1.

Difference between book keeping and financial accounting

Definition Bookkeeping
The process of complete and systematic record keeping of the monetary
transactions of an organization by the bookkeeper is known as bookkeeping.
It is the activity of keeping full documentation of every single financial
transaction of the entity in order to form as a base for the accounting
process.
The purpose of bookkeeping is to disclose the correct picture of income and
expenditure at the end of the accounting period. The task of bookkeeping is
performed by the bookkeeper who is responsible for recording the day-to-day
business transactions like incoming and outgoing of cash, goods sold
or purchased on credit, expenses incurred, etc. in an orderly manner. The
bookkeeper captures the transactions in the day books like purchase,
sales, purchase return, sales return, cash book, journal etc and posts them in
the concerned ledger, thereafter prepares the trial balance.
Definition of Financial Accounting
Financial

Accounting

is

simply

business

language

which

provides

information about the financial status of the organization. It is a complete

procedure which starts from recording of transactions and ends on reporting
of the financial statements at the end of the financial year. In accounting the
monetary transactions of an organization are identified and systematically
recorded, then they are grouped, i.e. the transactions of similar nature are
classified into a common group and then it is summarized in a way which can
be presented to the users of financial statement. After this thorough analysis
of financial statements are done which will help in interpreting the
conclusions and finally communicating the results of the financial statements
to the interested parties.

Key Differences between Bookkeeping and Accounting

The

following

are

the

major

differences

between

bookkeeping

and

accounting:
Bookkeeping is keeping proper records of the financial transactions of an
entity.

Accounting

is

recording,

measuring,

grouping,

summarizing,

evaluating and reporting of transactions of the entity which are in monetary

terms.
The task of Bookkeeping is performed by a bookkeeper whereas the task of
Accounting is performed by the accountant.
Financial Statement forms a part of the accounting process but not the
bookkeeping process.
Accounting records are taken as a base for taking managerial decision unlike
bookkeeping records, in which decision making is difficult.
Bookkeeping is the first step to Accounting.
Bookkeeping does not disclose the correct financial position however for
purpose accounting helps the users in showing the true and fair view of
the financial status and profitability of an organization.
2. History and origin of accounting
It is believed that the very origins of writing itself may have developed out of
early marks used to keep account of goods at ancient warehouses more than
5,300 years ago. The notion that pre-numerical counting systems pre-dated
even written language, didnt come as a surprise to many historians and
archeologists who have long since recognized that the history of human
civilization is largely indistinguishable from the history of commerce.

The story of the origins of monetary systems and commerce help provide a
historical account of the origins and progression of accountancy, as
commerce and accounting have run parallel to each other since their
respective beginnings. For this reason, the history of accounting is often seen
as indistinguishable from the history of finance and business.
Ancient Accountants of Egypt, Mesopotamia, Greece and Rome
Ancient Egyptian bookkeepers kept meticulous records of the inventory of
goods kept in royal storehouses. The accuracy of these records was assured
by the swift and severe penalty that came if mistakes were ever discovered.
Archeologist Dr. Gunter Dreyer of the German Institute of Archaeology
discovered 5,300-year-old bone labels inscribed with marks and attached to
bags of oil and linen in the Abydos, Egyptian tomb of King Scorpion I.
Describing inventory owners, amounts, and suppliers, these labels of
antiquity are known to be the ancient origin of the counting systems that
would eventually develop into the sophisticated accounting methods were
familiar with today.
Other ancient societies also used accounting methods, including scribes in
Mesopotamia who kept records of commerce on clay tablets. In ancient
Greece, the account books of bankers show that they changed and loaned
money and helped people make cash transfers through affiliate banks in
other cities. In ancient Rome, government and banking accounts grew out of
records kept by the heads of families.
14th Century - Double-Entry Bookkeeping
The most important event in accounting history is generally considered to be
the dissemination of double-entry bookkeeping by Luca Pacioli in 14th
century Italy. Pacioli was much revered in his day, and was a friend and
contemporary of Leonardo da Vinci.

