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Small businesses need to ask important questions, such as ‘What is the difference between bookkeeping and accounting?’ The bottom line is both are needed to corral financial records and understand them.
Critical financial decisions get made based on the different approaches. And the results from accounting and bookkeeping efforts blend together to make your business more efficient.
Bookkeeping Vs. Accounting
Bookkeepers play an essential role in the financial health of a business. They meticulously handle the recording and maintaining of financial information, ensuring every penny is accounted for.
A primary responsibility of the bookkeeping team is to document daily transactions, which could range from sales receipts to expense reports. This documentation is vital as it provides a clear snapshot of the day-to-day business activities, capturing the financial pulse of the company.
On the other hand, accounting dives deeper into the financial realm. Accounting isn’t just about listing numbers but is more centered on generating comprehensive reports.
These professionals take the foundational work done by bookkeepers and elevate it by summarizing, analyzing, and interpreting the raw numbers.
While bookkeepers note the transactions, accountants provide insights into the implications of these transactions. They often delve into more complex financial topics such as cash flows, tax obligations, and forecasts.
Ultimately, accounting gives stakeholders a better understanding and broader perspective of the raw data meticulously recorded by bookkeeping, transforming numbers into actionable business strategies.
Key Differences Between Bookkeeping and Accounting
For a clearer understanding of the distinctions between bookkeeping and accounting, refer to the comparison table below, which highlights their primary differences.
| Feature | Bookkeeping | Accounting |
|---|---|---|
| Primary Focus | Recording daily financial transactions | Generating, analyzing, and interpreting financial reports |
| Educational Requirements | Usually doesn’t require a degree | Often requires a degree and additional qualifications (e.g., CPA) |
| Scope of Work | Budgeting, payroll, forecasting, cash management | Financial statements, tax preparation, consulting, forensic accounting |
| License | Not required | CPA license often required in many states |
| Outcome | Gathered financial data | Processed and reported financial information |
How Does a Bookkeeper Manage Financial Transactions?
A bookkeeper is responsible for corralling financial data. Here’s a list of five things a bookkeeping service should include.
- Bookkeepers record transactions – The bookkeeping process covers recording important transactions. Like invoice collections and customer payments.
- Bookkeepers look after budgeting – This is another part of the bookkeeper’s role. They can create a budget specific to your company from financial reports.
- Bookkeepers look after payroll – They can help you make financial decisions by collecting data. A small business owner can get info on current and upcoming payroll expenses.
- Bookkeepers look after forecasting – Bookkeeping information can determine the growth rate of your business. By studying increased traffic, new accounts, and other financial records.
- Bookkeepers manage your cash – Their work integrates with bank statements to help make financial decisions about where cash is going.
How Does an Accountant Work With Financial Data?
Accounting procedures are a little different in the way they handle financial data. Here’s what you should expect, even from a basic accounting service.
- Financial Accounting – An accountant will generate reports from internal financial statements. An accounting professional needs to understand GAAP and IFRS standards.
- Accounting for Taxes- A certified public accountant does a number of tax returns. They have the expertise required for compliance with tax regulations. These tax preparation services help business owner file their taxes.
- Public Accounting – An accountant can supply advice and consulting services to a company. As well as audit, review, and prepare a financial statement like a balance sheet or an income statement.
- Forensic Accounting – An accountant needs sufficient experience to tackle this category. A company doesn’t always need a full-time accountant for this. An auditor can reconstruct financial records. This financial position is often found in the insurance industry.
Wondering how to hire an accountant for your small business? Consider going digital instead. Here’s a list of the best accounting software for small business.
How is the Accounting Process Different from Bookkeeping?
Small businesses need to be clear on the difference between bookkeeping and accounting. Here are five differences between what bookkeepers and accountants do.
1. Accountants Prepare Financial Statements
Accountants are skilled professionals who prepare a diverse range of financial statements to provide a comprehensive view of a company’s financial health.
Among these are the cash flow statements, which track the movement of money, balance sheets that offer a snapshot of a company’s assets and liabilities, and income statements, showcasing revenue and expenses.
These statements are generated using the records maintained by bookkeepers. For small businesses, these reports are vital, often serving as the primary financial insights that guide decision-making.
