First, an extremely brief and incomplete history of accounting.
Accounting has been around for millenia. Even before money flowed through the world, barter and trade transactions were recorded. In ancient Mesopotamia, when things of value exchanged hands, people marked these trades with clay tokens. They were keeping the books.
The practice of bookkeeping matured and spread in the Roman Empire. In fact, we still use Latin words for the most basic financial terms. Credit means “he trusts,” and debit means “he owes.”
More years pass until, finally, our Italian friend Luca Pacioli cemented modern accounting practices in 1494. He published a book that captured how almost everyone was managing their accounts at the time, a technique we still use today. Thus an industry standard was born!
And yet… even though bookkeeping and accounting have existed since ancient human civilizations, since before we knew the Earth was round, we’re still unclear about what the two practices actually are!
The difference between accounting and bookkeeping
The words “bookkeeping” and “accounting” are used interchangeably, but they refer to two distinct functions. Both exist in the financial arm of the business, and they’re certainly closely tied, but bookkeeping and accounting are not one and the same.
Bookkeeping is just one part of accounting, and bookkeeping comes first. Some describe it as the foundation of accounting, the necessary groundwork.
You could also describe it using a culinary metaphor. A bookkeeper is the sous-chef to the accountant, sorting and preparing all the material so the accountant can apply her expertise and produce the finished product — in this case, a financial report rather than a five-course meal. :)
But let’s talk about it in the literal sense, shall we? That’s why you’re here.
Bookkeeping is the practice of carefully recording all financial transactions in a business. “Book” refers to accounts, so bookkeeping is essentially maintaining accurate records or every account. The official name of this record is a “ledger” (or as Pacioli might have called it, the quaderno). There the bookkeeper keeps record of invoice details, payments from customers, and payments to suppliers or vendors.
With clear, organized records of how the money flows into and out of a business — with proper ledgers or well-kept books — the work of accounting can be done.
For some advice on keeping those ledgers in order, check out these hacks for small business bookkeeping.
Accounting is the practice of analyzing, interpreting, and summarizing a business’ financial data. If bookkeeping is the recording, then accounting is the reporting, taking the ledgers and turning them into meaningful business information.
Accounting dictates how your business processes cash flow, revenue, payroll, loans, leases, and losses. Intangible assets, insurance, and income taxes — all of these are under the accounting umbrella!
Some bookkeeping and accounting practices will change depending on your business model. Of course, a subscription business has a different revenue pattern than straightforward, one-and-done retail. So there are specific accounting concepts designed for SaaS or any recurring-revenue model business. Specifically, the accrual accounting method is recommended for SaaS and subscription businesses, and indeed required of most medium- to large-sized businesses of any kind.
Accounting standards around the world
Anything you do related to accounting should be a controlled procedure, consistent over time. It will fall into one of two accounting methodologies: the International Financial Reporting Standards (IFRS) or the Generally Accepted Accounting Principles (GAAP). You, and every other business, are expected to comply with one or the other.
Why so heavily regulated? While bookkeeping records usually serve an in-house function, accounting can produce financial statements that serve outside the business, too. Accounting, like any other calculation or measurement, must be standardized in order to be reliable. In a lot of ways, accounting is how we measure the economy at large.
Government auditors will take a look at the accounting of a business to check that everything is legal and above board. If you have a startup or any company that might seek investments in the future, potential investors will want to see your books to understand how to value your business. In the United States, businesses listed on the stock exchange must file regular financial statements according to GAAP.
So it’s all about following the rules!
Take a peek at some common accounting mistakes that could risk a business, educate yourself on the accounting standards in the countries where you sell, and make sure you’re on top of everything.
Make bookkeeping and accounting easy
Most business owners don’t have the time (or, let’s be honest, the desire) to figure out how to meticulously keep their own books and do their own accounting. Most business owners also can’t afford a certified accountant to complete the work for them.
Thanks to technology, we now have software that automates all bookkeeping and even produces instant financial statements. Quaderno is exactly this solution. (Here, Quaderno means our accounting & tax management app, not the old-school ledger Pacioli talked about!)
With every sale, a customized invoice is sent automatically, with the appropriate amount of sales tax. The customer’s information and payment are recorded automatically. Even if you sell in multiple places on the internet, Quaderno brings all of your revenue channels together and displays your business data on one easy-to-view dashboard. With every tax season, you can generate a full financial statement in just the click of a button.
Our goal is to save you time and headaches so that you can get back to the business that you love. (You never wanted to be an accountant, anyway!) Sign up for our free trial and see what you think.