What is bookkeeping (or recordkeeping) in a business, what does it involve, and how does it relate to accounting?

Which meaning of "bookkeeping" is someone using?

You will hear the word in three senses:

The edges vary as well. AccountingCoach notes that the term means different things to different people: some think bookkeeping is the same as accounting, including financial statements and tax reports, a view it says accountants do not share; others limit it to recording transactions and posting them to accounts in the ledger. To tell which sense someone means, ask what they expect to exist when "the bookkeeping" is done: entries, a complete and current set of books and files, or a service with an agreed scope. Below, bookkeeping means the recording activity unless another sense is named.

What does bookkeeping take in, and what does it produce?

Bookkeeping takes in transactions and the documents that evidence them. IRS Publication 583 says that purchases, sales, payroll and other transactions generate supporting documents, and that these documents contain information you need to record in your books. The practice reads each document, works out what the transaction did and which accounts it changes, and records it as a dated entry that points back to its document.

What exists afterwards was not in the documents: a set of accounts, each with a running balance, that can be totaled for any period and shows what the business earned, spent, owns and owes. The owner reads it to see how the business is doing, an accountant builds statements and tax returns from it, and it supports the figures on a return.

That output separates bookkeeping from two things it is often mistaken for:

• Filing documents. A box of receipts in date order, however tidy, cannot say what customers owe or what rent cost this year until each document has been recorded into accounts.
• A note of money in and out. A list of deposits and withdrawals shows cash moving but not what each item was, so it cannot be totaled by kind of income or expense.

IRS Publication 583 sets an outcome rather than a method: it says that, except in a few cases, the law does not require any specific kind of records, and that you can choose any recordkeeping system suited to your business that clearly shows your income and expenses. Single-entry bookkeeping, one such system, is covered separately.

Is recordkeeping the same thing as bookkeeping?

The two overlap, and the difference is scope. IRS Publication 583 says your recordkeeping system should include a summary of your business transactions, that this summary is ordinarily made in your books, such as journals and ledgers, and that in addition you must keep supporting documents. In that usage, bookkeeping is the part that produces and maintains the books, and recordkeeping is the books plus the evidence behind them. When the difference matters, ask whether the person means the books, the documents or both.

What does bookkeeping work on?

Bookkeeping works on four objects, each built from the one before:

• Transaction. A transaction is something the business does that has a money effect, such as a sale, a purchase, a payroll or a payment.
• Source document. The source document is the evidence of a transaction, such as an invoice, a receipt or a bank record, and IRS Publication 583 calls these supporting documents.
• Journal entry. The journal entry is the first record of the transaction, and Publication 583 describes the journal as a book where you record each business transaction shown on your supporting documents.
• Account. An account is a named record of one kind of item, such as cash, sales or rent, and Publication 583 describes the ledger as a book that contains the totals from all of your journals, organized into different accounts.

Moving an entry from the journal into its accounts is posting, which OpenStax's Principles of Accounting, in its section on journal entries, defines as transferring data from the journal to the general ledger. The ledger with its balances is the resulting record, and everything downstream is drawn from it. In software the journal and ledger are screens and reports rather than books, but the objects are the same.

Which concepts does the definition rest on?

Four ideas make the definition usable, and the last two belong to double-entry bookkeeping:

• Account. An account is where every entry of one kind collects and where its balance can be read at any date.
• Period. Bookkeeping runs continuously, but results are measured over periods, and OpenStax's section on accounting principles and assumptions states the time period assumption: a company can present useful information in shorter time periods, such as years, quarters or months.
• Two-sided entry. IRS Publication 583 explains that in a double-entry system each account has a left side for debits and a right side for credits, and that the system is self-balancing because every transaction is recorded as a debit entry in one account and a credit entry in another.
• Balancing check. OpenStax's section on journal entries says the dollar value of the debits must equal the dollar value of the credits, so debit balances across all accounts must total the same as credit balances, and the trial balance, which AccountingCoach describes as an internal report listing each account name and its balance, is where that is tested.

IRS Publication 583 says the double-entry system has built-in checks and balances, while the single-entry system, which it calls the simplest to maintain, records the flow of income and expenses. How debits and credits work is its own topic.

What does bookkeeping involve?

Described by what each activity produces, the practice comes down to six activities:

In a one-person business all six may happen in one sitting; with staff, different people may handle them across payroll, sales and banking systems, but the outputs are the same. Matching accounts to bank statements is reconciliation, and setting up a system and running a routine are separate questions.

The practice is not the software. If the business switched programs tomorrow, its transactions would still need documents, accounts, periods and a check that the books balance. That test tells you whether a task is bookkeeping or a feature of the tool. How manual and computerized systems differ is covered separately.

Why does a business need bookkeeping at all?

IRS Publication 583 states the obligation plainly: everyone in business must keep records. It lists what good records help a business do, among them monitoring the progress of the business, preparing financial statements, preparing tax returns and supporting items reported on tax returns.

