When it comes to maintaining financial records for a business, ensuring your data is complete and accurate is essential. Accounting and bookkeeping are two important processes that small business owners utilize to ensure their financial information is correct.
The line between bookkeeping and accounting becomes blurrier each year that passes. Both bookkeepers and accountants work with financial data, for example. Both professions require a basic knowledge of accounting practices.
But regardless of the similarities, the functions of accounting and bookkeeping are distinct and equally important for businesses of any size.
What is Accounting?
Accounting is the process of recording and managing financial information. Though accounting and bookkeeping are distinct functions, one of the reasons they’re so often confused is that bookkeeping falls under the umbrella of “accounting services” for a business.
Accountants use the financial information compiled by bookkeepers or business owners to produce financial reports. These reports are designed to help business owners better understand their profitability, cash flow, and financial path. Oftentimes, business owners turn to accountants for help with understanding their finances at a high level, tax planning, forecasting, and advice.
Accountants are also typically the financial experts who handle the preparation and filing of tax returns.
- Analyzing financial information
- Financial modeling
- Tax preparation and filing
- Advising business owners on financial decisions
- Preparing financial statements
There are several different types of accounting practices, each a little different. These include managerial accounting, tax accounting, financial accounting, government accounting, public accounting, and more.
What is Bookkeeping?
The function of bookkeeping for a business is to ensure that all financial data is properly recorded by creating a general ledger. The general ledger is where information such as debits and credits are recorded and can be made using software, a spreadsheet, or even a notebook. Maintaining the ledger is detail-heavy work, as thorough information provides the best tools for financial data interpretation and forecasting.
The role of a bookkeeper has less to do with advising than it does with compiling data and maintaining records. Bookkeepers are the people who spend time maintaining the records for a business, as well as handling payroll and creating invoices. They also handle the important task of financial reconciliation – which entails ensuring the bank statement of a business matches the records in the general ledger.
Adding to the confusion between accounting and bookkeeping is the fact that bookkeeping falls under the accounting process in business. Without thoroughly maintained records, accountants can’t properly analyze the financial data of a business.
- Creation and maintenance of the general ledger and balance sheets
- Tracking of sales and expenses
- Financial reconciliation
- Running payroll
- Creating and tracking invoices
Bookkeepers can utilize either the single-entry system or the double-entry system depending on the complexity of the financial transactions and the preference of the accountant or business owner.
Accounting and Bookkeeping Certifications or Credentials
Accountants are typically required to have a formal education and oftentimes some kind of certification or credential. At the least, accountants are required to hold a degree in accounting or finance. Accountants can also become Certified Public Accountants (CPAs) by becoming certified with their state, or Enrolled Agents (EAs) by being certified at the federal level.
One major difference between accountants and bookkeepers is that bookkeepers are often not required to have formal education or credentials. There’s no bookkeeping equivalent of a CPA. Bookkeepers can seek certification and become a Certified Bookkeeper, but this is not required. All a bookkeeper truly needs to be successful is financial knowledge and attention to detail.
In short, accountants can be bookkeepers, but unless properly certified, bookkeepers can’t be accountants.
Most laypeople aren’t aware that accounting and bookkeeping are separate functions and titles. As highlighted above, there are some crucial differences between accounting and bookkeeping for businesses. For easier comparison, we’ve listed some key differences between the two below:Accounting Bookkeeping Skills Requires the ability to quickly absorb technical information, and analytical thinking. Requires attention to detail and in-depth financial knowledge. Objective Analyzing the financial situation of a business in order to make projections and suggestions. Keeping thorough financial records for businesses by identifying and recording transactions. Advisory Advising businesses on their best tax strategies and create financial projections. Bookkeepers do not provide advisory for businesses, as their role is recording more than analysis. Tasks Analyzing and interpreting financial data to provide advice and support to businesses of all sizes. Recording and updating financial information in a general ledger. Certifications Accountants can become CPAs or EAs when they pass the appropriate exam. Bookkeepers can become Certified Bookkeepers, but it is often not required.
Though it’s now clear that accounting and bookkeeping are distinctly different functions, the line between them becomes blurrier each year. This is partially due to the creation and accessibility of bookkeeping and accounting software. Since a lot of types of bookkeeping software can generate financial statements (which was previously part of the accounting process) those are becoming more and more a bookkeeper’s responsibility.
Oftentimes bookkeepers and accountants work closely with each other. Without properly maintained books, accountants wouldn’t have the data they need to create financial models. Oftentimes bookkeepers work directly under the supervision of accountants.
Bookkeeping, Accounting, and Small Business
It should be clear by now that both bookkeeping and accounting are essential functions for businesses of any size. No matter how small your business or simple your service, your books can get messy, and your taxes can get complicated. Handling it yourself is at best time-consuming, and at worst confusing and stressful.
If you want to get better at bookkeeping, check out some tips from our bookkeepers for keeping your books in order.
If you find yourself confused or overwhelmed by bookkeeping, accounting, or taxes, you’re not alone! Partner with our experts today to get the support you need to take your business to the next level.