If you are starting a business, you will be looking into accounting and bookkeeping help, but to outsiders, the two often look like the same thing. Both professions involve recording and handling money, and both provide vital services for a business. Understanding the difference between bookkeeping vs accounting can help you make sure that your finances are healthy and that you hire or outsource the right kind of help for your business.
Here are the five key differences between bookkeeping and accounting:
Accountants Have a Degree
You don't need a degree to be a bookkeeper.
You do need one to be an accountant.
Most bookkeepers have taken a few accounting courses, understand the basics, and know how to use modern accounting software.
Accountants need to have at least a bachelor's degree, and CPAs take special courses and certifications.
Essentially, only an accountant is qualified to handle the entire accounting process. Bookkeepers keep records and ensure that transactions are accurate to give to the accountant.
In very small companies, the bookkeeper may be the receptionist or even the company's owner (most sole proprietors handle their own bookkeeping).
Needless to say, accountants, because of their higher level of qualification are paid and thus cost more.
Bookkeepers Handle Routine Stuff, Accountants the Big Picture
The primary job of a bookkeeper is to ensure that all of the routine financial transactions are handled and recorded.
A bookkeeper may pay sales tax and credit card bills, ensure that sales tax and other returns go in on terms, and provide reports.
However, a bookkeeper only sees those routine transactions and is generally not educated to analyze the reports, give tax advice, and fix problems.
Accountants, on the other hand, have the knowledge and expertise to see problems, often before they happen.
They will advise on taxes, file end of year returns. CPAs can also represent you to the IRS if there is a problem or you are audited.
While your accounting firm may also do your bookkeeping, this will generally be handed over to a less experienced or educated person on staff. If you only have an accountant, then you will be sending them your reports yourself.
A "full charge" bookkeeper may also handle the reports, but they often lack the training to do so as well as an accountant.
Modern accounting software helps a lot, but there is no substitute for having an accountant available at least to handle end of year matters.
The tasks performed by a bookkeeper tend to be simple and repetitive.
Bookkeepers are Responsible for Accuracy
A bookkeeper is responsible for ensuring that the correct information is provided to the accountant and to the company's board or owner.
The most vital skill a bookkeeper needs is the ability to enter transactions rapidly and accurately. If the bookkeeper messes up, then the accountant will not be able to do their job.
Because of this, while bookkeepers are less highly educated and earn less, they are just as vital to your business.
If the books are not properly done, your accountant will waste time (and your money) fixing the problem.
Preparing Financial Statements Falls Under Accounting
Bookkeepers record the data needed to prepare financial statements, but if your bookkeeper is providing you your statements, even with software help, it is time to look into getting the services of an accountant.
Essentially, bookkeeping is the first "level" that accountants need to do their job.
The prepared statements are how you know your business's financial health and can determined the next steps.
What your bookkeeper gives to your accountant is the financial transactions, stored chronologically, and accurate.
For larger companies, the double entry method of bookkeeping should be used to help keep the books balanced (this means recording transactions twice and comparing them).
Accountants Help You Make Decisions
Your bookkeeper should not be helping you make decisions (unless you are doing your own books).
Instead, the bookkeeper ensures that the information you need to make those decisions is accurate and available.
Bookkeeping requires a systematic method, but the basic facts recorded do not reflect your organization's financial health without further analysis, which is done by an accountant.
In fact, there is a decent chance that in the future almost all bookkeeping will be completely automated, whilst accounting will continue to need the human touch. Bookkeeping is a purely clerical task.
If you have a CPA, they will report back to you not just with your company's financial situation, but their advice on how best to improve it.
They may also offer advice on your personal finances and even, sometimes, other aspects of your business. They will help you plan for the next year or five years to ensure that your company continues to grow and stay healthy rather than stagnating.
If you have a financial problem, a good CPA can help you find a way to fix it and move forward. They can also help if you have issues with the IRS.
So, which do you need? Ideally, if you can afford it, both. Micro businesses may not need a full-time bookkeeper, but can outsource this to an accounting firm who offers the service separately (your accountant should not be doing routine bookkeeping tasks) or train an existing member of staff. If you are doing your own books, there will come a point where it is not a good use of your time and it is better to pay another person to handle it for you. Your accountant comes in only when all of the finances have been put together and you need advice on your taxes or on the financial state of your business. Paying an accountant to do bookkeeping is a waste of money that needs to be avoided.
Understanding the difference between the two supports knowing how each kind of professional supports your business. Without a good bookkeeper your accountant is working on false information; without an accountant you don't have the specialist expertise to make sound financial decisions. When in doubt, an accountant can often give advice on the best bookkeeping services and methods for your business. If you need accounting or bookkeeping services, contact LUXA Enterprises today.