Bookkeeping or Accounting:
What’s the Difference?
The short answer is that bookkeeping is the process of recording transactions in a system of business records. Accounting describes the system, organization, analysis and reporting of information. In other words, once an accounting and reporting system has been designed, a bookkeeper can record business transactions, following established accounting and reporting practices.
For the business owner, is the accounting system designed to function as a business recording and reporting tool and are its processes clearly documented so that personnel changes at the bookkeeper level will cause no disruption in the quality of accounting information and accuracy?
What about Accounting Software?
Regardless of the accounting software used, whether desktop or cloud-based, free or user-pay, the quality of the information produced by the system depends heavily on the design of the General Ledger chart of accounts and the documentation of procedures for recording transactions, including checklists for reporting deadlines and preparation of files at year end for an accountant or tax preparer.
A good accounting system begins with an analysis of the business and the information required to manage it intelligently. A retail business requires a system to capture and classify sales and manage inventory. A manufacturing business needs a system for recording labour and material costs, along with management of raw material and finished goods. A professional services corporation requires a system of recording time allocated to client work, billing and collections and allocation of overhead costs. Each business vocation has its distinct accounting and reporting requirements.
The choice of system software should be made after the accounting and reporting system has been designed and operating procedures have been documented. Frequently, accounting software is purchased or subscribed before the system design has been established, possibly limiting the capability of the system or at least, forcing compromises.
When the time comes to acquire accounting software, the decision will be based on the system design and reporting requirements, along with the practical needs of the business. If the bookkeeper will operate in a fixed office location, producing paper reports for managers in the same locale, a single-user, “desktop” system would be appropriate. If a manager or another bookkeeper will require access to the system, a “multi-user” version of the software will be required.
In a retail or wholesale enterprise, the equipment and software used to capture transactions as they occur, should communicate or interface with the general accounting system, to avoid re-handling information.
Resident or Cloud-Based?
The advantages and disadvantages of in-house or “cloud-based” systems should be considered. The in-house system operates with software and data files residing on an in-house computer. For the most part, access to the system is limited to personnel located in the same building. As the system and files are limited to local users, security is inherently stronger than a cloud or shared-access system.
In a cloud-based system, transactions are recorded, files accessed and reports generated over the internet. This approach requires reliable high-speed internet service, operating at 5 Mbps or better to work efficiently. The advantage of cloud-based systems is that files can be accessed from any computer or mobile device, anywhere. The disadvantage is that the host has control of the software, data files and security. Business owners should consider whether they are comfortable with the host having control over their accounting records and whether the server is physically located in or outside of Canada. The same consideration applies when using a cloud server for backups, a critical function which should be performed daily for accounting systems.
Desktop or in-house software is usually a one-time investment, with an annual fee for software updates and upgrades. Cloud systems are usually sold on a monthly or annual subscription basis. While the periodic payment system does not require a significant one-time cash outlay, access to the system and company records lasts only as long as payments are made.
The Final Decision:
Clearly, there is a preferred sequence of events in selecting an accounting system and a number of important decisions to be made regarding appropriateness to the company’s way of conducting business and the degree of flexibility and security required. Frequently, the smartest, most economical approach is to engage the help of a qualified accounting professional or consultant.