Posted by Shivali Anand
December 23, 2021 | 4-minute read (685 words)
Accounting and bookkeeping are a crucial part of managing your business’s finances. However, many small business owners are unfamiliar with how the roles differ and use the terms interchangeably.
Unaware of the distinctions, firms may hire a bookkeeper when they require an accountant, or the other way around. While the roles often overlap, it’s best to consider bookkeeping a part of the accounting process.
Here is a quick overview of the differences between bookkeeping and accounting so you can decide which meets your business’s needs best.
Bookkeeping is the process of documenting and categorizing business transactions to get a picture of a company's current financial situation. Essentially, bookkeepers record and organize financial data. Basic bookkeeping is required to obtain different loans and grants, and to participate in certain government programs.
What is the role of a bookkeeper?
A bookkeeper is not required to hold a bachelor's degree. You may discover that many very adept bookkeepers with years of experience lack a business degree.
Some of a bookkeeper's typical responsibilities include:
- Keeping track of daily transactions, such as extracting data from source documents and entering journal entries into accounting software.
- Performing reconciliations, meaning balancing bank accounts and examining the general ledger to ensure that financial data is appropriately recorded.
- Entering data such as the financial information needed to execute payroll and track debits and credits are entered. This may also entail incorporating changes to employee tax withholdings and salaries or wage rates.
- Money management, such as keeping track of accounts payable and receivable to ensure that suppliers are paid on schedule and that collections are received on time.
- Generating accurate financial statements and other reports for company leaders.
Accounting is inherently more subjective than bookkeeping. While bookkeeping is mostly concerned with recording financial transactions, accounting looks at what the financial data means. It aims to give insights into your financial health based on bookkeeping information. Accounting, simply described, is a tool that helps small business owners to track their success.
What is the role of an accountant?
In comparison to a bookkeeper, the position of an accountant necessitates a greater degree of experience and education. Accountants often have a bachelor's degree in accounting and have met state licensing requirements to earn their CPA designation. They understand current tax regulations and processes and stay abreast of changes to the taxation landscape.
Some of an accountant's typical responsibilities include:
- Producing financial statements, which may entail modifying the trial balance, producing income statements, balance sheets and cash flow statements.
- Preparing tax returns, which typically involves creating the financial reports necessary to prepare tax returns, preparing tax filings and submitting them to the IRS.
- Meeting government obligations, which refers to creating legal or compliance documentation as required by state or federal law.
- Weighing financial decisions, such as acting as a consultant for business decisions by offering analyses and financial breakdowns. The accountant may consider the financial implications of potentially buying new equipment or taking out a loan of credit, for example.
To recap, an accountant is not the same as a bookkeeper
A bookkeeper is in charge of keeping a systematic record of the company's financial activities. An accountant's job is to assess, analyze, and report on a company's financial health, using the data that has been collected. Accountants are also better equipped to provide tax advice.
Should you hire a bookkeeper or accountant?
There is no one-size-fits-all explanation for every circumstance. The most crucial thing to understand is that bookkeepers are responsible for organizing and keeping financial data, whereas accountants provide more in-depth financial knowledge and advice.
As your business expands, the number of financial transactions will increase. You may elect to handle your company's finance chores yourself at first, then assign the day-to-day transactional input to a bookkeeper as the company grows.
As your organization becomes more sophisticated, more time and skill will be required for financial analysis, compliance, reporting and cash flow management. Prepare to employ an accountant who can keep your entire accounting system on track and in good standing, free up your time and help you make intelligent business decisions.