Accounting and accountancy are words that are often used interchangeably. While the two may seem quite similar there is a difference between accounting and accountancy. While the difference between the two is not easily discernible in a short sentence or paragraph we can look at some of the key roles of the accountant to gain a better understanding of the difference between accounting and accountancy. Accounting refers to the act of keeping and maintaining books of records and preparation of accounts. Accountancy, on the other hand, refers to duties of the accountant which include accounting but also extend to auditing, advisory and tax advisory. To clearly understand the difference between accounting and accountancy let us look at the two in detail.
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Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof. Accounting involves the collecting and processing of financial data into accounts. This means that from the point of recording information in journals which are the books of original entry for accounting information to the completion of ledgers and the trial balance is the scope of accounting. The process of gathering recording, and summarising accounting information is the definition of accounting and where we can start to see a clear difference between accounting and accountancy.
When a transaction is done by the business, whether an inflow or outflow that transaction is recorded ion the journal using a double-entry system. As transaction occur they are accumulated and recorded in these journals. The recording is the first step in accounting and it represents the first difference between accounting and accountancy. Accounting records the information used in the provision of accountancy.
Of course, there are different classes of transactions in accounting. Money received from a business owner as capital is not treated in the same manner as money received from a customer for goods or services. And so it is with the multiplicity of transactions that a business can enter into. The second role of accounting is classifying the transaction data and organising it into different accounts which are represented by ledgers. Herein lies our second difference between accounting and accountancy, the information used in accountancy is classified during the accounting process.
Finally, accounting summarises the information gathered and this is done in the form of accounting ledgers. Ledgers are double-sided which present inflows on side of the account and outflows on the other side, similar to a bank account. They provide a collection of all transactions performed in respect of a particular account and also have a summary of the net effect of all the transactions, a balance. These balances produced by the ledgers are placed into what is called a trial balance which is a double c=heck to make sure all transactions have been treated accordingly in terms of double entry. This gives us our third difference between accounting and accountancy.
Accountancy is the art of communicating financial information about a business entity to users such as shareholders and managers. Accountancy, therefore, includes practices such as financial reporting, management accounting, advisory and auditing as these are all parts of the accounting profession that are concerned with interpreting and reporting financial data to various user groups including shareholders and management.
Financial reporting, sometimes referred to as financial accounting is an exercise that compiles accounting information into reports for management, shareholders and other stakeholders of a business. In public companies, there is a requirement to publish financial reports which among other reports must include the Income statement (Statement of Financial Performance), Balance Sheet (Statement of Financial Position), Cash Flow Statement and notes to the financial statements. These provide information that explains the performance and position of the business in certain areas and measures. And this presents our fourth difference between accounting and accountancy with the latter having a role of explaining the businesses performance.
Management accounting is a discipline within accountancy that produces various reports and explanations similar to financial reporting however management accounting concerns itself with producing reports for management only, hence the name. The intended users of the information are internal to the organisation, contrast this with the large external user list of financial reports. The information produced here assist management with financial control, variance analysis, costing, cost-benefit analysis and other internal decisions. This again highlights a difference between accounting and accountancy in that accountancy produces reports for the management.
Auditing is a part of accountancy that looks at how the accounting has been done. Whether or not it complies with both internal standards set by management and external standards set International accounting standards Board (IASB). Internal audit is an internal control function that is ongoing in a business. External audit is a service that checks the financial statements and reports for accuracy, compliance, consistency and reliability. This represents another difference between accounting and accountancy. Accountancy not only reports of accounting information of a business but also reports on the reliability of the accounting information provided. The role of an audit is to ensure that users of information can rely on it.
Accountancy also provides a group of services collectively referred to as advisory. There are many services encompassed within advisory some examples that may be familiar are tax advisory, financial advisory and consultancy. Through this role of accountancy, practitioners scrutinise on proposed actions and give both advice and strategic guidance on actions a business can take. A company that wants to invest in a new industry may need to advise on the tax advantages of going into that area if it is one government has earmarked for tax incentives. The accountants would analyse both the law and the planned operations and inform the company of the tax implications. They would then advise the company on how to proceed. This is another difference between accounting and accountancy, accountancy provides advice on future transactions and plans while accounting is largely concerned with what has happened.
By looking at the roles of accounting and accounting we have seen the clear differences between accounting and accountancy. Accounting records classifies and summarises business data while accountancy reports, advises and explains the financial position and performance of the business in the past, present and future where applicable.