1.1 Bookkeeping and accounting
Bookkeeping is the process of identifying and recording transactions and other financial events affecting an enterprise in a systematic way. Transactions refer to the trading activities or buying and selling that every business needs to record. A financial event could be any change in the value of a business, such as theft or damage to property, that also needs to be recorded. For hundreds of years the owners of businesses have needed to rely on financial records kept by bookkeepers. Such records have little value unless they are accurate and reliable.
Accounting is broader than bookkeeping and refers to the process of classifying, interpreting, summarising and reporting on transactions and other financial events. This is done in order to generate useful information from the many different types of purchases and sales that are individually recorded by bookkeepers.
An example of useful information is a daily sales report for a particular product in order to determine if an advertising campaign has made any difference to sales. By producing such a report, the sales transaction data recorded by the bookkeeper is organised into a meaningful form that will help the accountant to decide if sales for the relevant period have changed as a result of the advertising.
The following animated video summarises the broad purpose and role of accounting today.
The responsibility of accountants is to prepare reports that contain useful information for a range of decision makers and stakeholders inside and outside the business. Such reports need to give a complete answer to four crucial financial questions that will be discussed in the next section. Only in answering these fundamental questions is the accountant able to generate reports that meet the varying information needs of different stakeholders.