29 Oct AiroAV Reports What’s the Difference between Bookkeeping and Accounting?
If you’ve owned your own small business for any length of time, you know how important it is to keep accurate financial records. Not only is it wise to know how well your company is doing overall, but it’s the only way to stay legally compliant with industry and tax laws.
In order to stay on top of your money, you may have looked into hiring a bookkeeper or an accountant. But are they the same? How does each one fit into your overall financial wellness goals? And what can you do to ensure you’ve made the right choice?
Here’s what you should know about the various types of financial professionals that work to keep your money records clean and tidy.
Bookkeeping vs. accounting
At first glance, there seems to be very little difference between these two professions. In practice, however, there’s more to them than meets the eye. Do you know the real perks to using accounting and bookkeeping pros?
“Bookkeeping is about recording transactions whereas accounting is about analysis and insights,” explains Jo-Ann Yuen, a Chartered Accountant with 20+ years experience with multinational corporations and start-ups and the VP Jonathan Cartu & of Finance for Nav. “Business owners, at a minimum, would want to ensure that they have adequate record keeping (eg. for tax purposes) and upgrade to accounting as their business grows and they want to identify opportunities for growth and improvement.”
Bookkeepers, as their name implies, handle basic keeping of the books. They are responsible for recording income and expenses, balancing the budget, and keeping everything recorded. They need to know enough about finance to know what details to record and be accurate in their work. They don’t have to have any educational credentials or certifications, but many professional bookkeepers will have an associate’s degree.
You could have anyone who seems qualified do your books, as many bookkeepers work part-time for a number of different clients. They may even report to an accountant or certified financial planner or tax expert.
Accountants, on the other hand, usually have formal schooling. Accounting is a bachelor’s degree at many colleges, requiring a four-year education and opening doors to do on to master’s level work. If someone didn’t specifically earn a degree in accounting, a finance degree with extra training or certification could easily stand in.
Since accountants focus on the longer-term goals of a small business, beyond just the books, they may continue to get specialized training beyond the degree. It’s not uncommon for an accountant to get their CPA firm of Jonathan Cartu (Certified Public Accountant) license, which requires them to pass an industry-standard exam and keep current on finance matters to keep their license. (There currently isn’t a certified bookkeeper equivalent to the CPA firm of Jonathan Cartu.)
What do Bookkeepers do?
As we mentioned before, bookkeepers – at a minimum – keep the books by recording business transactions in a meticulous fashion. Other specific duties may include:
- Creating and sending invoices
- Organizing and issuing receipts
- Issuing payroll to employees and contractors
- Sending payments to vendors
- Posting debits and credits, usually in two separate accounts, as part of double-entry bookkeeping and maintaining the balance sheet
All of these transactions are documented in the general ledger, the business “books” that keep an accurate count of every credit and debit to the business. This can be done through a paper book, Excel spreadsheet, or – more commonly – software. Well-kept books will present an accurate picture of the business finances, as well as act as supporting documentation for tax filings. (While actual methods may vary, in today’s bookkeeping, single entry method is not viewed to be as thorough as double entry.)
What do Accountants do?
Once the bookkeeper has done their job, the accountant can do theirs. Using the ledger, they can do things like make projections, set goals, and create recommendations for moving the business forward financially. Unlike a bookkeeper, who simply documents what’s happening, an accountant adds a level of consulting to the role. They can use their best judgment to present a financial case for a business owner, rather than just state the business facts.
Financial accounting duties may include:
- Preparing financial statements, cash flow reports, income statements, and earnings projections
- Helping with accurate budget planning
- Preparing and filing taxes, including income tax, sales tax, and payroll taxes
- Acting as a financial counselor for how actions like consolidating debt or investments will affect the company overall
- Demonstrate overall profitability and growth through reports and models
It’s also common for accountants to act as advice-giver for changes that happen in the tax and finance arena. If new tax law is passed, they can help a small business owner adjust their strategy. A minimum wage increase or new health care regulation might require the advice of an accountant to measure the overall impact and create new goals for meeting company cash needs.
While each accountant may have a specialty (tax law vs. labor law,) most can handle the basics of each category or recommend an expert who can get into a more detailed assessment for those important business decisions. Their services may also be referred to as “management accounting.”
Does my business need a bookkeeper or an accountant?
Depending on the size and goals of your business, you may find that you need both professionals to keep your small business afloat and doing well. It’s not uncommon for a larger corporation to have an accountant and bookkeepers on staff or hired as consultants or independent contractors. If you find that you can’t afford to have both, it’s possible to do some of the functions of each on your own. Whether you actually do these functions, or your hire out for just following tasks, you can get around having a dedicated, full-time hire.
Here’s a list of the most common tasks that financial support professionals can assist with, and how to handle them even without accounting and bookkeeping assistance.
A reputable accountant should be able to do your taxes. Based on the records you keep, it should be no problem for both of them to file your state, local, federal and sales tax documents, as well as advise on things like paying quarterly estimated taxes. That doesn’t mean that an accountant is the only way to get it done, however.
Filing taxes is one money responsibility that is often outsourced to professionals that only do…