Accounting vs. Bookkeeping: What’s the Difference?
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Managing your money proficiently as a small business owner is a key part of achieving success and growing your operation.
You may have heard the terms accounting and bookkeeping used interchangeably, but there are differences between the two practices. Bookkeepers typically take care of day-to-day tasks, such as entering transactions and reconciling accounts. Accountants, on the other hand, give business owners a broader financial analysis. You, as the business owner, could take care of both tasks on your own thanks to accounting software, but a DIY approach may end up costing you time and money in the end, especially if you’re finding it difficult to balance financial record keeping and forecasting with other responsibilities.
Once you understand accounting vs. bookkeeping — and when to bring in outside expertise — you can better keep your small business finances on track.
What is accounting?
Accounting is the practice of recording a business’s financial transactions. These transactions are tracked through a record-keeping system that aggregates the results into financial reports.
Businesses should have set accounting policies in place to make sure financial records are kept in order. You could use commercially available accounting software, such as QuickBooks or FreshBooks to establish the record-keeping system for your business. You may need a separate system to collect and organize customer orders, bills and payments.
Your accounting system should allow you to produce a number of reports from the data you’ve collected, such as income statements, balance sheets and cash flow statements to illustrate the business’s overall financial health.
There are two accounting methods for businesses:
- Cash accounting is more common and requires you to record transactions once payments have been received or made.
- Accrual accounting calls for you to record transactions as soon as the transaction takes place, even if payments have not yet been received or paid.
Accrual accounting can be more complex than cash accounting, but it would provide better insight into your business’s financial state. Large businesses typically rely on accrual accounting and small businesses usually use cash accounting processes.
When do I need an accountant?
While accounting software programs can make it easier for you to manage your finances on your own, you may want to work with a professional accountant as your business grows. They could manage finances and create reports while analyzing your records to find trends or discrepancies.
An accountant would also ensure your business remains in compliance with tax laws. They could prepare your tax returns each year and help you find credits and deductions for which you could qualify. We’ll talk more about certified public accountants (CPAs) below.
What is bookkeeping?
Bookkeeping, like accounting, is the practice of recording a company’s financial activity. A business must accurately track all financial information on its books to make informed operating, investing and financing decisions. Once your business is up and running, you’ll need proper bookkeeping to measure daily performance and provide information to set revenue and income goals.
Many business owners choose to hire a bookkeeper to manage daily financial data. A bookkeeper would be responsible for documenting business expenses, processing payments, managing payroll and balancing the books by the end of each month.
Bookkeepers could also issue invoices to clients or keep track of bills paid to vendors. Like accountants, bookkeepers may be able to create basic financial statements as well.
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The difference between a bookkeeper and an accountant
Bookkeepers and accountants handle the financial details of a business, which includes documenting information and calculating reports. Both bookkeepers and accountants can work without certification, although there are certification programs available.
Bookkeepers can become certified through the American Institute of Professional Bookkeepers, while accountants can receive the Certified Public Accountant designation, or CPA, through the American Institute of Certified Public Accountants.
While the professions are similar, the scope of work varies. Bookkeepers are typically familiar with daily finances and transactional aspects of a business. Hiring a full-time bookkeeper usually costs less than working with an accountant.
An accountant may be more expensive because they are generally more experienced in business finance and can help you set long-term and big-picture goals, such as your business’s succession plan. Unlike a bookkeeper, you may only need to consult an accountant at specific times, such as tax season or when you’re preparing for expansion or, on the other end of the spectrum, financial downturns.
How to choose the right financial professional for your business
Hiring a professional to manage financial aspects of your business would not only free you up to tackle other tasks but would also help you reach your goals and maintain regulatory compliance.
Here are a few things to consider when choosing to work with a bookkeeper or an accountant.
What your business needs
The tasks that you need a financial professional to cover would determine who you decide to hire. Most business owners need help with tax preparation or regulatory compliance, financial statements and forecasting, or back-office functions like payroll.
If your needs are based on day-to-day business functions, then a bookkeeper may be the best choice. Bookkeepers typically focus on daily transactional information. If you need help planning for the future or preparing your taxes, an accountant may be the right person. An accountant could take a broader approach to managing your finances.
The type of accountant or firm that you work with would also depend on what you expect from the service. A sole proprietor may be suited to handle simple needs like tax preparation, while a small or large accounting firm could handle more complex financial requirements.
Qualifications and experience
Although both bookkeepers and accountants can perform their duties without certification, you may want to consider their qualifications if you have advanced financial needs. When hiring an accountant, it’s best to go with someone who has earned CPA designation from the AICPA.
No matter if you hire a bookkeeper or an accountant, look for a professional with experience in your industry. They would be better equipped to handle particular tax issues that may arise or offer industry-specific advice and insight.
When to hire a staff accountant or bookkeeper
Many small business owners manage their own financial needs to save money, but there will likely come a time when you need to pay for professional assistance. Most small business owners can probably outsource bookkeeping and/or accounting services until their enterprises reach a certain size or they find themselves routinely grappling with complex issues. Here’s how to understand the cost of hiring a bookkeeper or accountant on an as-needed basis.
Cost and fees
Some accountants and bookkeepers charge an hourly fee depending on the tasks at hand. The hourly rate could change based on the services provided, and some could cost more than others. Rates could also vary by location, individual expertise and skill level.
Financial professionals could also charge per project rather than by the hour. This could be more cost-efficient if you have ongoing or complicated financial needs, as hourly charges could quickly add up. An accountant or bookkeeper would review your request, then use their hourly fee to calculate a project-based cost.
You may be able to schedule a free consultation with a bookkeeper or accountant before committing to a payment. This would give you an opportunity to determine if you’ve found the right professional for your business’s financial needs. You could find a CPA through the American Institute of Certified Public Accountants. You could search for a bookkeeper through the American Institute of Professional Bookkeepers.