Many small business owners use “bookkeeping” and “accounting” interchangeably, but there are important distinctions. Bookkeeping and accounting are closely related, but they serve different roles. It’s important to understand the differences because it will affect your day-to-day operations.
Depending on whether you are using a bookkeeper or an accountant, you will need to make different decisions related to hiring, costs, and responsibilities. This short guide will identify the different roles played by these professionals, so you know when to use each one.
What is bookkeeping?
Bookkeeping is the system businesses use to keep track of financial transactions as they happen. To ensure accuracy and up-to-date information, you must record and organize daily financial transactions in real-time. Some people don’t realize how important it is to handle these tasks immediately, which leads to mistakes and confusion.
There are many ways you need to take care of your bookkeeping responsibilities, including:
- tracking income
- keeping track of expenses
- logging invoices
- and recording payments.
The focus of bookkeeping is to maintain accurate and up-to-date records. Bookkeeping is the foundation of accounting, and if you keep good records, you will have a better picture of how your business is doing in real time.
How much money did you bring in on a particular day? Are the invoices paid? Are your bills current? You should be able to answer these questions quickly. This can also save you trouble down the road if you run into tax issues and/or face an audit.
What is accounting?
Accounting is the process of tracking every dollar that flows into and out of your business and then organizing that information to show the financial performance of your business. An accountant will also analyze, interpret, and report financial data to keep your business in compliance for tax purposes.
Using bookkeeping data to generate insights and reports will help you see how your business is performing so that you can make decisions, both for daily operations and for future growth. Accountants assist in financial planning so that you can best leverage your resources to grow your business. Accounting includes regular bookkeeping tasks like recording data, but goes beyond that to focus on understanding and strategy.
5 differences between bookkeeping and accounting
Here are the main differences between bookkeeping and accounting:
1. Daily tasks vs analysis
Bookkeeping focuses on recording transactions and managing daily financial activity, while accounting focuses on analyzing data and producing reports.
2. Scope of work
Bookkeeping focuses on organization and accuracy, while accounting also includes reporting, forecasting, and strategic planning.
3. Skills and qualifications
Bookkeeping often requires training or a certification, often obtained as part of an associate’s degree. This can take about 2 years.
Someone practicing in accounting will typically need to have a bachelor’s degree, which usually takes about 4 years, and may include CPA certification. Many CPAs (Certified Public Accountants) also obtain a Master’s in Accounting. An accountant who offers tax services does not necessarily need a license, but will need a CPA license to sign audit reports, represent clients before the IRS, or file reports with the SEC. Only about 50% of U.S. accountants are licensed CPAs.
The higher qualifications of an accountant often come with broader responsibilities.
4. Role in business decisions
Bookkeepers provide data, which is important, and may require knowledge of business principles and processes. Accountants interpret data and advise clients, helping to guide important business decisions.
5. Timing and involvement
Bookkeeping involves involvement in ongoing, day-to-day actions, because it is vital to track financial information as it happens. Accounting may be done periodically, such as monthly, quarterly, or annually. Because accounting is strategic, it is important for accountants to have a data collection to work with.
What does a bookkeeper do?
Bookkeepers handle day-to-day financial record-keeping, which includes:
- Recording transactions, such as sales
- Managing invoices and payments
- Reconciling bank accounts
- Generating basic reports
A bookkeeper helps keep financial data accurate and organized. It should always be easy to immediately find all of these transactions and reports.
What does an accountant do?
Accountants work with financial data to provide insights and ensure compliance. This includes
- Preparing financial statements
- Filing taxes (which is usually done quarterly to avoid penalties)
- Analyzing performance to see how well your business is doing
- Advising on financial decisions
You should always have an accountant you trust, because they will be able to assist more if you involve them in higher-level planning.
Bookkeeping vs accounting cost
The cost involved in hiring bookkeepers vs accountants differs based on complexity and level of service.
Bookkeeper costs
Bookkeepers may command a wide range of salary. You may be paying from about $300 to $2,500/month for ongoing services. Bookkeepers generally have a lower cost due to the narrower scope of their responsibilities, but you may pay more depending on qualifications and what they actually do.
Accountant costs
Accountants charge more for their services because they have a higher level of expertise and offer more strategic input. They may charge from about $100 to $300 or more per hour, and from about $500 to $2,000 or more per hour for tax services.
Higher cost reflects expertise and strategic input, and professional accountants are generally insured to take responsibility for errors they make.
