost interchangeably. However, these terms do not mean the same thing. Small businesses have both bookkeeping and accounting functions.
Bookkeeping is the process of the record-keeping of all financial transactions of the company. Bookkeepers record the sales, expenses, and cash/bank transactions of the company. In a company that uses double-entry bookkeeping, an example of a double-entry transaction is a sale of an item to another organization which generates a sales invoice. That entry generates another entry which is the debt the other organization owes to the company.
The accounting function prepares a record of the financial affairs of the company. Accounting also includes the interpretation of the numbers prepared by the bookkeeper to determine the financial health of the firm. It also includes the presentation and financial health and control functions of the company.
In most businesses, the bookkeeping clerks operate under the accountant. In small businesses, the accountant may be the owner or Chief Financial Officer (CFO) or the accounting function may be outsourced. In some small businesses, both the bookkeeping and accounting functions are both outsourced.
Even if you, as a small business owner, outsource either or both your bookkeeping and accounting functions, it’s important that you maintain some understanding and control over both of them yourself. You need to understand the process of bookkeeping and accounting in your company.