When it comes to bookkeeping and accounting, a lot of folks think they’re basically the same thing. Like tomato and tomahto, potato and potahto, they’re just two sides of the same coin, right? Not exactly.
The two terms are often used interchangeably, but there are several important distinctions between them. Not every bookkeeper is an accountant, and not every accountant is a bookkeeper.
We’re here to unpack the differences between bookkeeping and accounting, and how this affects your small business. That way, you can make an informed decision about which service you need and what you need it for.
Let’s dive in, shall we?
What’s the Difference Between Bookkeeping and Accounting?
Let’s start by taking a look at the basic definitions, fundamental roles, and functions of accounting and bookkeeping for small businesses.
What is small business bookkeeping?
Small business bookkeeping is the recording and organization of financial data and business transactions. Once upon a time, businesses actually used physical books and ledgers, which is where the name comes from. Bookkeeping in olden times might elicit images of old-timey misers hunched over ledgers with a quill, reconciling their sales for the day. These days, however, business owners can ditch the hand-written books and instead choose from a variety of softwares to track this data.
Some of the major tasks for a bookkeeper include:
- Recording transactions
- Categorizing expenses and income
- Reconciling bank statements
- Managing accounts receivable and payable
- Maintaining general ledgers
- Keeping and organizing financial records
- Managing cash flow
- Tracking budgets
Bookkeeping is the foundation of accounting, which we’ll talk about next.
What is small business accounting?
Small business accounting is the tracking, analysis, and interpretation of financial data. An accountant takes the raw data compiled by the bookkeeper and translates it into comprehensible, actionable information. This is why you’ll often see crossover between the two jobs.
Just some of the important documents that accountants work with include:
A balance sheet is comprised of assets, liabilities, and shareholders’ equity. Income statements include revenue, gains, expenses, and losses—all of which are used to calculate a business’s net income. A cash flow statement consists of calculating operating activities, investing activities, and financing activities.
Accounting isn’t just preparing the numbers themselves—it’s about analyzing those numbers and working to uncover big-picture problems and solutions. That’s why accountants are often part of the decision-making process for a business’s major financial questions. They might create budgets and forecasts to assist in planning for future expenditures, revenue targets, or resource allocation.
What’s the difference between bookkeeping and accounting?
The basic difference between bookkeeping and accounting is recording vs. analysis. A bookkeeper records financial data, and an accountant interprets and analyzes it. Because of this additional responsibility, an accountant will have more training than a bookkeeper—typically going on to attain a certification to become a certified public accountant (CPA).
Whether you keep modest books or juggle complex accounts, there are several elements of bookkeeping and accounting that are critical to a small business.
5 Reasons That Bookkeeping and Accounting Matter
Why should you hire an expert to carefully manage your business’s finances and records? Here are five ways a professional accounting team can benefit your business.
- They ensure your business and personal finances stay separated.
By separating your personal finances from your business, you ensure that you won’t be held personally liable for any business-related debts or issues.
- They help you identify financial errors ASAP.
When you’re keeping track of daily transactions and reconciliations, you’re that much more likely to catch errors that could cost your business a lot more down the road.
- They simplify tax season for you.
If you’re working with a bookkeeper and/or an accountant, these professionals can streamline your tax-filing process and make it a lot easier.
- They let you monitor your business’s financial health.
Above and beyond catching mistakes, it’s important to pinpoint possible improvements or changes to your process. An accountant, in particular, is well positioned to identify areas for potential improvement.
- They keep you organized—and that makes everything easier.
When your records and documents are well organized and easily accessible, you’ll enjoy a streamlined process if you want to expand your business, apply for a loan, or run a report.
Bookkeeping or Accounting? That Is the Question.
The short answer is, it depends. Consider the number of your transactions, inventory size, and budget—these differ from business to business. Larger organizations generally have both, which makes sense since there’s more to manage.
Consider hiring a bookkeeper if you’re generally recording daily transactions and if you have smaller inventories or a less complex structure to your business. Keep in mind, too, that bookkeepers tend not to cost as much as accountants, so if you’re operating on a tighter budget, this could be a better choice for you.
Consider hiring an accountant if you have more complex transactions and larger inventories to monitor. They can conduct internal audits, offer financial forecasts, ensure tax compliance, and provide insight into the business’s overall financial health. This makes them a valuable player in the decision-making process for expansion or investment.
The best news is, with KYN Accounting, we make the choice easy for you, because we do both.
Hit the Books With Know Your Numbers Accounting.
The best time to hire a bookkeeper or accountant is before you encounter financial problems. But the second best time is now. If you’re still not sure whether you need some additional support from an accounting professional, here’s some insight into when that assistance is especially useful.
At Know Your Numbers Accounting you get small-business-focused bookkeeping and accounting services, including restoring cluttered records, guidance to set actionable financial goals, and external audit support. We’re happy to help you understand and meet your record-keeping goals so your i’s are dotted, t’s are crossed, and all your numbers add up.
Schedule a free consultation to chat about your bookkeeping and accounting needs today!
Still feeling at sea about the nitty gritty differences between bookkeeping and accounting? Leave your questions in the comments below!