Accounting versus Bookkeeping

Bookkeeping involves the recording of business transactions. It is a rather mechanical process and does not demand the financial training and insights of accounting. Bookkeeping is an important part of accounting, but accounting goes far beyond the mere recording of data. Accountants classify and summarize the data provided by bookkeepers. They interpret the data and report them to management. They also suggest strategies for improving the financial condition and progress of the firm. Accountants are especially valuable for income tax preparation and financial analysis.

Now that you have some understanding about what accountants do and for whom they do it, we can get down to the fundamental aspects of bookkeeping and accounting. Accounting involves the gathering and recording of transactions (for example, the sale of merchandise, the payment of a bill, or the receipt of merchandise into storage), and the periodic preparation of financial statements that summarize those transactions.

What Bookkeepers Do

If you were a bookkeeper, the first task you would perform would be to divide all of the firm’s paperwork into meaningful categories. Those categories would probably include the following:

♦ Sales documents (sales slips, cash register receipts, and invoices).

♦ Purchasing documents.

♦ Shipping documents.

♦ Payroll records.

♦ Bank documents (checks, deposit slips).

♦ Various expense documents.

If you collected all this information, you would have several piles of papers, much like the piles that are generated in the preparation of income tax forms. If this information is not compressed somehow, it will become too unmanageable. Therefore, the bookkeeper must begin to record the data from the original transaction documents (for example, the sales slips) into record books called journals. Journals are the books where accounting data are first entered. The term journal comes from the French word jour, which means day. A journal, therefore, is where the day’s transactions are kept.

So a bookkeeper is busy keeping the books of account of a business, recording a profit and loss account and compiling the balance sheet.

Exercise 4 Answer the following questions on the text.

1. What does accounting involve? 2. What is a transaction? Which ways can they be recorded? 3. What groups can transactions be classified? 4. What is the accounting system? 5. What are the purposes of accounting? 6. What is the difference between profit and non-profit organizations? Give some examples of non-profit organizations. 7. What two types of accounting are mentioned in the text? 8. What do accountants do with the information provided by bookkeepers? 9. What categories can all the firm’s paperwork be grouped into? 10. Why is it important to record the data from the original transaction documents? 11. What is a journal in accounting? What is the origin of the word?

Exercise 5 Say if these statements true or false.

1. Transactions include only selling of goods and services. 2. Nowadays transactions are recorded only by hand. 3. All transactions are classified into groups of common characteristics. 4. An accounting system is the method of recording and summarizing information. 5. Accounting information is only used for internal users. 6. Accounting records the information only about profit organizations. 7. Bookkeeping and accounting are two independent spheres of economics. 8. It is a usual practice for any firm to divide all paperwork into groups. 9. It is more convenient to record financial events from copies, not from original documents.

Exercise 6 Make notes on the following:

- the definition of the term ‘accounting’

- difference between accounting and bookkeeping

- types of transactions