Both accounting and bookkeeping are essential in managing a business's finances. As a small business owner, it is crucial to understand the difference between the concepts. While the differences can be subtle, understanding them can be critical in, for example, determining whether you should get an accountant or bookkeeper to best suit your needs.
What is Bookkeeping?
Bookkeeping describes the process of keeping records of transactions daily. As more of a record keeper, a bookkeeper can make you aware instantly if something is not looking right. Bookkeepers are responsible for keeping your company's general ledger, a reasonably simple document recording all sales and expenses in your business.
Bookkeeping usually consists of:
- Recording financial transactions
- Maintaining a general ledger
- Financial statements
- Posting debits and credits
Bookkeeping is a historical profession dating back to 2600 BCE. As opposed to accounting, bookkeeping requires no formal qualifications. However, great attention to detail is essential, and licenses are available.
What is Accounting?
Accounting, using financial data provided by, for example, a bookkeeper, interprets and presents this data to the business owner or investors. Accountants will provide you with bigger and broader conclusions about your business. They either work within an industry or by themselves and are hired externally by companies or individuals.
Accounting usually consists of:
- Tax returns
- Analysis of a business's financial health and performance
- Financial statements and reports
- Analyzing key metrics such as the cost of operations
- Supporting financial decisions
Accounting can be traced back to ancient civilizations. Nowadays, it can assess, for instance, whether your company is profitable and, based on this, provide you with strategic recommendations. Accountants can develop reports and financial statements of interest for your investors or shareholders. While 'accountant' is not a protected term, meaning anyone can call themselves an accountant, most will have a relevant advanced qualification.
Bookkeeping vs. Accounting
There are several critical differences between bookkeeping and accounting:
- Bookkeeping: Bookkeepers often record daily sales and expenses of a company, process a business's payroll, develop financial statements, manage bank reconciliations, send invoices, and maintain the general ledger
- Accounting: Accountants often analyze a company's cost of operations, perform audits, prepare adjusting entries, analyze a business's financial health, file tax returns, forecast finances, and perform advisory services
- Bookkeeping: No qualifications are required to become a bookkeeper
- Accounting: While it is not essential, most accountants hold a degree, and most will have a relevant advanced qualification
- Bookkeeping: Clerical role - mainly record financial information
- Accounting: Analytical role - review and analyze financial information and provide advisory, forecasting, and strategic services
- Bookkeeping: Forms the basis for accounting
- Accounting: Uses the information prepared in bookkeeping
- Bookkeeping: Results in the information that can be used as a basis for accounting
- Accounting: Results are financial statements that help the business make informed decisions
Do I Need A Bookkeeper or Accountant?
There are various factors to consider when deciding whether to get a bookkeeper or an accountant. What is best for your company depends on, for example, the size of your business, the services or goods offered, the sector you are working in, the size of your team, and the financial management and state of your business. While bookkeepers are great for keeping an eye on your business transactions, accountants can be a great asset in your company's decision-making. Which profession to go to depends on the task at hand. If you need help keeping on top of the transactions coming in and out of your company accounts, a bookkeeper is ideally suited for the job. If you, however, require help with your taxes or want to have a more strategic adviser and outlook on your company's financial planning, an accountant is better suited for your needs. Bookkeepers charge a lower rate than accountants. So, if you want to save some bugs, hiring a bookkeeper may be a better choice.
Bookkeeper and Accountant FAQs
- What can a bookkeeper not do?
Bookkeepers do not provide strategic advisory or forecasting services to your company. They record financial transactions and maintain your ledger.
- Is accounting a part of bookkeeping?
Bookkeeping is a part of the accounting process. A bookkeeper prepares the financial information an accountant uses, e.g., advisory services, forecasting, or financial reports.