Many people confuse bookkeeping and accounting. They think that bookkeeping is accounting. Bookkeeping is the act of recording transactions in the accounting system. Accounting is the way we set up the system, the principles behind it, and the ways we check the system to make sure that it is working properly. Accounting ensures that bookkeeping is honest and accurate and, through financial accounting and management accounting, it provides people outside and inside the business the picture they need of where the company’s money is.

Accountants developed bookkeeping procedures as a way to organize records, to classify the many transactions that take place. Bookkeeping puts related transactions together into groups so that their impact on the accounting equation can be recorded and analyzed.

When we put several transactions together into one account, we’re creating a ledger. Each account has a ledger that lists all its transactions. Every transaction is entered twice, in two ledgers, once as a credit and once as a debit. The individual lines in a ledger are called entries. In a manual system, each entry is first put on a master page called the journal, or book of first entry, and then copied to the appropriate individual account pages. As a result,
the books stay in balance; the total of all credits equals the total of all debits.

Before we overload you with more accounting terminology, let’s use the example of our new service business to show how all this works. As a result of the three transactions we’ve entered, here are the ledgers for five accounts:

• Income: Consulting Services
• Assets: Accounts Receivable
• Assets: Corporate Checking
• Liabilities: Accounts Payable
• Expenses: Subcontractor

With these five account ledgers laid out, we can trace the transactions related to that one day of work. For example, we can see that accounts receivable increased by $1,000 when we sent the invoice, then decreased back to zero when we received the invoice and deposited the check.

Take a moment to trace all the entries from the previous pages in these ledgers. In fact, take more than a moment. Visualize the action that was taken related to each transaction. See yourself first writing an invoice, then receiving and entering a bill, and finally receiving and depositing a check. Find the two entries related to each of these actions. When it’s all clear in your mind, you’re ready for the big leap—from bookkeeping to accounting.

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