Difference Between Bookkeeping and Accounting
Many small business owners think bookkeeping and accounting are interchangeable terms referring to the same set of tasks. However, while bookkeeping and accounting are related and complement each other, they are distinctly different functions with separate roles in managing business finances.
Understanding the nuances between bookkeeping and accounting is crucial for making informed decisions about your financial data and achieving your business goals. Read on as we clearly break down what sets these two financial functions apart.
What is Bookkeeping?
Bookkeeping refers to the day-to-day recording of all financial transactions a business engages in. This includes tracking money that comes in (revenue/income) and money that goes out (expenses and payments) systematically according to the principles of double-entry bookkeeping.
Some core bookkeeping tasks include:
- Recording sales, invoices, bill payments, payroll, etc. in accounting software
- Entering expenses and income in appropriate categories
- Reconciling accounts to ensure their accuracy
- Tracking what is owed to the business by customers (accounts receivable)
- Tracking what the business owes to vendors or lenders (accounts payable)
- Calculating sales tax and other tax liabilities
- Issuing financial statements and closing entries at the end of accounting periods
Thorough bookkeeping creates a foundation for financial transparency and control. By having complete and accurate books, small businesses can comply with tax and regulatory requirements, prevent fraud or errors, identify areas for cost savings, and spot financial trends over time.
Bookkeeping can be handled by a finance staff member, contracted out to a freelance bookkeeper, or managed entirely by a bookkeeping service.
What is Accounting?
Accounting deals with the interpretation, analysis, reporting, and auditing of financial data tracked through bookkeeping. Professional accountants use books kept up-to-date by bookkeepers to:
- Prepare financial statements like income statements, cash flow statements, and balance sheets
- Perform deep analysis to assess an organization’s financial performance
- Identify growth and cost-cutting opportunities through financial modeling, ratio analysis, benchmarking etc.
- Complete tax returns
- Conduct audits to certify accuracy and completeness of records
- Provide business insights and advice managers can use to guide strategy
While bookkeepers focus on properly recording granular transactions, accountants take a big picture perspective to evaluate the health of a business using books as source material for higher level financial review and planning.
An accountant holds a professional credential like Certified Public Accountant (CPA) and often has a college degree in accounting or related business field.
Key Differences Between Bookkeeping and Accounting:
| Bookkeeping | Accounting |
|---|---|
| Transaction-level daily tracking of money in and money out according to double-entry method | Higher level financial reporting, analysis, auditing and planning using recorded transactions |
| Tactical focus on maintaining orderly books and records | Strategic focus on assessing performance and advising business leaders |
| Foundational financial activity | Specialized financial practice requiring professional credentials |
| Can be handled by trained staff or outsourced to a bookkeeping firm | Typically requires a degreed accountant |
| Documents financial activities as they occur | Review documentation of past financial activities to guide future decisions |
| Ensures basic accounting equation balances: Assets = Liabilities + Equity | Goes beyond basic accounting equation to identify issues, growth opportunities and cost management |
When Should You Hire Help?
Wondering if your small business needs to bring a bookkeeper or accountant on board? Here are some signs it may be time to call in professional back-up:
Bookkeeper:
- Invoices, bank statements and bills are piling up unrecorded
- You repeatedly miss tax deadlines or have trouble compiling paperwork for tax preparers
- It takes too much time for you as a business owner to classify transactions and update accounts
- You notice unexplained errors, lags or discrepancies in financial records
Accountant:
- You want expert consultation on the best structure and practices for managing business finances
- You suspect you overpaid or underpaid taxes in previous years
- Quarterly and annual financial statements consistently reveal unseen problems
- You want to analyze KPIs like profit margins, turnover rate and return on assets but lack experience
Ideally, small businesses have access to both consistent bookkeeping services to maintain daily finances and an accountant to optimize finances. Seeking help allows you to focus on growing your business rather than getting bogged down in numbers.
How to Find the Right Bookkeeper or Accountant
With so many financial professionals to choose from, how do you select the right experts? Follow these tips:
- Determine the credentials you need (e.g. CPA designation for an accountant)
- Ask trusted contacts like your bank or business advisors for referrals
- Vet several candidates to compare experience and specialties
- Validate necessary knowledge, skills and software literacy through interviews and assessments
- Review portfolios for clients similar to your business
- Ask follow up questions about capacity, bandwidth, communication protocols etc. to set clear expectations
- Check references to confirm satisfactory outcomes for past clients
It’s well worth taking the time to carefully evaluate options and choose the best service providers. Your financial management network should contain supporting players who integrate with existing staff and enhance financial fitness.
The Bottom Line
Bookkeeping forms the foundation for accounting by systematically logging every penny that enters or leaves a business. Accounting leverages bookkeeping output to paint a financial portrait of the past, present and future to guide better business.
Understanding when you need one function, the other or both is imperative to control costs, maximize tax advantages, operate transparently, chart strategic expansion and ultimately derive greater profit. Implement solid bookkeeping habits first, then consider supplementing internal capabilities with external accounting expertise taken the growth journey.
