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Finance

Learn the Basic Difference Between Bookkeeping and Accounting?

Accurate financial records are of utmost importance. It does not matter whether your business is small or big, if you have proper records of all transactions, debit, and credit, you will be able to deal with tax laws and other regulations involved in the industry quite easily. 

Now, these tasks might all fall under the same category but they have to be handled by specific people. Some of these tasks can be done by bookkeepers, while you will require an accountant to handle the others. Therefore, when you need to hire someone to take care of such tasks related to the financials of and business credit building, you must be clear on who is a better choice.  

A bookkeeper and an accountant do not have the same jobs. They have different qualifications and therefore, different expertise. 

When you decide to hire a professional to take care of your finances, you will need to understand what kind of expertise you need. The following two points discuss what qualifications a bookkeeper and an accountant hold and this will help you to distinguish between their jobs. 

  • A bookkeeper will have to have enough knowledge about finance so that he or she can do this without any errors. If there are errors, then your whole business might get compromised due to a lack of transparency. However, there are no specific educational qualifications required for one to be a bookkeeper. Anyone capable of handling finances and keeping records can be hired as a bookkeeper. If required, a bookkeeper can be guided by or can report to an accountant or a certified financial planner. But, nowadays, most people who apply to the job of a bookkeeper, usually have an associate’s degree. 
  • An accountant will have to earn a bachelor’s degree in accounting, which is provided as a four-year course in most colleges. Now, if someone does not have a degree in accounting, then a finance degree with extra training or certification would be sufficient. Accountants usually have to deal with the company’s long term finance-related goals. To be able to do this, they might require some professional training, other than their degree or certification. Many accountants get a CPA (Certified Public Accountant) license, by passing an industry-standard exam. 

Bookkeeping vs. Accounting

If you are just starting out and have launched your first business venture, or if you own a small business where you have not needed an accountant or a bookkeeper before, it is easy to make a mistake between the two. But there is a very basic difference between them. 

Bookkeeping is actually limited to keeping records of financial statements and a bookkeeper will simply have to document all transactions. Accounting, on the other hand, involves analyzing these records, reviewing the transactions and providing insights about the financial status of your company. An accountant has the skills to do so while a bookkeeper will actually not be able to review or provide any advice regarding the company’s finances. 

What Does Bookkeeping Include?

While in the simplest terms, as mentioned before, bookkeeping is keeping a track of all financial transactions, it does include a few other things like:

  • Creating and sending invoices
  • Organizing and issuing receipts
  • Issuing the payroll to all employees and contractors
  • Sending payments to vendors
  • Making sure that debit and credit are posted on two separate accounts. This is a part of double-entry bookkeeping. 

What Does Accounting Include?

Using the Accountants often refer to the general ledger created by bookkeepers to make projections, set goals, and give recommendations to help the business to move forward, financially. However, that is not what accounting is limited to. It includes: 

  • Preparing financial statements, cash flow reports, and income statements.
  • Budget planning.
  • Filing taxes, including income tax, sales tax, and payroll taxes.
  • Financial counseling, especially in situations related to consolidating debt or investments.
  • Analyzing and demonstrating overall profitability and growth through reports and models.
  • Providing advice regarding any new tax laws or regulations.

Does My Business Need A Bookkeeper Or An Accountant?

Whether you need a bookkeeper or an accountant for your business, will depend upon its size and the kind of job you want the hired professional to do. Large companies often hire both, bookkeepers and accountants. If you have a small company, then you can simply hire a consultant or an independent contractor. 

But as mentioned before, depending upon their qualifications and expertise, accountants and bookkeepers are suitable for very specific jobs. You cannot ask a bookkeeper to do all tasks related to the finances of your company as he or she will not have the skills to do so. However, you will also not be able to get an accountant to just take care of documenting financial transactions, instead of reviewing and analyzing reports. 

Given below are the most common tasks that financial support professionals can take care of. The following points also discuss whether an accountant or a bookkeeper is required for your business. 

  • Filing Taxes

Taxes should always be filed by an accountant. He or she will be able to refer to your record to file your state, local, federal and sales tax documents. While filing taxes, your accountant will also be able to advise on things like paying quarterly estimated taxes. 

Now, you can always hire a tax firm or an independent contractor to file your taxes or even use one of the software applications available that can help track, estimate, and file your own taxes. The only downside to this is that you do not get any professional advice, especially when dealing with the complicated tax laws surrounding employee health insurance or recent corporate tax cuts. 

  • Accounts Receivable and Accounts Payable

This is a job best suited for bookkeepers. Other than keeping track of vendor bills and payments coming into the company, the bookkeeper will also be able to take care of payment onboarding functions. These functions include issuing PO numbers and creating proper payment channels.

To create these channels, the bookkeeper will set up electronic funds transfer arrangements. Bookkeepers do not just record and make the necessary payments. They are also involved in approving the certain transaction and can keep a track of all such transactions so that it is easier for you to match expense reports and tax filings. 

Now, you might wonder if it is possible to do all these without hiring a bookkeeper. Well, if you have a small business that does not make too many transactions, you can do it all on your own. You can even use a software application, similar to the ones used for filing taxes, to record vendor bills and make sure that all payments are made on time. 

But it is advisable that you hire a separate individual to help you with these functions. You can ask one of your existing employees to fill in the role of a bookkeeper, especially if there are not too many vendor bills and payments to take care of. 

  • Account Reconciliation

This is a job that can be done by a professional bookkeeper or an accountant. You can also hire an independent contractor to assume a dual role, combining both. Now, with the advancement in technology, and rapid digitalization, one hardly maintains physical copies of ledgers.  Bookkeepers usually match the payments and deposits and document them electronically along with bank statements and credit cards. 

This task can be done by accountants as well as they will need to refer to the ledgers to analyze and prepare reports about the company’s financial status. There are certain software applications available that make it easy to organize all records. 

However, even with the help of technology, there might be some issues and discrepancies. What happens if you have extra transactions showing up on your own records that have not been cleared through the bank yet? 

Or, is it a problem if the bank shows a credit or debit that you did not document? Such transactions need to be reconciled, (a financial term for making sure that one side of the books matches the other) and this can only be done by a professional. Once the account has been adjusted or “reconciled,” it is closed out and the changes or adjustments made are marked as final. 

Now, the question is – do you actually need a bookkeeper or an accountant or can you assume these roles yourself? You can actually do the bookkeeping yourself if there are not too many complex transactions to keep track of. But an accountant is always important and he or she will be able to provide the correct insight when it comes to the financial growth of your company.  Also, documenting transactions can be quite a time consuming and at one point you will need to cut down on the hours spent on this. At this time, you should definitely consider hiring a professional.