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Accounting vs Bookkeeping: Differences and Similarities

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  • 0:06 Bookkeeping
  • 2:19 Accounting Defined
  • 4:49 A Note About Technology
  • 5:24 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
The terms accounting and bookkeeping are common place in the business world. However, there's often confusion about the difference between these two terms. In this lesson, you'll learn the difference between accounting and bookkeeping.

Bookkeeping

Beth is a bookkeeper for a small mom-and-pop restaurant. Bookkeeping is the collection, sorting and recording of the financial transactions of a business. Beth records all the sales transactions and all the expenses incurred by the restaurant on a daily basis. We'll discuss how this data is used a bit later on. Beth follows a series of steps making up a bookkeeping process. Let's take a quick look at the steps.

First, Beth will collect and sort all of the source documents for each financial transaction undertaken by the restaurant. Source documents are the evidence that the financial transaction has occurred and include such things as receipts and invoices.

Second, Beth will record the relevant data from each source document. Beth will make an entry into the company's general journal, which is a chronological list of financial transactions. Recording transactions in the general journal is generally done on a daily basis.

Third, at the end of each month, Beth will post the financial transactions recorded in the general journal to the general ledger. The general ledger is arranged by account. The company's accountant has set up a chart of accounts, such as payroll accounts, supplies, utilities and food and beverage accounts, just to name a few.

Since Beth's restaurant uses double entry accounting, she must make two entries for each financial transaction - a credit and a debit. A credit in one account requires a debit in another account to keep the ledger in balance. For example, if the restaurant buys $1,000 worth of beef, Beth will debit the appropriate asset account and credit the supplier's account.

Fourth, at the end of each accounting period, such as a month, quarter or year, Beth will prepare an adjusted trial balance. She'll ensure that the general ledger balances, which means total debits equal total credits. If they don't balance, she'll find out why and make the appropriate corrections.

Accounting Defined

Arnold is an accountant for the restaurant where Beth is employed as a bookkeeper. While many accountants work 'in house' as employees, Arnold is not an employee of the restaurant. He's a certified public accountant (CPA) that owns his own accounting firm. He was hired by Beth's restaurant to perform accounting services.

According to the American Accounting Association, accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of the information. This definition may sound very close to what bookkeeping is, and you are right. Bookkeeping is part of the accounting process. Bookkeeping involves the recording of financial data taken from businesses' financial transactions. Accounting begins before bookkeeping starts and continues after it ends.

When Arnold was hired, he assessed the nature of the restaurant's business from a financial perspective. He then designed an appropriate accounting system for Beth to use. He set up a general journal where she will record transactions in the order they occur. He also set up a chart of accounts and a general ledger. Accounts consist of a chronological listing of changes in the value of an asset, liability or owner's equity. For example, an inventory account may increase or decrease in value depending on whether more inventory is purchased, sold or used. He also developed rules and procedures to guide Beth in the use of the records and will be available to provide direction to Beth as needed.

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