In fact, the Italians of the 14th to 16th centuries are widely acknowledged as
the fathers of modern accounting and were the first to commonly use Arabic,
rather than Roman, numerals for tracking business accounts.
Pacioli described double-entry bookkeeping, and other commerce-related
concepts, in his book De Computis et Scripturis translated in English to Of
Reckonings and Writings.
The book was translated into five languages within a century of initial
publication. The fundamentals of bookkeeping methods used today have
actually changed little since the days of Pacioli.
19th Century The Beginnings of Modern Accounting in Europe and
America
The modern, formal accounting profession emerged in Scotland in 1854
when Queen Victoria granted a royal charter to the Institute of Accountants
in Glasgow, creating the profession of chartered accountant (CA). Today, the
longest standing societies of public accountants are found in Scotland.
In the late 1800s, chartered accountants from Scotland and Britain came to
the U.S. to audit British investments. Some of these accountants stayed in
the U.S., setting up accounting practices and becoming the origins of several
U.S. accounting firms.
The first national U.S. accounting society was set up in 1887. The American
Association of Public Accountants was the forerunner to the current American
Institute of Certified Public Accountants (AICPA).
20th Century The Development of Modern Accounting Standards
The accounting profession in the 20th century developed around, at first,
state requirements for financial statement audits, and then around Federal
requirements created by securities acts passed in 1933 and 1934 (which

created the Securities and Exchange Commission), according to a July 1999

article in The CPA Journal.
In the 1970s, Congress and SEC demands for more reliable and comparable
financial reporting led to the founding of the Financial Accounting Standards
Board (FASB) in 1973. The FASB and the Governmental Accounting Standards
Board (GASB) are now two of the main organizations responsible for
establishing generally accepted accounting principles (GAAP) in the U.S.
21st Century Accounting Regulation in Modern Commerce
Beyond the industry's self-regulation, the government also sets accounting
standards,

through

agencies

such

as

the

Securities

and

Exchange

Commission and laws such as the Sarbanes-Oxley Act of 2002, passed after
the Enron and WorldComm accounting scandals.
The 21st century also saw the passage of the Dodd-Frank Act after the
recession of 2008. The act contains 16 major areas of reform, including
creation of the Financial Stability Oversight Council and the Volcker Rule that
restricts banks from owning, investing, or sponsoring hedge funds, private
equity funds, or any other type of proprietary trading operations that result
in their own profit.
Looking to the Future
Accountants looking to the future have recognized that existing accounting
principals in place in the United States known as the Generally Accepted
Accounting Principals (GAAP), are likely to go the way of the dinosaurs at
some point in the not too distant future.
The global standard outside of the US is the International Financial Reporting
Standards (IFRS). As global commerce continues to grow, efforts are
underway to create consistent accounting standards across borders through

the widespread adoption of IFRS by American businesses and accounting

firms who wish to continue to participate in the global economy.
3. Importance of keeping accounting records
Here are the main reasons why you need to keep detailed and accurate accounting records:
It will keep the tax man happy
You might not have a lot of time for Revenue Authority but theyll have plenty for you if your
tax affairs arent in order. Maintaining accurate accounts will help you to know how much profit
youre making and therefore how much tax needs to be paid. Poor record keeping could result in
a tax investigation, which is a process thats best avoided if at all possible. Not only could it lead
to you facing a large bill, it will also suck up hours and perhaps days of your time that could have
been put to much more profitable use.
To help you manage your business
When youre starting out the most important task is winning customers and keeping them happy.
While making sales must always remain a focus if youre to succeed, at some point youll want
to analyse how your business is performing. Thats not possible without detailed information
about your income and your costs.
It makes it easier to borrow money
Many businesses need an injection of cash if they are to grow. It might be to buy a new machine
or vehicle, to purchase stock or simply to cover a shortfall between paying suppliers and getting
paid by customers. Whether youre looking for an overdraft, a loan or an invoice finance
arrangement youll needed to satisfy your lender that youre in control of your business, which
means having accurate and up-to-date accounts.
It will make it easier to sell your business
If someone wants to buy your business they will be keen to look at your accounting records. The
quality of information will help them to determine how well youve run the business and how

profitable it is. This will influence how much theyre willing to pay and indeed whether they
want to proceed. Perhaps selling is the last thing on your mind, particularly if youre just starting
out. But circumstances can take us by surprise and its better to be prepared.
Statutory duty to file accounts
Last, but not least. If you run a limited a company youre obliged, by law, to submit accounts to
Companies House every year.

4. Challenges facing accountants