In the commercial and financial world, the terms ‘bookkeeping’ and ‘accounting‘ have been used interchangeably and this has created practical confusion. However, both of these words denote two related though different essential activities necessary for the appropriate control of financial performance.
This blog explores the fundamental distinction between bookkeeping and accounting with reference to the Indian legal and financial framework. These will be discussed individually on their functionality, essential components, and importance, with a focus on the roles of Indian laws and regulations.
Introduction
Bookkeeping and accounting form the backbone of this financial management system because, in India, which ranges from small proprietorships to multinational corporations, keeping correct financial records is not only a best practice but also a legal necessity.
Bookkeeping is, therefore, the systematic recording of such financial transactions. Accounting goes just one step further by analytically summarizing and interpreting the data.
There is a very thin line between these concepts. By understanding the difference between bookkeeping and accounting, we will be able to know their function, process, and importance in the business organisation while maintaining financial records.
Understanding the terms Bookkeeping and Accounting
These two concepts are useful for various purposes in different organisation for their financial activities. Let’s have a look on these two and its process.
Bookkeeping
It refers to the process of systematic recording and classification of the financial transactions of an organization. Bookkeeping is stated as being the basis of accounting whereas accounting falls under the greater scope of finance.
The chief focus area of bookkeeping is in maintaining the accounts record of each and every transaction of business. Such a record assists companies in their major investments.
A bookkeeper maintains records of bookkeeping. Precise bookkeeping is necessary for business since it can provide a part of sound information about the performance of a company.
The steps involved in the bookkeeping process are as follows:
- Identifying a financial transaction
- Recording a financial transaction
- Preparing a ledger account
- Preparing trial balance
Accounting
Accounting is the identification and measurement of financial events which have occurred in an enterprise and the preparation of financial reports. Accounting is a accurate and efficient report on the financial operations in an accounting period as reflected by the financial statements. The financial statements outline the position of a company’s financial, operational activities, and cash flows.
Consolidation of financial information helps to make it understandable and clear to all stakeholders. Accounting also ensures timely and accurate records of a firm’s finances.
Accountancy maintains and compiles company records of daily transactions, which include financial statements: income statement, statement of cash flows, and balance sheet. These financial statements make it easy to judge performance by the stakeholders.
Following the processes of accounting in steps include:
- Making entry of adjustment,
- Preparing and drawing analysis of finance statements.
- Conducting estimation of operating expense
- Tax Preparation
- Making Finance decision.
Importance of Understanding the Difference
To businesses, this means that it is not only theoretical but also practical and legal in nature.
- Compliance- Keeping correct records and preparing correct and accurate financial statements ensures compliance with laws like the Companies Act and the Income Tax Act.
- Strategic Decision-Making– While bookkeeping provides raw data, accounting delivers actionable insights.
- Audits and Transparency– True financial records and statements generate trust with the stakeholders such as investors, regulators, and customers.
- Operational Efficiency– Clear demarcation of roles ensures efficient delegation of tasks and accountability within an organization.
Accounting Vs Bookkeeping
Let us see the main basis of the difference between bookkeeping and accounting in the table below:
| Basis of Difference | Bookkeeping | Accounting |
| Definition | Bookkeeping is a process of recording and organizing financial transactions. | Accounting is the activity of identifying, measuring, analysing, and communicating financial information. |
| Decision-Making | Bookkeeping supplies historical and factual data in the shape of numbers that are not suitable for decision-making. | Accounting provides relevant data to decision-makers so that they may make the right decisions. |
| Preparation of Financial Statements | Financial statements are not prepared in bookkeeping. | Accounting involves the preparation of statements. |
| Analysis | Bookkeeping does not involve analyzing data. | Accounting involves analyzing data to generate meaningful business insights. |
| Persons Involved | Any person who is responsible for handling the books of account is referred to as a bookkeeper. | A person who is accountable for preparing and maintaining accounts is called an accountant. |
| Determining Financial Position | Bookkeeping does not reveal the financial position of a business. | Accounting presents the financial condition of a business organization in its entirety. |
| Level of Learning | Bookkeeping is at a very basic level, and it involves little learning compared to other learning methods. | Accounting requires professionalism for the appropriate implementation of the required processes. |
Interdependence of Bookkeeping and Accounting
Despite having different functions, bookkeeping and accounting are very integrated. Bookkeeping forms a basis for accounting since accounting relies on accurate and categorized data.
Without proper bookkeeping, accounting processes could easily lack reliable data to interpret, while accounting helps validate and even verify the accuracy of what is done in bookkeeping.
Legal Impacts of Bookkeeping and Accounting in India
The Indian legal system places significant emphasis on maintaining proper financial records and accounting practices:
- Audit Mandates: Section 139 of the Companies Act, 2013 mandates a set of companies to submit their accounts to statutory audit where proper bookkeeping and account-keeping practices will come into play.
- Tax Compliance: Accounts must satisfy the demands of the Income Tax Act and GST statutes to avert penalties.
- Record Retention: Section 128 of the Companies Act of 2013 requires books of account to be preserved for at least eight years. This can be done through accounting practices.
As we know non compliance of the above provisions result into legal actions hence bookkeeping and accounting must be in compliance.
Conclusion
Bookkeeping and accounting are two closely related terms that, however, refer to different aspects of the financial management continuum. In India, their roles are not only operational but also legal and are the most important aspects of compliance and governance. Bookkeeping is the foundation that ensures that all financial transactions are recorded, while accounting builds on it to analyze and report the data for strategic purposes.
The awareness of this difference assists business houses on the management of funds, legal compliance as well as decision making towards growth and sustainability in India’s competitive economic environment.
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References
The Companies Act, 2013
