Every business and not-for-profit entity needs a reliable bookkeeping system based on established accounting principles. It is essential for assessing your business’ financial situation and forecasting for the future.
However, many small business owners are unsure about the difference between bookkeeping vs accounting. Understanding the distinction is critical as knowing the difference can help you hire the right professionals to advise you in your business. It can also help you know what to expect from each relationship.
Bookkeeping vs Accounting: What is bookkeeping?
Bookkeeping is the process of recording basic business transactions in a consistent way, usually through a recordkeeping system.
They record financial transactions for businesses, typically using database and spreadsheet programs that have been selected and set up by an accountant. Basically, a bookkeeper records all the money flowing into and out of a business.
A bookkeeper may also issue checks, prepare invoices, and create reports on taxes, expenditures, profit and loss, and cash flow. In a large firm with many employees, a bookkeeper may specialize in a particular area, such as accounts payable, accounts receivable, or auditing.
The complexity of the 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 Internal Revenue Service (IRS) lays out which business transactions require supporting documents on their website.
What does a bookkeeper do?
Generally, bookkeepers perform the following duties:
- Record financial transactions
- Post debits and credits
- Produce invoices
- Maintain and balance subsidiaries, general ledgers and historical accounts
- Complete payroll
The higher-volume bookkeeping tasks include recording supplier invoices and cash receipts, preparing customer invoices and processing payroll. Due to the high volume of these certain activities, some bookkeepers develop procedures to standardize the bookkeeping transaction processes. A bookkeeper may also handle a number of operational tasks such as paying supplier invoices, remitting sales taxes and preparing government reports.
Maintaining a general ledger is one of the main components of bookkeeping. The general ledger is a basic document where the bookkeeper records the amounts from sale and expense receipts.
What are the professional requirements for bookkeepers?
Typically, bookkeepers do not require any formal education. However, a successful bookkeeper is extremely accurate, has a keen eye for detail and is knowledgeable about key financial topics. Usually, an accountant or the owner of the business oversees the bookkeeper’s work. So a bookkeeper cannot call themselves an “accountant.”
Bookkeeping vs Accounting: What is accounting?
Accounting is the process of systemically recording business financial transactions. It involves summarizing, analyzing, and reporting the business’ transactions to oversight agencies, regulators, and tax collection entities in the form of financial statements. These statements are a concise summary of financial transactions over an accounting period, as they account for a company’s operations, financial positions and cash flows.
The everyday duties of an accountant vary depending on their specialization, which might be auditing, tax preparation, or estate/trusts, for instance.
Accounting consists of three primary activities:
1. Record keeping system. An accounting recordkeeping system requires a standard set of accounting policies and procedures, as well as standardized forms. The outlined procedures should incorporate controls designed to ensure that the use of assets is in line with expectations. Typically, an accountant builds the recordkeeping system around a commercially available, off-the-shelf accounting software package.
The accountant also designs the internal controls for the system. These controls aim to minimize errors in recording the large number of activities that an entity engages over the period. The internal controls also serve to detect and deter theft, embezzlement, fraud and dishonest behavior.
2. Transaction tracking. An accountant institutes separate procedures to collect information about each type of business transaction. For example, separate systems are in place to process customer orders, bill customers, and collect cash from customers.
3. Financial reporting. Generally accepted accounting principles (GAAP) and the International Financial Reporting Standards (IFRS), as well as other accounting frameworks, mandate a specific manner for the treatment of business records in the accounting records and their aggregation into financial statements. This results in an income statement, balance sheet, statement of cash flows and supporting disclosures that describe the results of the reporting period.
What else does an accountant do?
Typically, accountants perform the following types of activities:
- Prepare adjusting entries (recording expenses that have occurred but are not yet recorded in the bookkeeping process)
- Prepare company financial statements
- Analyze cost of operations
- Complete income tax returns
- Aid the business owner in understanding the financial impact of decisions
- Strategic tax planning
- Financial forecasting
What requirements exist to perform accounting tasks?
Accountants usually have a bachelor’s degree in accounting or a related field. They may go on to get a master’s in accounting or a master of business administration (MBA) that focuses on accounting.
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.
How do I know what my business needs?
Honestly, any small business should consult with a qualified accountant as soon as they decide to open their business. Investing in “good advice” during the early days is certainly worthwhile. But more than that, hiring an accountant can help a small business owner decide on the right entity type, understand tax filing requirements, and offer strategic advice to maximize profits and/or minimize tax liabilities.
Depending on the size and nature of your business, you might initially be able to handle the bookkeeping by yourself. But as your business grows and becomes more complex, you’ll want to seek out a full charge bookkeeper. This person will sufficiently organize your business transactions so that you have the information you need to effectively manage your business.
Working with an accountant regularly ensures that you’ll recognize when you get to the point of needing a bookkeeper.
What is the benefit of having a bookkeeper and/or accountant?
At the end of the day, businesses do better when they have a complete picture of their finances, and bookkeepers and accountants each bring a different perspective to assess a business’ numbers.
Bookkeeping vs accounting does not have to be an either/or proposition. The two functions work hand in hand, helping business owners become more profitable. With the perspectives of both positions, you get a holistic view of your finances, setting your mind at ease and freeing your energy to do what you love – running your business.
How can Squar Milner help?
Squar Milner doesn’t just offer dynamic tax planning and comprehensive audits. We also have a top-rate consulting practice where you can take advantage of our outsourced accounting services. Our team of accountants has extensive experience working with clients of all sizes and industries. We even have in-depth experience handling some of the more complicated problems affecting different industries.
For example, our team is well-versed in the banking problems that many cannabis-related companies face resulting in the need to move large amounts of cash. Our people have served as controllers, CFOs and other positions and stand ready to step in and help your business with your accounting needs.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.