Accounting vs. Bookkeeping: What’s the Difference?

Accounting and bookkeeping are two related functions that involve the finances of an individual or a business. While these two can help you achieve the common goal of keeping your finances on track, it’s important to understand the difference between these two areas of finance to be able to decide whether you need to hire an accountant or a bookkeeper.

In this article, we will highlight the distinction between these two aspects of finance and explain the differences between the roles of an accountant and a bookkeeper.

What is Bookkeeping?

Bookkeeping refers to the process of diligent recording of day-to-day financial transactions. It is a crucial aspect of running a business and must be performed consistently to ensure updated and accurate financial data is always available to aid in decision-making.

Bookkeeping may involve the following tasks:

• Daily recording of financial transactions.
• Posting debits and credits.
• Bank reconciliation.
• Preparing and sending out invoices.
• Chasing overdue invoices.
• Preparation of financial statements such as the balance sheet, income statement, and cash flow statement.
• Efficient maintenance of general ledgers and historical accounts.
• End-to-end payroll processing.

Among these tasks, one of the primary functions associated with bookkeeping is the maintenance of the general ledger. This is a basic document where the bookkeeper records or posts sales and expenses. So the more sales you have, the more often the ledger is posted.

Traditionally, ledgers are maintained using sheets of paper or spreadsheets. Nowadays, innovative accounting systems can help maintain ledgers more efficiently and conveniently.

Although the bookkeeping function seems to involve basic administrative tasks, the complexity increases depending on the size of your business and the number of transactions completed. This is because all sales and purchases must be recorded, and the IRS requires supporting documents on some items or business transactions.

What is Accounting?

Accounting is a high-level function that involves using bookkeeping data to generate financial models. Compared to bookkeeping which is mainly transactional, accounting is somewhat more subjective.

The accounting function involves the following tasks:

• Preparing to adjust entries.
• Financial statement review.
• Analysis of operational costs.
• Accomplishing income tax returns.
• Helping business owners understand the impacts and implications of their decisions.

One of the crucial aspects of the accounting process involves the analysis of financial reports to help you make informed decisions. The end result is that you will achieve a more in-depth understanding of your business’ actual profitability and be better equipped to manage your cash flow efficiently.

You will be able to turn the financial information recorded on the general ledger into valuable insights on your business performance and monitor how you’re tracking towards reaching your goals. Business owners usually tap into the expertise of accountants to assist them in analyzing their financial position, budgeting, forecasting, and efficient tax planning.

What is the difference between an Accountant and a Bookkeeper?

Many people are not aware of the difference in the role of accountants and bookkeepers. Contrary to the common belief that they do the same work, these two professions actually require different skill sets.

Generally, the role of the bookkeeper is to keep an accurate and updated record of transactions and ensure that your books and reports are kept organized. On the other hand, accountants can assist you in financial analysis, provide tailored advice, and help you navigate complex tax matters.

Bookkeepers aren’t required to undergo formal education, and accountants typically oversee their work. In order to be an effective bookkeeper, it is crucial to have a keen attention to detail and diligence.

Meanwhile, accountants need to graduate with a bachelor’s degree in accounting and hold additional certifications. In order to obtain the title of Certified Public Accountant, the accountant must first pass the Uniform Certified Public Accountant exam and have sufficient experience.

Final Thoughts

To sum it up, the bookkeeping function is more transactional and administrative, while accounting uses bookkeeping information to provide you with insights into your business’s financial performance.

With the help of a good accountant and bookkeeper, you will be able to achieve organized books and financial records, develop a sound financial strategy, and build a tax-efficient business that thrives.

While some small business owners do the accounting and bookkeeping by themselves, this is not an efficient use of your time. As a business leader, your focus should be directed to managing the core aspects of your business and driving growth.

So if you’re looking for a reliable accounting firm that can do both and even provide personalized business advice, you might want to consider a princeton CPA. Our team of accountants can also assist you with hassle-free audits and efficient tax planning that can help you enjoy cost savings.

Contact us today to learn more about how we can help you run your business better and give you more time to focus on doing what you do best.