The International Association of Bookkeepers (IAB) explains in its Study Text (which all IAB students receive on registering for an IAB qualification) the difference between bookkeeper and accountant:

The term ‘accounting’ is generally used to describe a range of activities associated with:

• Keeping financial records for a business
• Preparing financial statements for a business
• Preparing financial reports for use by the owners and managers of a business

Although all of the above activities are described as ‘accounting’ we actually find that in practice accounting is divided into two main functions. These are known as:

• Financial Accounting
• Management Accounting

Financial accounting is concerned with the activities of keeping financial records (bookkeeping), and preparing financial statements (accounting) on behalf of a business organisation.

Financial accounting is compulsory as all businesses, irrespective of their size and type, are legally required to keep appropriate financial records and prepare financial statements.

Whereas financial accounting is compulsory, management accounting is a voluntary activity.

Management accounting is a form of ‘internal accounting’, whereby financial information is provided at a time and in a format which makes it useable by management for the purpose of planning and controlling the business.

Cost accounting, financial forecasting and budgetary control are all activities associated with management accounting.

As outlined above bookkeeping and accounting are activities within the function of financial accounting.

Bookkeeping is the mechanistic system of processing the day-to-day financial transactions of a business. The type of bookkeeping system maintained by a business organisation usually depends on the size of the organisation and the volume of transactions to be processed.

Small business units, such as small sole trader and partnership organisations, tend to use a very basic and simple form of bookkeeping for the purpose of recording financial transactions – this system is known as ‘single entry bookkeeping’.

Medium size and large business organisations, including limited companies and larger sole trader and partnership organisations, with a high volume of transactions to process, tend to use a system for recording business transactions known as ‘double entry bookkeeping’.

Many businesses using double entry bookkeeping systems tend to use a computerised accounting system Software packages such as those offered by Sage are cheap to install and, with appropriate training and support, fairly easy to operate.

Accounting is concerned with the use of financial information from within a bookkeeping system for the purpose of preparing financial statements.

Accounting includes the classification, summarising, measurement, interpretation and communication of financial information.

The financial statements prepared on behalf of a business organisation as the basis of reporting and communication financial information include:

• The Trading and Profit and Loss Account
• The Balance Sheet

The Trading and Profit and Loss Account is a form of performance statement. It is prepared for a particular period of time (normally a financial year) and is an account of income earned by the business in the period, the costs and expenses incurred by the business in the same period, and the profit or loss generated by the business in the accounting period under review.

The Balance Sheet is a statement of financial position as at a particular period in time (normally the financial year end). The Balance Sheet is sometimes referred to as a ‘financial window’, it provides the reader with information relating to what a business owns (its assets) and what it owes (its capital and liability obligations) ‘frozen in time’.