Simply put, bookkeeping is more transactional and administrative, concerned with recording financial transactions. Accounting is more subjective, giving you insights into your business’s financial health based on bookkeeping information.
In this guide, we’ll explain the functional differences between accounting and bookkeeping, as well as the differences between the roles of bookkeepers and accountants.
The function of bookkeeping
Bookkeeping is the process of recording daily transactions in a consistent way, and is a key component to gathering the financial information needed to run a successful business.
Bookkeeping is comprised of:
- Recording financial transactions
- Posting debits and credits
- Producing invoices
- Preparation of financial statements (balance sheet, cash flow statement, and income statement)
- Maintaining and balancing subsidiaries, general ledgers, and historical accounts
- Completing payroll
Maintaining a general ledger is one of the main components of bookkeeping. The general ledger is a basic document where a bookkeeper records the amounts from sale and expense receipts. This is referred to as posting. The more sales that are completed, the more often the ledger is posted. A ledger can be created with specialized software, a computer spreadsheet, or simply a lined sheet of paper.
The complexity of a bookkeeping system often depends on the size of the business and the number of transactions completed daily, weekly, and monthly. All sales and purchases made by your business need to be recorded in the ledger, and certain items need supporting documents. The IRS lays out which business transactions require supporting documents on their website.
The function of accounting
Accounting is a high-level process that uses financial data compiled by a bookkeeper or business owner to produce financial models.
The accounting process is more subjective than bookkeeping, which is largely transactional.
Accounting is comprised of:
- Preparing adjusting entries (recording expenses that have occurred but aren’t yet recorded in the bookkeeping process)
- Reviewing company financial statements
- Analyzing costs of operations
- Completing income tax returns
- Aiding the business owner in understanding the impact of financial decisions
A key part of the accounting process is analyzing financial reports to help you make business decisions. The result is a better understanding of actual profitability and an awareness of cash flow in your business. Accounting turns the information from the general ledger into insights that reveal the bigger picture of the business, and the path the company is progressing on. Business owners will often look to accountants for help with strategic tax planning, analysing their financial position, forecasting, and tax filing.
The roles: bookkeeper vs accountant
Bookkeepers and accountants sometimes do the same work, but have a different skill set. In general, a bookkeeper’s role is to record transactions and keep you financially organized, while accountants provide consultation, analysis, and are more qualified to advise on tax matters.
Typically, bookkeepers aren’t required to have any formal education. To be successful in their work, bookkeepers need to be sticklers for accuracy, and knowledgeable about key financial topics. Usually, the bookkeeper’s work is overseen by either an accountant or the small business owner whose books they are doing. So a bookkeeper can’t call themselves an “accountant.”
To qualify for the title of an accountant, generally an individual must have a bachelor’s degree in accounting. For those that don’t have a specific degree in accounting, finance degrees are often considered an adequate substitute.
Accountants, unlike bookkeepers, are also eligible to acquire additional professional certifications. For example, accountants with sufficient experience and education can obtain the title of Certified Public Accountant (CPA), one of the most common types of accounting designations. To become a CPA, an accountant must pass the Uniform Certified Public Accountant exam and possess experience as a professional accountant. These required credentials are a determinating factor in the cost of an accountant.
The bottom line
Organized financial records and properly balanced finances produced by the bookkeeper, coupled with smart financial strategy and accurate tax filing by the accountant, contribute directly to the long-term success of every business.
Some business owners learn to manage their finances on their own, while others opt to hire a professional so that they can focus on the parts of their business that they really love. Whichever option you choose, investing—whether it be time or money—into your business financials will only help your business grow.