Bookkeeping vs Accounting: An All-You-Need-to-Know Guide for Small Businesses
Of all small businesses in the United States today, only 40 percent are profitable. Half of the remaining ones manage to break even. The rest are continually making losses.
One of the top factors that determine the success or failure of any business is how the business manages its finances. Indeed, cash flow problems are among the leading causes of small business failure.
A smart move to boost the chances of success in business is to seek professional financial guidance. That’s where the bookkeeping vs accounting discussion comes in.
Should you hire a seasoned bookkeeper to help out with your finances or is an expert accountant the right person for the job? That’s what this guide explores. We’ll look at the difference between bookkeeping and accounting and tell you whether you need both in your business.
Read on to learn more.
Bookkeeping vs Accounting: Explaining the Basics
A lot of people use the terms bookkeeping and accounting interchangeably, and it’s easy to see why. To begin with, both bookkeepers and accountants work closely to meet the needs of their clients.
Secondly, both bookkeeping and accounting services involve financial reporting. They are geared towards the financial well-being of a business.
Since bookkeepers and accountants are usually busiest between January and April, it’s easy to see why the difference is blurred.
There are certain key differences between bookkeeping and accounting for small businesses.
What is Bookkeeping?
Bookkeeping refers to the daily recording of all financial transactions regarding a business. Bookkeeping services ensure that all financial transactions are correct, comprehensive, and up-to-date. For this reason, accuracy is highly critical to the entire process.
Every transaction that you make in your business, whether it involves a purchase or sale, needs to be appropriately recorded. Quality controls in bookkeeping ensure that the records are accurate and timely.
Effective bookkeeping supplies all the essential information needed to prepare accounts.
What Is Accounting?
Accounting refers to the process of summarizing, analyzing, and reporting financial transactions. Financial statements are used in the accounting process as a summary of all financial transactions that took place over a specific accounting period. Accounting summarizes an organization’s operations, cash flows, and financial position.
The Main Differences Between Bookkeeping and Accounting
While bookkeeping and accounting may have similar objectives when it comes to the financial well-being of your small business, the two processes have significant differences in a few ways. We’ll look at two of those ways.
The first major difference between bookkeeping and accounting involves the functions of each. The following section explores these differences:
The Functions of Bookkeeping
So what exactly does a bookkeeper do in a business? We’ve listed six key tasks:
- They record all business expenses and income from the services you offer
- They manage the payroll
- They create invoices and make payments on behalf of your business.
- They compare balances in your business books against all transactions to determine whether they match or not
- They track accounts payable and accounts receivable
- They maintain the general ledger
The Functions of Accounting
Accounting uses the financial information compiled during bookkeeping to produce financial models. Unlike bookkeeping, which is mainly transactional, the accounting process is more subjective. Accounting for small business owners involves the following functions:
- Preparation of financial statements
- The analysis and adjustment of journals and ledger entries
- Helping out on tax preparation and planning
- Giving financial advice
- Helping the business owner understand how their financial decisions will affect their business
The second major difference is the credentials professionals in both fields need to have.
Generally, a bookkeeper doesn’t have to possess any formal education or training. What they need is to pay a lot of attention to accuracy and be knowledgeable when it comes to relevant financial topics.
A bookkeeper’s work is usually overseen by an accountant or the owner of the business they work for. Therefore, bookkeepers cannot refer to themselves as accountants.
Accountants must possess a bachelor’s degree in accounting before they qualify for that title. A degree in finance can also be considered a suitable substitute in case one doesn’t have a degree in accounting.
An accountant is eligible for additional professional certifications, unlike a bookkeeper. With ample training and experience, for instance, an accountant can become a CPA (Certified Public Accountant).
Certified public accounting is one of the commonest accounting designations. Before becoming a CPA, you need to pass the Uniform Certified Public Accountant exam. You also need to possess a certain level of experience as an accountant working professionally.
The Right Financial Professional Can Make a Big Difference
Any serious business owner must have a complete picture of how they’re doing financially at all times. Engaging the right financial professionals can give your business the boost it needs to go to the next level.
As you’ve seen, accountants and bookkeepers look at your business finances through different lenses. However, they are both committed to helping your business become more profitable by providing you with the best financial advice.
For this reason, bookkeeping vs accounting should never be an either/or proposition for you. You need the perspectives of both to get a wholesome picture of your finances and decide on the course of action your business will take.
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