What is the difference between bookkeeping and accounting?

by Adarsh Raj Bhatt in

Image credit: Pexels

Key Takeaways

  • Bookkeeping is a component of the accounting system as a whole. In fact, bookkeeping is the foundation for accounting. Accounting prepares financial documents and statements based on the data provided by bookkeeping. 
  • Accounting differs from bookkeeping in that it begins where bookkeeping ends and has a greater scope. The goal of bookkeeping is to preserve chronological documentation of financial activity and transactions. Accounting's objective is to evaluate a company's financial health and to project the outcomes of its operations. Accounting also ensures your startup's compliance with federal regulations.
  • Bookkeeping is important for several reasons: it assists startups in creating accurate budgets, ensures that you are tax-ready, organizes records properly, makes it simpler for business goals to be realized, and provides founders with additional peace of mind. 
  • Accounting also has its own range of benefits: it ensures accuracy of your tax returns, it’s important for raising capital, it helps evaluate new strategies, it manages compliance, and it helps founders understand their startup’s financial health.
  • Virtual bookkeepers handle daily financial responsibilities including documenting transactions, balancing bank or credit card transactions, and processing payroll, much like conventional on-site bookkeepers. The main distinction is that a conventional bookkeeper must be physically active in your office to carry out these duties, but a virtual bookkeeper may do so by employing cloud-based software from anywhere.

What is bookkeeping? 

Bookkeeping oversees the daily financial transaction of a startup. It ensures that all financial transaction records are accurate, updated, and complete. As a result, accuracy is critical to the whole procedure. Accounting is based on the data provided by bookkeeping. Thus, bookkeeping falls under the umbrella of accounting.

Every transaction, whether it’s a purchase or a sale, needs to be documented. "Quality controls," as they are known in the bookkeeping world, are in place to guarantee accuracy of records.

What is accounting?

The systematic collection, analysis, interpretation, and presentation of a startup’s financial data are known as business accounting. Accountants examine the financial statements of a startup so that the founder may make more effective choices. This data is then arranged into reports that reflect a startup's financial health. That’s not all. Accounting assists founders in meeting their legal responsibilities. It also assists them in making sound financial decisions.

Why is bookkeeping important? 

Bookkeeping aids in budgeting, preparing tax returns, the management of your startup, and much more. This is something that you shouldn't put off if you really want to have your finances in order and stop the IRS from causing you extra headaches along the way. 

Here are 5 reasons why bookkeeping is crucial to your startup's success:

Assists Startups in Creating Accurate Budgets

Every startup needs bookkeeping since it makes budgeting so much simpler. It's relatively straightforward to evaluate your economic means if you've correctly structured your income and expenditures. Your startup's financial path is created by a budget. This is because you can prepare for future investments for your startup if you have a budget in place. 

And it's far more difficult to establish an accurate budget if you don't maintain accurate and up-to-date records, otherwise, the budget is founded on mostly speculation.

Ensures that you are tax-ready

Businesses must submit their taxes at the end of the fiscal year and you'll have financial data prepared for tax season if your startup has a solid bookkeeping system in place. This ensures that the tax department won't be hovering over you, keeping you distracted from the core business ops that matter.

Organizes Records Properly

Last-minute stress from looking for a critical piece of business documentation might result in missed deadlines and minor blunders. Your startup simply can't afford to make such mistakes, and consistent bookkeeping can help prevent this. Organized records and staying on top of tax filing deadlines will prevent any last-minute snafus.

Makes it Simpler to Realize Business Goals

Every startup wants to expand but inadequate financial records might prevent this from happening as quickly as you'd like. It's difficult to hit most growth targets when you don't have any precise numbers or data to assess. You can more precisely sketch out your business objectives and better accomplish the expansion you seek by staying on top of your finances and maintaining consistent financial records.

Provides you with additional peace of mind

You can relax knowing that your startup's financial records will stand up to scrutiny and that you won't have to worry too much about IRS audits. You will be able to better concentrate on other aspects of your startup.

Why is accounting important? 

There’s No Way Around it

Taking care of your startup's accounting isn't really an option. Your startup must have an accounting mechanism in place, regardless of how you handle it (e.g., outsourcing, using software in-house, etc.). You must implement an accounting structure and system, according to the IRS. Your startup's tax returns will be incorrect if you don't have these in place. And everyone knows what that entails -- audit red flags and fines from the IRS. You might have to comply with a set of accounting rules, termed “generally accepted accounting principles” (GAAP), besides maintaining accurate records.

