Bookkeeping vs. Accounting: A Comprehensive Comparison for Your Business’s Financial Needs

Managing your financial statements can sometimes feel like an overwhelming task, consuming valuable time that could be spent on your core operations. According to Adobe’s Future of Time Report, 65% of small and midsize business (SMB) leaders agreed that activities like filling out expense reports hindered their regular work.

When starting a business, preparing your own financial statements may seem manageable. However, as your company grows, you’ll likely consider hiring a professional to handle your financial affairs. The question then arises: Should you opt for a bookkeeper or an accountant? To make an informed decision, you need to understand the key differences between bookkeeping and accounting, assess your financial needs, evaluate your budget, and determine whether you require a full-time hire or the services of an external accounting firm or bookkeeping service.

Distinguishing Bookkeeping from Accounting

While there may be some overlap in the responsibilities of bookkeepers and accountants, several crucial distinctions set them apart. Bookkeeping primarily focuses on data entry and involves the preparation of various financial statements for a business. Accounting, on the other hand, delves deeper into the accuracy, interrelation, and overall financial health depicted by these statements.

The Role of Bookkeeping

Bookkeeping entails diligently tracking and recording a business’s financial transactions. It involves extensive data entry and administrative tasks related to financial transactions, which are typically handled by a bookkeeper. The bookkeeping process involves monitoring and organizing various documents, including bills, invoices, payroll records, bank statements, purchases, receipts, and financial statements such as balance sheets and income statements. Accuracy is paramount in bookkeeping, and bookkeepers often conduct initial checks on the general ledger to ensure account balances are in order.

Initially, you may have used single-entry bookkeeping, where each transaction is recorded in a single account. However, as your company expands, it is advisable to transition to double-entry bookkeeping. This method records each transaction as a credit in one account and a debit in another, offering a dual check on the accuracy of your books. Moreover, double-entry bookkeeping aligns with generally accepted accounting principles (GAAP) and is preferred by lenders and most bookkeeping software.

The Role of Accounting

Accounting involves a more interpretive approach compared to bookkeeping. While accountants may perform bookkeeping duties, their tasks extend beyond that.

Accounting encompasses budgeting, summarizing financial data, analyzing financial statements, and offering insights into a company’s financial health. As part of their responsibilities, accountants review statements prepared by bookkeepers for errors and make necessary adjustments. They may also conduct audits of financial information to ensure its accuracy. Accounting facilitates the interpretation of financial statements, providing a comprehensive understanding of a business’s health and enabling the development of forecasting models for predicting future costs.

Hiring an accountant becomes particularly beneficial when preparing tax returns, auditing financial statements, or formulating long-term financial strategies. Accountants play a vital role in ensuring correct business tax filings, as they scrutinize financial statements, identify possible deductions, and help prevent overpayment.

Differentiating Accountants from Bookkeepers

Although accountants may handle certain bookkeeping responsibilities, several key differences set them apart. These differences relate to their training, day-to-day tasks, and the respective advantages and disadvantages of each profession.

Training Requirements

Bookkeepers typically possess at least an associate’s degree, although it is not always a mandatory requirement. Some bookkeepers may have only a high school diploma or some trade school training, subsequently pursuing further education in college as their careers progress. Accountants, on the other hand, almost always hold a bachelor’s degree in accounting. Many accountants pursue master’s degrees, especially if their state’s certified public accountant (CPA) board mandates it.

CPAs, recognized as experts in their field, may possess additional qualifications compared to regular accountants, particularly when it comes to performing specific auditing or taxation tasks. 

Typical Responsibilities

Bookkeepers focus on preparing financial reports and handling day-to-day financial transaction recording for businesses. Their tasks are vital for maintaining the financial stability of an organization. Many bookkeepers utilize online bookkeeping software such as QuickBooks to streamline their work.

Accountants, on the other hand, interpret financial data, monitor compliance, provide financial advice, and assist with tax preparation, particularly for complex filings. They can guide businesses through significant changes, aid in long-term planning, and offer financial advisory services. While bookkeepers can adapt to various business types, accountants often specialize in specific areas such as tax preparation, healthcare accounting, auditing, or industry-specific financial practices.

Pros and Cons of Bookkeeping and Accounting

Here are some of the advantages and disadvantages associated with bookkeeping and accounting:

Pros of Bookkeeping:

– Generally more cost-effective than hiring an accountant
– Easier to find applicants due to less stringent requirements
– Requires less training time for new hires

Cons of Bookkeeping:

– Unable to provide financial advice
– Lack of training to handle tax-related matters
– Limited ability to prepare certain forms due to legal restrictions

Pros of Accounting:

– Comprehension of the impact of financial statements on your business
– Better equipped to offer financial advice
– Ability to handle tax-related queries and prepare returns
– Specialized training and certifications available for addressing complex financial issues

Cons of Accounting:

– Typically more expensive to hire compared to bookkeepers
– Limited number of trained accountants available

Determining Your Needs: Do You Require a Bookkeeper, an Accountant, or Both?

Choosing between bookkeeping and accounting depends on your specific business requirements. In general, either option can enhance your productivity and efficiency, potentially resulting in cost savings. 

Some businesses choose to outsource their entire accounting needs to a third-party service provider. Jim Trevors, CEO of We Review Tires, a tire review website, highlights the benefits of this approach, stating, “This enabled us to keep track of our day-to-day financial data but put the responsibility on a professional accountant while we focused on growing and scaling the business.”

If you are just starting out, having a bookkeeper on your payroll may be sufficient. However, it may be beneficial to hire an accountant initially to establish proper bookkeeping processes and systems. This can contribute to your overall financial well-being and facilitate quarterly or end-of-year tax filings.

Even if you do not have an accountant as a permanent staff member, establishing a contract with an external accounting services firm to handle audits and taxes can prove advantageous.

In-House or Third-Party Services?

Working with in-house bookkeeping and accounting staff can reduce miscommunication and offer advantages such as knowledge of your business practices, flexibility, and easier communication. Clutch’s 2021 survey of over 300 small business owners identified these as the top reasons for hiring accountants in-house.

However, in-house staff can be more expensive compared to engaging a third-party bookkeeping or accounting firm. Partnering with an external service provider reduces hiring and turnover costs, as well as the downtime often experienced by small companies with in-house accounting during staff changes.

The decision of whether to hire a bookkeeper, an accountant, or both depends on factors such as the size of your business, the complexity of your financial situation, and the tasks requiring assistance. For example, a small family-run restaurant registered as a sole proprietorship might manage with bookkeeping software and an annual meeting with a local accountant. Conversely, a growing retail business operating as an LLC in multiple states is likely to benefit from more comprehensive support.

Seeking a consultation with an accountant can provide valuable insights into the complexity of your business’s financial needs and help you make an informed decision regarding your financial future.

Irrespective of whether you opt for in-house bookkeeping or accounting staff or engage an external third-party firm, employing reliable accounting software is crucial for streamlining the process and ensuring efficiency.

Your Outside Team