What affects cost
There is a wide range of factors that can influence the cost of your bookkeeper and/or accountant, including:
- How big is your business? You may be able to handle the transactions yourself if you’re just starting a business and it is very small, but when your business grows, handling those tasks will take you away from important work growing your business.
- How many transactions does your business handle every day?
- How complex are your transactions? For instance, having different kinds of transactions is more complicated, as is handling payroll and insurance when you have start hiring employees.
- What kind of services are required?
- Where is your business located?
- How much experience does your bookkeeper/accountant have?
When do you need a bookkeeper vs an accountant
Most businesses need both of these professionals at different stages.
When to hire a bookkeeper
You can hire a bookkeeper when you have regular transactions to manage and you need help staying organized. This will keep you from spending too much time on record-keeping.
When to hire an accountant
Many businesses use accountants to handle the tax complexity that comes with running a business, and accountants also assist with business growth and with financial advice and planning.
When to use both
It may be more efficient, even financially, to use both bookkeepers and accountants. A bookkeeper earns less and handles daily tasks, while an accountant costs more but handles strategy and compliance. Having both bookkeepers and accountants is a common setup for growing businesses.
Can software replace a bookkeeper or accountant?
It is a myth that you can replace a bookkeeper or accountant with software. While software can handle many bookkeeping tasks, it cannot replace the judgment of a skilled person.
What software can do
Software can:
- Track income and expenses
- Automate invoicing
- Generate reports
Many businesses start using bookkeeping or accounting software because it streamlines work processes and saves time and money. Software has revolutionized the way businesses are run.
What software cannot replace
Software cannot
- Offer strategic advice
- Handle complex taxes
- Assist with financial planning
- Understand ethics and other human issues
An experienced, trained financial services professional can offer insight and offer tailored advice that no program can provide.
Practical approach
Software is useful and can definitely help save you money. Software can also provide regular support when you and your employees are trained and know how to take advantage of all its uses. Many businesses use both software and professional support.
Common mistakes when choosing between bookkeeping and accounting
It’s okay to change your mind, even if you have operated using different resources for years. The best thing for your business is based on your business needs, and that can change over time.
Here are some of the common mistakes people make:
- Hiring an accountant when only bookkeeping is needed. If your business is small and your processes are not complex, you may only need a bookkeeper. Accountants are more expensive, and you want to be careful about how you use your business resources.
- Trying to manage everything without support. You may think you can handle everything yourself. Bookkeepers and accountants are considered financial professionals and they receive many hours of education and training.
- Confusing roles and expectations. It’s important to understand what roles bookkeepers and accountants play so you are taking advantage of them while not wasting business resources.
Preparing your business for financial management
Setting up a business involves more than having a great idea and opening a shop. There are a lot of other considerations, and your business will be subject to local and federal regulations. Both bookkeeping and accounting are easier when your business is properly set up.
Business structure: What kind of structure is best for your business? That depends on factors such as size and ownership. You may want to have a sole proprietorship, which is only yours, or you may want to create an LLC, which gives you liability protection. Once you make the choice, you will need to ensure that you are following the rules on how to run that kind of business.
EIN: Your business will probably need an Employer Identification Number, which identifies your business. You will need an EIN for paying taxes and handling payroll and other important tasks.
Separate bank account: One thing people don’t realize is that they need to keep their personal assets separate from their business assets. The most important one is that you will need to set up a separate bank account.
Organized financial records: Businesses have certain requirements for maintaining and filing business records. If you are not in compliance, it can cause you problems years later.
Starting out with a good setup reduces errors and confusion. Platforms like Tailor Brands help a lot of business owners with important tasks like:
- Forming their business, and choosing the best structure;
- Managing documents and compliance;
- And creating invoices, tracking payments, and handling basic bookkeeping. Using this kind of platform means you can handle these tasks in one place, and platforms like Tailor Brands also offer support for organization and day-to-day financial management.
This is not a replacement for accountants, but assists in handling regular business operations. There are never any guaranteed financial outcomes and these are tools that support your organization, but they cannot replace professional advice.
Conclusion
Accounting vs bookkeeping? You need both. Bookkeeping and accounting serve different but complementary roles. While bookkeeping focuses on daily records, accounting focuses on analysis and strategy. Most small businesses benefit from using both over time, but it is important to understand the most efficient and effective way to take advantage of both.
The right choice for bookkeeping and accounting depends on the complexity and stage of the business. You will have different needs over time, and as your business grows, your accounting needs will grow too. This is something to celebrate, because it means you’re doing well. Just make sure you have the resources you need.