Important for Raising Capital

Before investing in your startup or lending you capital, investors and banks need to learn a lot about your startup, and that entails delving into your startup's accounting information. Typically, businesses must present corporate accounting records to investors and lenders, who will be able to learn about your profitability -- along with other aspects of your operations. Your accounting information, financial projections, and claims of growth/success will be inaccurate and unsupported if your accounting records are unstructured.

Evaluate New Strategies

Founders usually undertake a risk assessment before making a change in their startup. They can then decide if taking that risk will help or harm their startup. But what happens after the risk? Don't businesses want to think about the consequences of taking a risk (or making changes) after they've already gone through with it? 

Accounting helps with this. We already have the figures for the startup's expenditure and profits prior to the change. One may then compare these figures to the new figures once they've made the changes. That way, we'll know if the plan benefited or harmed the company. An example of such a risk or change is a pivot.

Holds Startups Accountable

Accounting holds you accountable. Your investors hold you responsible for your startup's performance. They can use your accounting data to track the development and performance of your startup. Accounting can also assist you in holding your employees accountable. Make sure you're up to speed on bank statement reconciliation and trial balances for starters. You'll be able to detect fraudulent conduct before it actually has a significant impact on your company.

Understanding Your Startup’s Financial Health

Which of your customers hasn't paid you yet? Which debts are yet to be paid? You will know precisely how much the accounts receivable/payable are if your business implements accrual accounting. In a nutshell, accounting helps you understand what your startup has been up to financially. It also keeps you well-informed so that you can prepare your tax returns correctly and ethically.

What is the difference between bookkeeping and accounting? 

The words “bookkeeping” and “accounting” are practically interchangeable in the finance industry. These ideas, nevertheless, are not the same. Accounting is concerned with the analysis, evaluation, categorization, reporting, and presentation of a company's financial data, whereas bookkeeping is concerned with the documentation of the financial transactions of the startup.


The information offered by bookkeeping is, by itself, insufficient for making business decisions. On the basis of accounting data, however, the founders/leadership may make significant judgments.

Preparing Financial Statements

Preparing financial reports is not a part of bookkeeping but is a fundamental of accounting.


In bookkeeping, no analysis is necessary. On the other hand, accounting examines the data and generates actionable insights.

Determining a Startup’s Financial Status

Bookkeeping does not reveal a company's overall financial situation. In contrast, accounting aids in presenting a clear picture of a company's financial status.

Learning Level

There is no need for advanced knowledge in bookkeeping. However, understanding and analyzing accounting principles requires education and expertise.

What is virtual bookkeeping? 

Virtual bookkeepers handle daily financial responsibilities including documenting transactions, balancing bank or credit card transactions, and processing payroll, much like conventional on-site bookkeepers. The main distinction is that a conventional bookkeeper must be physically present in your office to carry out these duties, but a virtual bookkeeper may do so by using cloud-based software from anywhere. “Remote” or “online bookkeeping” are other terms for virtual bookkeeping. It's necessary to make sure that any person or product you are entrusting your startup's finances with is dependable, precise, fast, and thorough.

You have the option of hiring a virtual bookkeeper as a full-time or part-time employee, an independent consultant or contractor, or outsourcing the job to a virtual bookkeeping provider. When you use a bookkeeping solution, you have the competitive advantage of working with an entire team of specialists, which brings with it a broader variety of bookkeeping experience and the ability to cover extra bookkeeping duties and financial accounting as needed.

Virtual accounting is a fruitful solution for startups that are capable and willing to go digital and replace actual printed sales invoices with cloud services. There are a plethora of related resources that are available, such as Bill.com for paper-free payments and invoicing, Expensify for workforce compensation, and innovative banking and payment businesses like Brex with inbuilt receipt management solutions and digitalized statements. These solutions make moving your startup's bookkeeping to the cloud simpler than ever.

Final tips -- and some templates

A bookkeeper who is familiar with your startup's financial statements such as monthly reports (e.g., Profit & Loss and Income Statement, Balance Sheets, and Cash Flows) and tax requirements can complete your bookkeeping work quickly and accurately while ensuring that you don't lose money unnecessarily. It might be difficult to locate somebody with the necessary bookkeeping expertise who lives within commutable distance of your workplace, especially if your company has a unique business plan or is in a niche market. 

You may instead pick from a larger selection of bookkeepers and financial services situated anywhere in the world if you deal with a virtual accounting company. You're more likely to discover somebody who has expertise with your unique bookkeeping requirements. 

Here are some templates and resources to get you started.

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