The federal tax obligation Publication 583 describes sets a floor: except in a few cases, any system that clearly shows income and expenses and supports the return, with the records needed depending on the business you are in. The decisions the business faces set the rest: whether it is making money, which work pays, whether it can take on a cost, and what a lender will want to see. That is why a one-person business and a firm with staff and several systems can both be doing bookkeeping while doing very different amounts of it. Which records a business must keep is its own question.

Where does bookkeeping stop and accounting begin?

Accounting starts from the books and adds what recording alone cannot supply: adjustments for things no single document captures, financial statements, tax work, and the interpretation and advice built on them. AccountingCoach describes one common version of the handover: after the amounts are posted, the bookkeeping has ended and an accountant with a college degree takes over. It also reports the opposite view, held by some people, that preparing financial statements and tax reports is all part of bookkeeping, and says accountants do not share it.

All three ways of drawing the line are in live use:

Apart from work tied to a license, no rule fixes the line: AccountingCoach reports that the past distinctions between bookkeeping and accounting have become blurred with the use of computers and accounting software, and each arrangement assigns work by who is available and what is paid for. Expect the next bookkeeper or accountant you deal with to draw it somewhere different, and agree where it falls rather than assuming.

How does one sale travel from invoice to a financial statement?

A landscaping business that records sales when it bills them finishes a job on March 3 and bills the customer 1,200.00, payable in 30 days. The path runs in this order:

1. Transaction. The work is done and the customer owes 1,200.00.
2. Source document. Invoice 1042, dated March 3, names the customer, the work and the amount.
3. Journal entry. The entry in the table below is recorded on March 3 with a reference to invoice 1042.
4. Posting. Accounts receivable and Service revenue each rise by 1,200.00 in the ledger.
5. Balancing check. At March 31 the trial balance lists both accounts, and total debits equal total credits.
6. Adjusting and preparing statements. The balances are reviewed and adjusted where needed, and the March income statement includes the 1,200.00 in its Service revenue line, while the unpaid amount appears on the balance sheet as accounts receivable.
7. Interpreting. Someone reads the statements to see how March revenue compares with last year and whether this customer tends to pay late.

If invoice 1042 is issued from accounting software, steps 3 and 4 happen as it is issued: AccountingCoach notes that when software prepares a sales invoice for a credit customer, it debits Accounts Receivable and credits the sales account in the general ledger. Also keying the table in as a manual entry would record the sale twice, an error AccountingCoach says the software cannot detect.

Under the kind-of-work convention, bookkeeping ends between steps 5 and 6: recording, posting and checking that the books balance are bookkeeping, and adjusting, preparing statements and interpreting are accounting. AccountingCoach's narrower version draws the line one step earlier, once the amounts are posted. Under the other two conventions the same bookkeeper might also prepare the March statements, or one person might do all seven steps. When the customer pays, a second entry moves the 1,200.00 from Accounts receivable to Cash, and the path starts again from the bank record.

What does a bookkeeper do, and what does an accountant do?

Under the kind-of-work convention, which follows the handover AccountingCoach describes from before computers and software (the bookkeeper prepared the trial balance and corrected errors, and the accounting phase began with an accountant's adjusting entries), the bookkeeper owns capturing, classifying, recording, posting, checking and reporting from the books, and the accountant owns adjusting, statements, tax returns and advice. A bookkeepers' professional body puts adjusting on the bookkeeping side: the American Institute of Professional Bookkeepers (AIPB) presents computing and recording end-of-period adjustments as an advanced bookkeeping skill. Real arrangements move that line in either direction, and what each credential establishes is narrower than the split:

• Certified Bookkeeper. AIPB's prep course for its Certified Bookkeeper (CB) designation covers what it calls advanced bookkeeping skills, including mastering adjusting entries and mastering correction of accounting errors, work that comes after posting and so, in the narrow view, falls to the accountant.
• CPA. NASBA describes a CPA as a certified public accountant who is licensed by a state board of accountancy. The AICPA's page on the Uniform Accountancy Act, the model framework for CPA licensure and regulation it developed jointly with NASBA, says each state determines whether and how to adopt its provisions, and describes attest services, which include audits, reviews and compilations, as performed by licensed CPAs to provide assurance on financial information.
• Tax preparation. The IRS page on tax return preparer credentials says any tax professional with an IRS preparer tax identification number (PTIN) is authorized to prepare federal tax returns, that tax professionals have differing levels of skills, education and expertise, and that enrolled agents, certified public accountants and attorneys have unlimited representation rights before the IRS, on any matters including audits, payment/collection issues and appeals.

Some work is tied to a license rather than to the split you agree: the attest services the AICPA page describes and the unlimited representation rights on the IRS credentials page. A credential tells you what someone has been examined on, or what a state or the IRS licenses or authorizes them to do. It does not tell you which bookkeeping or accounting tasks they have agreed to do in your arrangement.

If you are dividing work between yourself, a bookkeeper and an accountant, use the activity table and the seven steps as the list: write down who owns each one, including who checks that the books balance and who reviews the statements. Within those limits, each arrangement negotiates its own split, and a job title does not settle it.