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Bookkeeping and accounting are intricately connected, but they’re not interchangeable. If you’re considering hiring someone to fulfill one function or the other for your business, you need to be able to distinguish the two.
Here’s what you should know about the difference between bookkeeping and accounting, including their general business functions and the specific activities involved.
Bookkeeping is the process of recording financial transactions that occur as part of your day-to-day operations. Accounting is more sophisticated and involves manipulating that transactional data to generate, refine, and interpret financial statements.
In other words, the fundamental difference between the two is that bookkeeping is clerical while accounting is more analytical. Bookkeeping generates the financial information that accounting consolidates, reorganizes, and investigates.
Let’s dive deeper into the two processes to help you better understand their role in keeping your business going.
The primary bookkeeping task is to maintain accurate and informative financial records of your business’s transactions. In other words, a bookkeeper’s job is to document a company’s history so an accountant can interpret it.
As a result, good bookkeepers always keep the accountant in mind. They create documentation that’s easy to follow. Accountants can then investigate irregularities without having to ask the bookkeepers or business owners for clarification.
That’s why accuracy is necessary but not sufficient for good bookkeeping. Bookkeepers also need to use consistent account categories, provide context for anything unusual, and break out the details of potentially misleading transactions.
For example, say you purchase $4,000 of equipment and $500 of supplies for your company in the same transaction. You use your business credit card to finance the amount initially, then pay off the balance two weeks later.
It’d be your bookkeeper’s job to record the $4,500 expense and the initial credit card liability, then document the cash coming out of your bank account to pay off the balance.
A good bookkeeper would also take the time to note that the expense included both equipment and supplies since that information would be relevant to an accountant in the future.
The primary purpose of the accounting process is to translate a bookkeeper’s raw financial data into a balance sheet, income statement, and cash flow statement, and then use that information to make financial decisions and navigate tax obligations.
In other words, accounting functions utilize financial data rather than record it. They turn disparate transactions into a comprehensive picture of a business’s assets, liabilities, income, and expenses.
An accountant can glean valuable insights about a company’s finances from that picture, such as the relative strength of its financial position, opportunities for higher profit margins, and potential savings on its tax return.
For instance, take the example we mentioned in the previous section where your bookkeeper recorded a $4,500 expense. It would be your accountant’s job to recognize that while the equipment portion is tax-deductible, you couldn’t take it all at once.
Instead, you’d need to capitalize the $4,000 of equipment and depreciate it over the asset’s useful life. Your accountant would update your financial statements to reflect that change and revise your net income for tax purposes.
Now that you understand the overarching purposes of bookkeeping and accounting, let’s look at the specific duties a person in charge of those processes might handle.
In general, a bookkeeper is responsible for maintaining the records of each financial transaction. That includes anything that might impact a financial statement, whether or not cash is involved.
For example, they should still update their documentation if you pay an expense with a credit card or make a sale on net-30 terms. If it affects an asset, liability, income, or expense account, the bookkeeper should record it.
Small business owners often document their transactions in spreadsheets, but the best approach is to keep a general ledger using double-entry bookkeeping. That involves creating a “journal entry” using debits and credits for each transaction.
In addition to making journal entries, bookkeepers may also be responsible for:
Because they provide less complex services, it’s usually much cheaper to hire a bookkeeper than an accountant. They generally don’t need the same degree of education or certification to do their jobs. Whether you pay someone else to manage your bookkeeping and accounting processes or handle them all yourself, software is definitely something to consider investing in for your business. Here’s what you should know about its capabilities.
An accountant is responsible for finalizing your financial statements, extracting insight from them, and using that insight to give you financial advice. That could be anything from tax stance recommendations to a forecast of your company’s future revenues.
Unlike bookkeepers, accountants are essentially consultants. Though they can assist with a wide range of problems depending on their unique expertise, they always serve in some strategic advisory capacity.
More specifically, accountant responsibilities often include:
As you can see from the list above, accounting services go far beyond the scope of bookkeeping. As a result, their services cost more by a significant margin. They also have higher education and certification requirements.
For example, to obtain the Certified Public Accountant (CPA) license, you must reach a minimum number of relevant credits in college, pass a four-part exam, and meet annual continuing education requirements.
Accountants also cover a broader range of nuanced subjects and usually have to specialize more than bookkeepers. As a result, you should always try to find one with experience helping businesses like yours.
While there is a clear difference between accounting and bookkeeping services, the distinction between bookkeeping and accounting software is less obvious. Many products in this space facilitate both functions to some degree.
Whether you pay someone else to manage your bookkeeping and accounting processes or handle them all yourself, software is definitely something to consider investing in for your business. Here’s what you should know about its capabilities.
Software can help your business in many exciting ways these days, but it’s legitimately revolutionized bookkeeping. Accounting software can do all of the following for you:
If you compare that list with the bookkeeping duties from a few sections ago, you’ll notice that accounting software can handle almost all of them automatically.
Unfortunately, accounting processes are harder to automate with software. After all, they usually involve more subjective and analytical thinking, while bookkeeping is typically objective and procedural.
However, software can still help meet quite a bit of your accounting needs. For example, in addition to tracking and categorizing your business transactions, accounting software can also:
That said, if you rely on software to manage one or the other, let it handle your bookkeeping process. If your business is even moderately sophisticated, you’ll still need an expert’s advice for accounting and tax planning.
Software has many powerful bookkeeping and accounting uses, but there are limits to what it can do. You’ll always need to be involved in your financial management to some degree, and it can’t entirely replace expert help.
For example, bookkeeping software can handle recording transactions for the most part, but it’s not infallible. It’s still a good idea to have a human review your accounting records to ensure that everything is categorized correctly.
It’s even more likely that you’ll need to pay someone for help with sophisticated accounting tasks.
You’ll be hard-pressed to find software that can explain the “Generally Accepted Accounting Principles” or the cost accounting system in understandable terms.
That said, financial accounting software is a fantastic tool for any small business owner.
Nick Gallo is a Certified Public Accountant and content marketer for the financial industry. He has been an auditor of international companies and a tax strategist for real estate investors. He now writes articles on personal and corporate finance, accounting and tax matters, and entrepreneurship.
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