The Difference Between Bookkeeping and Accounting: A No-Nonsense Guide
Whether you’re the owner of a local shop or you’re doing your business online, accounting and bookkeeping are equally important for your business. Both have the same goal: to manage your financial help and make your business stronger. Still, while the boundaries may be blurred, there’s a significant difference between bookkeeping and accounting. Bookkeeping is the process of gathering data associated with your business activities, while accounting analyzes that data, helping you make better decisions for your business.
If you’re not a financial expert, there are good chances that you didn’t understand a word from that definition, which means you need to be better informed about bookkeeping and accounting responsibilities. Luckily, our guide will help you figure out the similarities and discrepancies between these two positions, as well as when and why you should hire someone to fill either role.
What Is the Difference Between Bookkeeping and Accounting?
Bookkeeping is where it all starts: It’s the first step in taking care of your business’s financial health. It involves recording and collecting your business’s daily financial transactions, including bank transactions and receipts for sales or purchases. Bookkeeping refers to the technical process of organizing and preparing your profits and expenses for further analysis.
Once that’s done, the financial data you get is subjected to the accounting process. Accounting formulates the big picture of your business by dissecting and interpreting financial information. Accurate accounting is crucial for business owners, as it provides insight into their business’s financial condition.
Basically, you shouldn’t pit bookkeeping vs. accounting. Bookkeeping is more about record keeping and classification, while accounting requires more knowledge to “read” the financial information. Both are essential for a successful venture. Many people do some sort of bookkeeping, i.e., they record receipts and categorize their expenses every month to make budgeting decisions. However, business bookkeeping is more stressful, as reconstructing your business’s financial history is no small feat.
The accounting process goes a step further, helping business owners run their business better and, more importantly, in accordance with the law. Accountants are responsible for payrolls and taxes, too, so they need to stay up to date with the state laws.
The Bookkeeper vs. the Accountant
Generally, the bookkeeper records and categorizes transactions, while the accountant analyzes them and gives business owners advice on future business decisions. Bookkeepers and accountants share the same field of interest, and sometimes, the same person can be in charge of both jobs. However, a bookkeeper and an accountant are separate roles that require disparate levels of education, come with different duties, and have different salaries. Together, bookkeepers and accountants take care of your finances and help your business stay on the right track.
What Does a Bookkeeper Do?
A bookkeeper is responsible for taking care of your daily finances. They track your bank transactions, record your sales and purchases, and maintain your general ledger and payroll.
The bookkeeper must record your financial transactions regularly and organize them in a way that’s understandable to you. Depending on your needs, bookkeepers can create monthly or weekly financial statements displaying your company’s income and all its expenses.
A bookkeeper’s job doesn’t require any formal education, but they need to know how to use bookkeeping software, like QuickBooks or FreshBooks. A bookkeeper has to be a responsible person, since one of the most important bookkeeper duties is to take care of a general ledger – a book that contains records of all your sales and purchases.
Although there’s no bookkeeping school, they can get licenses from the American Institute of Professional Bookkeepers (AIPB) and the National Association of Certified Public Bookkeepers (NACPB) to prove that they passed the necessary tests and have the required experience. It’s always good to know that your bookkeeper is certifiably ready to handle your daily finances. Moreover, both agencies require yearly educational courses for license holders to learn new skills.
Now when you know what the role of a bookkeeper is, you can think about how much money you’re ready to pay for this service. A bookkeeper’s salary depends on several factors: Your business needs, the state your business operates in, and the level of expertise you’re looking for.
Before looking for a professional bookkeeping service, figure out what bookkeeping skills you need and how often you’ll need them. Some business owners learn to use bookkeeping software and only pay for accounting services. However, if your business documentation is too complicated to manage, an experienced bookkeeper is what you need. Once you know the tasks you need one for, you’ll know whether to hire a part-time or a full-time bookkeeper and whether they need to be certified.
What Is the Role of an Accountant?
An accountant interprets financial data recorded by a bookkeeper and gives business owners detailed insights into their business to help them make financial decisions.
Accounting is a practice that has strict requirements and standards each accountant must follow. During financial accounting, an accountant first verifies and analyzes the data provided by a bookkeeper. Then, the accountant creates financial statements and reports that showcase your business performance. These documents include balance sheets, and income and cash flow statements.
