O LEVEL POA-Distinguishing Between Accounting and Bookkeeping: What’s the Difference?

Distinguishing Between Accounting and Bookkeeping: What’s the Difference? 

Every business owner gets to the point when they feel the pressing need to gain control of their
business finances.  The fiscal tasks are viewed as an important issue but not as essential as the
revenue generating activity.  Although true to an extent, the economic processes can make the
difference in the success of an organization.
What constitutes control and how do you get it?  Do you hire an Accountant or a Bookkeeper?

Is there a difference? 

As with any business, there is process that dictates the input and the output of the organization -
the business cycle.  The means of measuring these activities is captured in the accounting
processes - the accounting cycle.  Accounting is a system of events that identifies, records, and
reports the economic events of an organization.  Included in the process are the bookkeeping
functions, which involves the recording of the events.
In order to determine whether a bookkeeper is sufficient or an accountant is needed will depend
upon the financial reporting needs of the organization.  Does the organization require external
reporting, in addition to internal reporting?  With they require help in the area of profitability and
tax planning?  The complexity of the data and the reporting requirements will dictate the
financial skill set needed.

The Bookkeeper

The bookkeeper’s job is to record the economic events of the organization.  The financial
transactions of the organization are recorded in a systematic way.  The skills involved in this
particular part of the accounting process are basic and require minimal understanding of
accounting concepts.  Furthermore, with today’s user-friendly accounting packages, bookkeeping
can be done with very little to no skill at all.  The understanding of debits and credits is no longer
a requirement.  Today’s accounting software uses terms such as “increase” and “decrease.”  As
helpful as this may appear, it limits the user’s ability to effectively understand the entries and
communicate the events effectively.  

The Accountant

The accountant’s job is to understand the entire accounting process and how it relates to the
business functions of the organization.  The accountant engineers the recording process and
organizes the economic events in a systematic way that provides the most benefit to the
organization.  In a very basic sense, the accountant considers the events and their relationship to
company profits and tax liability.  The challenge is to provide an operating plan that promotes
the maximization of profits but at the same time the reduction of tax liability.   The necessary
skill set for an accountant is more than basic and will vary depending upon the accounting needs
of the organization (i.e. financial accounting versus managerial accounting).
Financial control will vary from organization to organization.  Whatever the need, it is certain
that the success of an organization can be traced back to the fiscal processes of the organization.
Although often overlooked, the accounting process is the business infrastructure and without a
solid foundation in which to build, the business activities can be unstable.

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Depreciation Methods

GAAP

Depreciation is a systematic and rational process of distributing the cost of tangible assets over the life of assets.      Depreciation is a process of allocation.      Cost to be allocated = acquisition cot - salvage value      Allocated over the estimated useful life of assets.      Allocation method should be systematic and rational.

Depreciation Methods

Depreciation methods based on time            Straight line method            Declining balance method                     Sum-of-the-years'-digits method      Depreciation based on use (activity)

Straight Line Depreciation Method

Depreciation = (Cost - Residual value) / Useful life [Example, Straight line depreciation]         On April 1, 2011, Company A purchased an equipment at the cost of $140,000.  This equipment is estimated to have 5 year useful life.  At the end of the 5th year, the salvage value (residual value) will be $20,000.  Company A recognizes depreciation to the nearest whole month.  Calculate the depreciation expenses for 2011,  2012 and 2013 using straight line depreciation method.         Depreciation for 2011            = ($140,000 - $20,000) x 1/5 x 9/12 = $18,000        Depreciation for 2012            = ($140,000 - $20,000) x 1/5 x 12/12 = $24,000        Depreciation for 2013            = ($140,000 - $20,000) x 1/5 x 12/12 = $24,000

Declining Balance Depreciation Method

Depreciation = Book value x Depreciation rate        Book value = Cost - Accumulated depreciation               Depreciation rate for double declining balance method            = Straight line depreciation rate x 200%        Depreciation rate for 150% declining balance method            = Straight line depreciation rate x 150% [Example, Double declining balance depreciation]         On April 1, 2011, Company A purchased an equipment at the cost of $140,000.  This equipment is estimated to have 5 year useful life.  At the end of the 5th year, the salvage value (residual value) will be $20,000.  Company A recognizes depreciation to the nearest whole month.  Calculate the depreciation expenses for 2011,  2012 and 2013 using double declining balance depreciation method.         Useful life = 5 years  -->  Straight line depreciation rate = 1/5 = 20% per year        Depreciation rate for double declining balance method             = 20% x 200% = 20% x 2 = 40% per year        Depreciation for 2011            = $140,000 x 40% x 9/12 = $42,000        Depreciation for 2012            = ($140,000 - $42,000) x 40% x 12/12 = $39,200        Depreciation for 2013            = ($140,000 - $42,000 - $39,200) x 40% x 12/12 = $23,520      Double Declining Balance Depreciation Method   Year Book Value at the beginning Depreciation Rate Depreciation Expense Book Value at the year-end 2011 $140,000 40% $42,000 (*1) $98,000 2012 $98,000 40% $39,200 (*2) $58,800 2013 $58,800 40% $23,520 (*3) $35,280 2014 $35,280 40% $14,112 (*4) $21,168 2015 $21,168 40% $1,168 (*5) $20,000    (*1) $140,000 x 40% x 9/12 = $42,000    (*2) $98,000 x 40% x 12/12 = $39,200    (*3) $58,800 x 40% x 12/12 = $23,520    (*4) $35,280 x 40% x 12/12 = $14,112    (*5) $21,168 x 40% x 12/12 = $8,467            --> Depreciation for 2015 is $1,168 to keep book value same as salvage value.            --> $21,168 - $20,000 = $1,168 (At this point, depreciation stops.)

[Example, 150% declining balance depreciation]          On April 1, 2011, Company A purchased an equipment at the cost of $140,000.  This equipment is estimated to have 5 year useful life.  At the end of the 5th year, the salvage value (residual value) will be $20,000.  Company A recognizes depreciation to the nearest whole month.  Calculate the depreciation expenses for 2011,  2012 and 2013 using double declining balance depreciation method.         Useful life = 5 years  -->  Straight line depreciation rate = 1/5 = 20% per year        Depreciation rate for double declining balance method             = 20% x 150% = 20% x 1.5 = 30% per year        Depreciation for 2011            = $140,000 x 30% x 9/12 = $31,500        Depreciation for 2012            = ($140,000 - $31,500) x 30% x 12/12 = $32,550        Depreciation for 2013            = ($140,000 - $31,500 - $32,550) x 30% x 12/12 = $22,785    150% Declining Balance Depreciation Method   Year Book Value at the beginning Depreciation Rate Depreciation Expense Book Value at the year-end 2011 $140,000 30% $31,500 (*1) $108,500 2012 $108,500 30% $32,550 (*2) $75,950 2013 $75.950 30% $22,785 (*3) $53,165 2014 $53,165 30% $15,950 (*4) $37,216 2015 $37,216 30% $11,165 (*5) $26,051 2016 $26,051 30% $6,051 (*6) $20,000    (*1) $140,000 x 30% x 9/12 = $31,500    (*2) $108,500 x 30% x 12/12 = $32,550    (*3) $75,950 x 30% x 12/12 = $22,785    (*4) $53,165 x 30% x 12/12 = $15,950    (*5) $37,216 x 30% x 12/12 = $11,165    (*6) $26,051 x 30% x 12/12 = $7,815            --> Depreciation for 2016 is $6,051 to keep book value same as salvage value.            --> $26,051 - $20,000 = $6,051 (At this point, depreciation stops.)