Bookkeeping vs. accounting. What is the difference? These terms are often used interchangeably, but they are distinctly different functions and serve purposes for your business. Thinking about hiring an accountant or bookkeeper? Here’s what you need to know about these two roles to determine which one your business needs.

What is bookkeeping?

At its core, Bookkeeping is a direct record of all purchases and sales your business conducts, while accounting is a subjective look at what that data means for your business.

Bookkeeping focuses on recording all financial transactions and categorizing expenses. It tracks what you earned and what you spent. Bookkeepers generate reports telling you what areas of your business are profitable and what expenses endanger your profitability.

Here’s a list of typical financial tasks bookkeepers are responsible for in your business:

• recording revenue
• categorizing expenses
• filing receipts
• generating basic reports
• profit and loss statements
• balance sheets

 

Your company’s bookkeeper may also oversee invoicing customers and processing employee payroll, though it depends on the size and structure of the business.

Accurate bookkeeping data is essential for running any business successfully. Having up-to-date financial numbers keeps you compliant with state and federal regulations. It also supports you and the people you hire in making critical decisions about the future of your business. Staying on top of your bookkeeping tasks prevents scrambling at year-end to pull it all together for taxes.

One of a bookkeeper’s primary duties is maintaining a general ledger, which is a document that records the amounts from sales and expense receipts. Ledgers can vary in complexity from a sheet of paper to specialized bookkeeping software, such as QuickBooks and Xero, to track their entries, debits, and credits.

While many people can learn Quickbooks or other bookkeeping software, it takes a professional bookkeeper to ensure you’re up to date on the latest regulations. An accountant can be considered a bookkeeper, but a bookkeeper can’t be an accountant without proper certification.

What is accounting?

Accounting picks up where bookkeeping ends by analyzing and interpreting your financial data. Accountants look at the big picture. For example, if your business handles a lot of coupons and rebates, your accountant will know how best to record those transactions. They answer questions like, “Should I record just the net amount of the sale, or the gross sale amount as well?”

Accountants are also authorized to file your business taxes. Although both can prepare your tax returns, a CPA is more knowledgeable about tax codes and can represent you if you get audited by the IRS. A bookkeeper helps ensure your financial data is current and accurate. An accountant enables you to understand what your numbers mean and how they help you plan for the future of your business.

Typical accountancy tasks include but are not limited to:

• Verifying and analyzing data
• Generating reports
• Performing audits
• Preparing financial reporting records (tax returns, income statements, balance sheets)
• Providing information for forecasts, business trends, and opportunities for growth
• Helping the business owner understand the impact of financial decisions
• Adjusting ledger entries

 

Based on your profit and loss statement and balance sheet, you and your accountant talk about:

• Ways to reduce your operating expenses
• Options for increasing employee salaries
• When you can offer health benefits
• Strategies for maximizing tax deductions

 

Accounting also takes into account the business financial statements and reports. It prepares annual tax filings for the business, whether a Schedule C for a sole proprietor “side hustle” or a total return for an S-corp or C-corp.

Bookkeeping vs. Accounting – Do you need both?

Many business owners need both bookkeeping and accounting. If your business is just getting started, you may choose to keep bookkeeping tasks in-house for a time. You may possess the skills to analyze your reports for growth opportunities, and even file your business tax return.

As your business grows, you’ll likely outsource your bookkeeping to a qualified professional and hire a CPA. You’ll earn more money by staying in your zone of genius (running your business) than you will save by doing your books.

A qualified bookkeeping professional saves you time and money by ensuring your books reflect the current city, state, and federal regulations. Your professional accountant analyzes your numbers and provides insights into your business’s next steps. They can tell when it’s to your advantage to move from LLC to an S-Corp. They also stand behind you in case your tax returns are ever questioned. An accountant will walk beside you through any audit.

Some companies provide both bookkeeping and accounting. However, it’s good to keep these functions separate, whether in-house or through a contracted partner company. Two sets of eyes are better than one when it comes to your business finances, so while the option to consolidate these functions with one firm may seem tempting, we recommend keeping them separate.

By taking the time to understand the difference between bookkeeping versus accounting, you’ll understand how to find the right partners for these functions. Your bookkeeper and your accountant are your partners when making critical business decisions.

Still not sure if you need a bookkeeper or accountant?

If you’re still not sure if you need to hire someone to help with your books, consider the following common scenarios. If one or more sounds like you, its time to hire a financial professional:

1. Your taxes are complex. Your taxes have become too complex to manage on your own. With multiple income streams, foreign investments, several deductions, or other considerations, it’s time to hire an accountant. An accountant can save you hours and help you stay on top of payroll, tax deductions, and tax filings.
2. You’re spending too much time on accounting. If you’re spending too much time taking care of accounting tasks and can’t work on growing your business or keeping existing customers happy, you’re doing your enterprise a disservice. You may make more money long-term if you leave the accounting to the experts and focus on your growth prospects.
3. Your business is experiencing growth. Doing your accounting yourself may be fine when your business is small. When your business is in growth mode, it is likely time to bring in someone to help. You could start by contracting with a bookkeeper who balances the books once a month. Then you’re ready for a CPA to do your taxes. Then, as your bookkeeping needs increase, hire in-house.

 

What to look for when you’re hiring a bookkeeper or accountant?

Bookkeepers aren’t required to be certified, but they can be licensed. Both the American Institute of Professional Bookkeepers (AIPB) and the National Association of Certified Public Bookkeepers (NACPB) offers accreditation and licensing to bookkeepers.

When you’re ready to start interviewing, be sure to ask for references in the same field of business you’re in. Ask about any certifications or training they’ve recently completed. You can also look at the American Institute of Certified Public Accountants to find CPAs with skills in certain areas, such as employee benefits or personal finance.

If you’d like our help determining if it’s time to hire a professional bookkeeper – give us a shout. We offer complimentary 30-minute consultations.