One of the most important accountant responsibilities is tax preparation and filing tax returns. Unlike bookkeepers, accountants must be familiar with tax laws, know how to calculate deductions, and prepare your returns for the IRS. An accountant also reviews your general ledger to see whether all transactions are correctly recorded.
The other part of accounting is advisory: Providing financial advice to business owners based on their financial reports. An accountant with knowledge about your business’s financial health and market opportunities can greatly help your business growth.
Although there is a significant difference between bookkeeping and accounting, a bookkeeper and accountant work in tandem. We can think about an accountant as someone who gives directions to a bookkeeper when needed. For example, an accountant keeps track of law changes related to tax returns and helps bookkeepers manage payrolls.
Unlike a bookkeeper managing daily transactions, an accountant uses this data to offer an all-encompassing overview of financial health, and helps you plan for the future. Even if you can do bookkeeping on your own, you must hire a professional to do your accounting. After all, the primary difference between an accountant and a bookkeeper is schooling. To be an accountant, you have to get at least a bachelor’s degree from an accredited university, and further your expertise with additional certificates and licenses.
The distinction between a regular accountant and a certificated public accountant is also essential. A CPA has at least 150 hours of specialized education and a four-part exam under their belt, and meets the American Institute of CPA’s experience requirements.
CPAs win every time in a CPA vs. an accountant comparison, especially if your business has complex tax returns. CPAs specialize in doing taxes, and they can communicate with the IRS on your behalf. However, CPAs are also more expensive to hire.
Bookkeeping Versus Accounting – An Overview
If bookkeeping and accounting looked like the same job to you, now you know that these are two different roles with different responsibilities and education. They are both parts of the same process – taking care of a business’s financial health – but a bookkeeper and an accountant have different responsibilities. By now, you probably have a clear vision of what services you need for your business, but just in case, we’ll outline the critical tasks professionals from both branches perform. That way, you’ll always know what the difference between accounting and bookkeeping is:
- Perform day-to-day financial tasks
- Record bank transactions, purchases, sales, receipts
- Take care of all your income
- Manage your general ledger
- Organize and categorize business expenses
- Manage the payroll
- Use bookkeeping and accounting software to produce weekly or monthly statements for business owners
- Work closely with accountants and send them statements quarterly for the purpose of tax payments
- Analyze and interpret financial data
- Advise bookkeepers on how to manage transactions and prepare the payroll
- Prepare financial statements for business owners (balance sheets, income statements, and cash flow statement)
- Review the general ledger and other documents
- Prepare taxes, calculate deductions, and work with the IRS
- Advise managers and business owners
Our guide answers the question: is bookkeeping and accounting the same? Financial bookkeeping is more of a technical position, while accounting requires detailed knowledge about finances and taxes. Bookkeepers and accountants work closely to create a clear financial picture for business owners, but they provide completely different services. While it’s possible to do your own bookkeeping with the right software, an accountant’s job can only be done by a professional with a degree. All businesses need both accounting and bookkeeping services to manage their financial records and successfully grow their business; it’s just a matter of who you can afford to hire.
What exactly does a bookkeeper do?
You can read our guide to learn what is a bookkeeper and what are the responsibilities of a bookkeeper. Generally, a bookkeeper records daily transactions and organizes them for business owners and accountants. Based on the data provided by a bookkeeper, accountants can produce financial statements and offer financial advice to the business owner.
Is it hard to be a bookkeeper?
Although you don’t need to go to school and get a diploma to be a bookkeeper, you need to know managing finances and obtaining the certificate from the AIPB or the NACPB. You also need to learn how to use software products like Xero or Quickbooks.
What is the difference between accounting and bookkeeping?
Bookkeepers and accountants help business owners take care of their finances, but they have different responsibilities. Bookkeeping means recording business income and expenses, and organizing them for business owners and accountants. An accountant analyzes and interprets financial reports to help business owners manage their finances.
So, you can see that while most people use the two terms interchangeably, there is actually a subtle distinction between the two professions. We hope we’ve finally given you a sensible answer to this tricky question and that you now fully understand the difference between bookkeeping and accounting.