Bookkeeping is often confused with accounting, which is actually quite different. Bookkeeping is a necessary component of accounting and important to every business and even to most individuals, regardless of their incomes and expenses.
By itself, bookkeeping does not create accounting and/or financial statements, but it does display the "flow" of incoming and outgoing funds from a business or home environment.
The terms "bookkeeping" and "accounting" are often used interchangeably--and incorrectly. Bookkeeping is typically the actual recording of business transactions into your accounting books and records. These records are used to perform accounting functions, provide analyses and critical information and be the basis for financial statements for a business or person.
Bookkeeping is the process of physically recording the individual transactions of a business or personal budget into the correct accounts. Incoming cash may come from sales, personal compensation, loans, investment or other sources. The origins of incoming cash should be identified and categorized. Similarly, outgoing cash might involve operating expenses, loan payments, dividends paid to stock holders and compensation to employees.
It is NOT the responsibility of bookkeeping to identify, analyze and/or present the picture of these recordings to display results of financial activities for a period. It IS the responsibility of bookkeeping to record all transactions in the appropriate accounts and in balance.
Since all bookkeeping is performed as a "cut and paste" process, with paper and pencil, or as a direct entry into software, the reality of error is always present. Even the best bookkeepers can make errors. Entering the wrong data or "posting" to an incorrect account will occur. These results may display the wrong information to you or third parties who make financial judgments on this erroneous information.
To minimize these risks, many businesses schedule "audits" on an annual basis. Qualified third parties will review and analyze all bookkeeping entries and the accounting reports generated from these recordings to verify that the resulting reports and financial statements are correct as displayed.
Historical facts often have a major impact on future developments. Consider this well-worn statement that remains relative to contemporary situations. "Continue to do what you've always done, and you'll continue to get what you've always got." If whatever you're doing works well, keep it up. If the results aren't what you want, you must change something. Bookkeeping generates information to display the results of your actions and decisions
Using the results of bookkeeping and, eventually, accounting, as a road map to success is indisputable. The picture painted by accurate bookkeeping shows your situation as it really exists. When this picture is pleasing, you can look at the face in the mirror and deliver congratulations to the person you see. If the numbers cause you concern, analyze the results and take action to correct, change, modify or eliminate those components that are causing an unacceptable outcome.
By showing the facts in a format that paints a picture of recent history and the indicators of future results, bookkeeping provides the clues about which actions worked and which actions didn't.
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