2. Bookkeepers Record Financial Transactions
With a keen eye for detail, bookkeepers shoulder the responsibility of recording each financial transaction a business undergoes.
This includes but is not limited to noting down payments made to vendors, documenting sales, and tracking various business-related expenses. Their work ensures a clear and systematic financial trail for any enterprise.
3. Accountants Have A License
Performing accounting tasks often involves a deeper dive into bookkeeping records and a higher level of analytical skills.
Furthermore, if one wishes to become a Certified Public Accountant (CPA), it’s imperative in all 50 states of the U.S. that they complete a certain number of credit hours in coursework and pass a stringent written exam, showcasing their competence in the field.
4. Bookkeepers Don’t Require A Degree
The thresholds for entering the bookkeeping profession are comparatively lower. While there are distinctions between bookkeeping and accounting, one of the most pronounced is in the educational requirements.
For bookkeeping roles, often, a high school diploma coupled with solid communication, writing, and basic math skills is sufficient to get started.
5. One Gathers The Data and The Other Sorts It
Although accounting and bookkeeping are distinct disciplines, they are intricately interwoven, working collaboratively towards ensuring financial clarity. Bookkeepers play the role of the data collectors, meticulously noting down every financial piece of information.
Then, with this data in hand, professional accountants step in, sorting and organizing this vast amount of information, transforming it into meaningful, structured reports that offer in-depth financial insights.
How to Decide Between a Bookkeeper and Accountant
When navigating the financial landscape of your business, the decision of whether to hire a bookkeeper or an accountant can be daunting.
The choice depends largely on your company’s specific needs. Here’s a guide to help you understand when to opt for bookkeeping services and when it might be time to engage an accountant.
Looking to Make Proper Decisions About Your Business?
If strategic financial planning is what you’re after, an accountant might be the better choice. One pivotal distinction between the two roles is that accountants typically prepare and analyze financial statements, which can offer valuable insights.
For instance, a cash flow statement can provide clarity on your business’s liquidity, offering insights into investment opportunities or potential pitfalls.
Moreover, studying historical accounts can illuminate past trends, assisting you in anticipating future financial trajectories and making informed decisions.
Looking for Just a General Ledger?
If your primary focus is on organizing your financial data and maintaining a clean record of your transactions, bookkeeping might suffice.
This is especially true if you’re leveraging online platforms for tasks like tax filing, where having organized bank statements and expense receipts can streamline the process.
It’s crucial, however, to have a clear understanding of your finance process, to determine the extent of expertise required.
Looking to Keep Things Simple?
For small business owners, especially sole proprietors, simplicity can be the key. In such cases, a bookkeeper might be all you need.
They can efficiently manage basic financial tasks without overwhelming your budget. This could include duties like recording incoming revenue, tracking outgoing expenses, or managing accounts receivable and payable.
Looking to Go Public?
If your sights are set on taking your company public, an accountant’s expertise becomes indispensable. The world of Initial Public Offerings (IPOs) demands a more intricate level of financial reporting and disclosure.
An accountant, equipped with specialized skills, can prepare detailed financial documents tailored to woo potential investors.
Their in-depth formal education, often culminating in a bachelor’s degree or beyond, coupled with their analytical prowess, ensures your business meets regulatory standards and attracts the right investment attention.
When to Hire a Bookkeeper or Accountant
We have gone over the differences between bookkeeping and accounting. Here are a few words on choosing a bookkeeper or accountant.
- Maybe you’re doing your own bookkeeping and it takes up too much time. You can save by hiring a bookkeeper.
- If your company is small, you can get away with the bookkeeper. Likewise, if you’re a sole proprietor. Look for double-entry bookkeeping where the debits and credits equal out. This is more accurate than a single entry.
- On the other hand, you’ll need the special skill of an accountant if you’ve experienced rapid growth.
- A company that needs professional financial reporting needs an accountant.
Do Accountants Do Bookkeeping?
Yes. Accountants can do bookkeeping but it’s generally better to separate the two categories for small businesses. Bookkeepers and accountants can work together but they have different skills.
The main difference is an accountant usually has more education and a bigger skill set than a bookkeeper.
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