What is the Difference Between Accounting vs Bookkeeping?
The financial world can sometimes seem like a labyrinth of complex terms and job titles. Two of the most common terms you’ll encounter are “accounting” and “bookkeeping.” While these two terms are often used interchangeably, they refer to different aspects of the financial management process. In this blog, we will delve into the differences and similarities between accounting and bookkeeping.
What is Bookkeeping?
Bookkeeping is the process of recording and organizing a business’s financial transactions. It is a crucial part of the accounting process, providing the groundwork upon which all other financial management tasks are built.
A bookkeeper’s primary role includes:
- Recording financial transactions such as sales, purchases, income, and payments.
- Posting debits and credits.
- Producing invoices.
- Maintaining and balancing ledgers, accounts, and subsidiaries.
- Completing the payroll.
The accuracy of a company’s financial data largely depends on the efficiency of the bookkeeping process. A bookkeeper ensures all financial transactions, whether it’s an income statement or balance sheet, are accurate and up-to-date.
What is Accounting?
Accounting is a more high-level process that uses the financial data compiled by a bookkeeper or business owner to produce financial models. It is much more subjective than bookkeeping, involving strategic analysis and interpretation of financial data.
An accountant’s main duties include:
- Preparing to adjust entries (recording expenses that have occurred but aren’t yet recorded in the bookkeeping process).
- Preparing company financial statements.
- Analyzing costs of operations.
- Completing income tax returns.
- Aiding the business owner in understanding the impact of financial decisions.
Accounting provides a broader understanding of a company’s current financial state and future trajectory. A certified public accountant often performs these tasks, providing strategic financial guidance.
Key Differences Between Accounting and Bookkeeping
The main differences between bookkeeping and accounting are that bookkeeping is primarily transactional, focusing on day-to-day operations and maintaining accurate financial records. In contrast, accounting is more analytical, providing business insights based on the data collected from the bookkeeping process.
While a bookkeeper records and classifies the company’s financial transactions, an accountant takes this information and makes high-level financial models, forecasts, and reports that help business owners make more informed decisions.
In short, bookkeeping is the first step in the financial cycle, with accounting following to provide further analysis and insights.
The Importance of Both Accounting and Bookkeeping
Bookkeeping and accounting are both essential to your business. Good bookkeeping habits help prevent unnecessary financial stress, while sound accounting practices give you the information needed to make strategic decisions for your business growth.
While bookkeeping and accounting are distinct, they’re closely intertwined. Understanding the difference between the two can help you better manage your business’s financial health and make more informed decisions for your company’s future.
Accounting vs. Bookkeeping for Small Business Owners
As a small business owner, it’s crucial to understand how both bookkeeping and accounting play into the financial health of your company. Bookkeeping, which involves the daily recording of transactions, is a necessary foundation. However, accounting expands upon this foundation and provides a big-picture view of your business’s financial standing.
Even if you’re operating on a smaller scale, having a well-organized general ledger, an updated financial report and a clear understanding of your company’s financial information is essential. Accounting provides these insights, helping you understand not just where your money is going, but also how to strategize for future growth.
While bookkeeping can often be managed by the business owner or a team member with the right software and basic financial knowledge, accounting can be a bit more complex. It may require a professional with a bachelor’s degree in the field to fully interpret and analyze the data collected.
Hiring a Professional Accountant to Protect Your Financial Information
One of the top reasons to hire a professional accountant is their ability to protect and enhance your financial information. An accountant doesn’t just crunch numbers; they analyze, interpret, and present the data of financial reports in an understandable format.
Here are the major benefits of hiring a professional accountant:
- Expert Guidance: An accountant can provide expert advice on tax deductions, business expenditures, and financial decisions. Their insights can help you save money and make profitable decisions.
- Time-Saving: Managing your finances can be time-consuming. By hiring a professional accountant, you can dedicate more time to other aspects of your business, such as product development or customer service.
- Risk Reduction: Mistakes in bookkeeping or tax filing can lead to fines or legal issues. An experienced accountant knows the ins and outs of financial laws and regulations, reducing the chance of errors.
- Future Planning: Accountants can use their financial data to forecast trends and project future revenues or expenses. These projections can guide your business planning and help you prepare for the future.
Accounting and bookkeeping are both crucial for the success of any business, small businesses or large. Understanding the difference between the two and knowing when to involve a professional can make a significant impact on your business’s financial health and growth.
What are the Credentials of an Accountant?
An accountant’s credentials often involve a more rigorous educational and certification path compared to a bookkeeper. This is because accountants handle more complex tasks, such as preparing and analyzing financial reports, making strategic business decisions, and even handling tax issues.
Most professional accountants hold a bachelor’s degree in accounting or a related field. They may also pursue further education, such as a master’s degree in accounting or business administration. Additionally, many accountants choose to become Certified Public Accountants (CPAs). To become a CPA, they must pass the Uniform CPA Examination and meet other state-specific requirements.
Apart from general accountants, there are also specialized tax accountants, forensic accountants, and management accountants, each with their own set of credentials and areas of expertise.
What are the Credentials of a Bookkeeper?
On the other hand, the credentials for a bookkeeper are less stringent. While some bookkeepers may have a degree in finance or a related field, it’s not always necessary. Many successful bookkeepers learned on the job or completed a certificate program.
The main job of a bookkeeper is recording financial transactions, managing invoices, and keeping track of accounts payable and receivable. These bookkeeping tasks are fundamental to maintaining an organized financial record for any business. In recent years, proficiency in bookkeeping software has become a highly desirable skill for bookkeepers. Programs like QuickBooks or Xero can automate many routine bookkeeping tasks, making the bookkeeper’s job more efficient.
Some bookkeepers also choose to gain certification to demonstrate their competence and professionalism. The Certified Bookkeeper (CB) designation is one such certification offered by the American Institute of Professional Bookkeepers (AIPB).
Understanding the credentials of both accountants and bookkeepers can help you determine what kind of professional support your business needs. Whether it’s the day-to-day recording of transactions or the more complex job of analyzing a cash flow statement, both roles are crucial to your business’s financial health.
The Cost of Hiring an Accountant vs. a Bookkeeper
The cost of hiring an accountant or a bookkeeper varies depending on the complexity of the work, the level of experience of the professional, and the geographical location.
- Accountant Costs
Generally, accountants charge more than bookkeepers due to their higher level of education, expertise, and the complexity of tasks they handle, such as preparing cash flow statements and performing financial analysis.
Accountants usually charge by the hour, with rates ranging from $150 to $400 per hour for a certified public accountant in the United States. However, for small businesses, many accountants offer a monthly rate that can range from $500 to $2,500 per month. This typically includes services such as financial consultation, tax preparation, and financial reporting.
- Bookkeeper Costs
Bookkeepers, on the other hand, usually charge less since their tasks are more transactional and less analytical. The average hourly rate for a bookkeeper in the U.S. ranges from $30 to $50. For ongoing services, bookkeepers often set flat monthly rates that can range from $200 to $800 depending on the volume of transactions and the complexity of the work.
Keep in mind that these are average costs, and the actual cost can vary greatly based on the specific needs of your business.
Investing in Financial Services
Regardless of the costs, investing in accounting and bookkeeping services can be beneficial for businesses of all sizes. Accurate and timely financial information is crucial for making informed business decisions, securing loans from financial institutions, and ensuring compliance with tax laws.
Understanding the differences between bookkeeping and accounting can help you decide which service you need and how much to budget for it. Whether you’re a small business owner looking for basic bookkeeping or a larger corporation needing detailed financial analysis, there’s a financial professional out there who can provide valuable services to help your business thrive.