Bookkeeping vs. Accounting – What’s the Difference?
Though bookkeeping and accounting both serve to help you get a clear picture of your business’ financial health, they support your business at different stages of the financial workflow.
-Bookkeeping involves measuring and recording all financial data in order to get a picture of your business as a whole – helping you to later determine areas of improvement and/or get a better understanding of how your business is performing.
-Accounting is more focused on analyzing the data assembled by the bookkeeper to inform business decisions and process tax returns, including helping you to better understand your organization’s profitability, business growth, areas for improvement, and cash flow.
Lots of people use the terms bookkeeper and accountant interchangeably. But, the truth is they’re really not. Although the two roles are intertwined, they serve different functions for your business and operate at different levels. A bookkeeper’s work is very transactional. They’re in the weeds recording the specifics of every dollar into and out of your company. An accountant, on the other hand, is more analytical. They take the information a bookkeeper compiles to be able to analyze and offer insight into how your business is doing.
Here’s a breakdown of the difference between bookkeeping and accounting in one digestible tweet (or, 280 characters):
Bookkeeping is the process of consistently recording financial transactions. Accounting is the high-level process of interpreting, analyzing, reporting, and classifying the data provided during the bookkeeping process to help business owners make informed decisions.
One process relies heavily on the other to help your business grow and achieve financial success. Still confused on where the line is? Here’s a more in-depth analysis of the two roles:
The Role of Bookkeeping
Simply put, bookkeeping is the process of consistently recording financial transactions and is a key component of building a successful business. That’s because it involves measuring and recording all financial data in order to get a picture of your business as a whole – helping you to later determine areas of improvement and/or get a better understanding of how your business is performing.
Generally, bookkeeping consists of:
-Recording financial transactions
-Posting debits and credits (money out and money in)
-Managing bills and invoices (money you owe and money you’re due)
-Reconciling monthly bank statements (making sure the money in your bank matches the money in your books)
Most of the above is done by maintaining a general ledger – which is a simple document that a bookkeeper uses to track and record sales and expense receipts. Depending on the size of your business and how many transactions are recorded each day, week, and month, the general ledger will vary in complexity. Your general ledger can be created using bookkeeping-specific software or a simple Excel spreadsheet.
A record of sales and expenses for your business is required by the IRS – highlighting why bookkeeping is something all businesses should take seriously.
Required Education for Professional Bookkeepers:
While we’ve all heard of a friend-of-a-friend doing an organization’s bookkeeping as a favor (or for free food), generally, bookkeepers should have at least two years of experience or an associate’s degree. Professional bookkeepers should also be organized, knowledgeable about financial topics, and have some knowledge of the accounting process. (The more, the better!)
The Role of Accounting
While bookkeeping is focused on transactional records, accounting is more focused on analyzing the data assembled by the bookkeeper to inform business decisions and process tax returns.
Generally, accounting consists of:
-Working with the business owner to understand the impact of financial decisions
-Preparing adjusting entries
-Preparing business financial statements
-Interpreting costs of operations
-Completing and filing tax returns
Working with an accountant will help you get a better understanding of profitability, business growth, areas for improvement, and cash flow. Some bookkeeping services, like Anchor Bookkeeping, integrate building CPA-approved financial statements into their systems in order to ensure a seamless handoff from bookkeeper to accountant.
Required Education for Professional Accountants: To be an accountant, individuals must have a bachelor’s degree in accounting or related finance degree. To become licensed, accountants typically will need at least two years of work experience plus education to sit for the Uniform Certified Public Accountant exam in order to earn the title of Certified Public Accountant (CPA).
To DIY or Outsource?
Some business owners opt to be heavily involved in both the bookkeeping and accounting process by largely managing their finances on their own, while others choose to outsource these business functions in order to focus on other aspects of their business. Regardless of whether or not you choose to DIY your books or hire an expert, one thing is clear: Properly organized financial documents by a bookkeeper coupled with valuable insight by an accountant will help you gain a clear and complete picture of how well your business is actually doing and contribute to your overall financial success.