Here's an in-depth explanation of bookkeeping vs. accounting and how they are different (and similar).
“What’s the difference between bookkeeping and accounting?”
Unless you’re an accountant or bookkeeper, you may struggle to answer this question, and understandably so. On the surface, these professions are very similar: Bookkeepers and accountants both work with financial data and help you manage your finances.
There’s also a blurring of roles, with some bookkeepers in smaller businesses handling accounting tasks due to resource constraints. Adding to the confusion is the emergence of bookkeeping software that can create financial statements—a task traditionally reserved for accountants.
But, despite obvious similarities and the morphing of job roles, bookkeeping and accounting are worlds apart. At a high-level, bookkeepers record financial transactions and accountants analyze and interpret this data. Of course, this is overly simplistic.
So, What Is Bookkeeping?
Bookkeeping is a crucial first step in the accounting process. Think of bookkeepers as athletes who start the track relay. They lay the foundation for accountants by recording financial transactions. Once the first leg of the race is finished, they hand over the batons—the financial information contained in ledgers and journals—to accountants to complete the race.
(That’s not to say that accountants can’t and won’t record transactions—they can and often will. This analogy simply illustrates the differences in roles).
By recording transactions, bookkeepers track your finances so you can view at a glance how much money is entering and leaving your business. And because they’re tax compliant, you can feel confident they’ll keep you on the straight and narrow.
But what exactly are some of the tasks bookkeepers do? Here are six common bookkeeping tasks:
- Recording income from services as well as expenses such as rent, utilities and office supplies
- Managing payroll, though this is not a core bookkeeping function
- Creating invoices and making payments for you—this depends on your specific arrangement with them
- Comparing the balances in your books against bank transactions to see if they match. If not, they make adjustments and create bank reconciliation statements to record these discrepancies.
- Tracking accounts payable (money you owe) and accounts receivable (money owed to you). Bookkeepers keep tabs on all invoices and due dates and follow up with late payers. They will also make sure that you pay your accounts on time and don’t pay twice. As soon as the payment is made they will record the amount as a business expense in the ledger.
- Maintaining the general ledger, which is the master accounting document that stores all your financial transactions. The general ledger typically uses the double-entry accounting method, meaning for every debit on one account there’s a corresponding credit on another. Your bookkeeper will:
- Post relevant credit and debits to your journal before transferring it over to the general ledger
- Ensure these debits and credits balance
- Record all income and expenses in this way
What Is Accounting?
The accountant will now use the recorded data to interpret, analyze and report on the financial health of the business. Because they offer more detailed insights that inform business decisions, you wouldn’t want to hire an accountant to only record income and expenses. You’d pay more for the same service a bookkeeper could do for less, and in the process, underutilize the accountant’s expertise. Here are four tasks that an accountant performs:
- Preparing financial statements to help you see the bigger picture and assess the financial health of your business, including:
- Balance sheets: A snapshot of your financial situation at a point in time, calculated through this formula: Assets = Equity – Liabilities
- Income statements: A record of all your income and expenses over a period of time
- Cash flow statement: A record of cash flowing in and out of your business for a period of time
- Analyzing journals and ledger entries, and making adjustments, e.g., accountants will identify any incurred expenses that have not yet been recorded
- Providing tax advice and completing and filing tax returns
- Offering financial advice and helping understand the consequences of your financial decisions
Bookkeeping vs. Accounting: So, What’s the Difference?
By now you can probably infer what the differences and similarities are. But for clarity, here’s a quick summary plus a few notable differences that relate to credentials.
- Accountants and bookkeepers work with financial data
- They share the common goal of improving your financial health
- Their roles sometimes overlap in small businesses due to the advent of bookkeeping software that can compile financial statements
- Both require basic accounting knowledge to enter either profession
- Both are tax compliant
Nature of Role
Accounting and bookkeeping are two vastly different professions despite the similarities and blurring of roles. Hopefully, this post helped clarify these differences and similarities to remove any confusion.
Now that you understand how bookkeeping and accounting differ, it’s time to decide which one is right for your business. While this decision is personal and depends on your needs and business goals, here’s a post detailing why it may be time to hire a bookkeeper.