Theoretical Framework of Accounting

Bookkeeping

Recording of financial transactions in a proper manner related to the business operation of an entity is known as bookkeeping. Bookkeeping is the permanent recording of financial transactions in a proper manner in the books of accounts of an entity so that their financial effect on the business of entity can be seen. There is a difference between the two terms bookkeeping and accounting

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Bookkeeping and Accounting

Book-keeping and accounting are different from each other. Bookkeeping is an important part of accounting. Accounting is broader than book-keeping. Accounting includes a design of accounting systems which book-keepers use for the preparation of financial statements, audits, cost studies, income-tax statements, etc.

It also facilitates the interpretation of accounting information for both internal and external users for business decisions making. It requires skills and experience of an accountant.

There is a difference between the two terms bookkeeping and accounting, let us understand what is bookkeeping and accounting, their processes and difference between the two.

While doing Bookkeeping, we need to follow the basic accounting concepts and accounting conventions.

Bookkeeping is clerical in nature. Book-keeping is usually done by junior employees of the entity. Most of the entities nowadays use computers for bookkeeping rather than recording them manually. Accounting of an entity depends on its book-keeping system.

Book-keeping is the basis for accounting. It is because it is responsible for the proper recording of financial transactions. Whereas, Accounting involves classification, summarizing and reporting of financial transactions. It involves the preparation of source documents for all the financial transactions of the entity.

Process of Bookkeeping

  1. Identifying financial transactions
  2. Recording of financial transactions
  3. Preparation of ledger accounts
  4. Preparation of trial balance

what is bookkeeping and accounting

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Accounting

Accounting includes recording, classifying, summarizing financial transactions in a proper manner. It deals with common monetary measurement. It is thus a broader concept than bookkeeping. Bookkeeping is a part of accounting.

Only financial transactions which can be expressed in terms of money are recorded. Thus, accounting enables stakeholders to know the financial position of an entity for the period. It is concerned with summarizing of the recorded financial transactions. Also, it enables management to prepare various types of reports.

Process of Accounting

  1. Identifying financial transactions
  2. Recording of financial transactions
  3. Preparing ledger accounts
  4. Preparation of trial balance
  5. Preparation of financial statements
  6. Analysis of financial statements

Solved Example onĀ Bookkeeping and Accounting

Question: There is a difference between the two terms bookkeeping and accounting

Ans. The difference between bookkeeping and accounting is as follows:-

  1. Bookkeeping is concerned with the recording of financial transactions whereas accounting involves recording, classifying and summarizing financial transactions.
  2. Bookkeeping is clerical in nature and usually is the junior staff performs this function whereas accounting requires skills of accountant and knowledge of various accounting policies.
  3. The Bookkeeping is the base for accounting. Accounting starts where the bookkeeping ends and is thus broader in scope than bookkeeping.
  4. Bookkeeping is in accordance with the accounting concepts and conventions. Whereas, the accounting methods and procedures for analyzing and interpreting the financial reports may vary from entity to entity.
  5. Financial statements do not form part of bookkeeping. Thus, these are prepared from the accounting process.
  6. The accounting reports help in ascertaining the financial position of an entity, however not bookkeeping records.
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