Many small businesses are not familiar with the distinction between bookkeeping and accounting. There are some significant differences, though, and knowing what they are will allow you to employ the best of each to aid your business. It will also allow you to properly set your expectations for what each can contribute.

Which Do You Need for Your Small Business?

Many small businesses are not familiar with the distinction between bookkeeping and accounting. There are some significant differences, though, and knowing what they are will allow you to employ the best of each to aid your business. It will also allow you to properly set your expectations for what each can contribute.

So, what are the differences?

Many people use the terms Accounting and Bookkeeping interchangeably. That is not completely incorrect, but there are some important distinctions. Bookkeepers do just what their name implies, they keep the books–they pay invoices, collect receivables and receipts, make deposits, and more. Whereas an accountant’s function is less about the day to day balance sheets, and more about the overall financial health of the company–performing audits, producing financial reports, optimizing revenue and reducing expenses, and advising management on financial matters.

Bookkeepers typically manage the daily financial transactions (accounts receivable and payable management (invoicing), bank reconciliations, expenses and petty cash management, production of financial statements (including cash flow, income statement, and balance sheet), payroll processing, and are in charge of preparing the accounts, and producing preliminary accounts at the end of the month). Skilled bookkeepers will usually advise clients on record keeping requirements and methods, cash flow forecasting management and general record keeping.

Accountants generally have a broader purview than bookkeepers, they take more of a consulting position with business owners. Accountants use the financial statements created by the bookkeeper to provide  financial statements and reports that are required by banks and governmental agencies. They additionally provide monthly or quarterly insight into the health of the business. Accountants will use the financial statements prepared by the bookkeeper to provide insight into the company and create plans to help their client grow their business. CPA are certified public accountants, that are regulated by their state board accountancy. They are required to meet the annual minimum educational and experience requirements, which ensures they stay informed on the new laws and regulations. Accountants will also verify the accuracy and completeness of the accounting records, income tax planning, and offer advice on tax law, entity structure, and key financial decisions.

To be able to completely represent their clients, accountants and bookkeepers typically work closely together.

The shifting of roles between bookkeeping and accounting

As innovation has changed the way we operate, we have likewise seen a shift in the bookkeeping and accounting industry. Automation has significantly simplified the bookkeeping functions inside accounting software.This has liberated bookkeepers from much of the conventional work of data entry, enabling them to move into more of an advisory role.

Bookkeepers are now spending more time training on a range of solutions, growing the choices for accounting resources and other financial applications at a fast pace. Their aim is to be able to recommend the right “technology stack” for the varying needs of their customers. In addition to calling themselves bookkeepers, many bookkeepers now refer to themselves as “technology experts.” 

Accountants are taking innovative approaches to serve their consumers as well. Tax resolution has become a common subject for many accountants as the tax system becomes more complex and sophisticated. Often, being that accountants are generally well versed in the personal financial condition of their consumers as well as their company, some become tax coaches and qualified financial planners. These fields of specialization help accountants to provide their customers with advanced business tax plans, so that customers can hold on to more of their hard-earned dollars.

So how do bookkeeping and accounting overlap?

Both bookkeepers and accountants offer their clients strategic advice. 

A bookkeeper may tell you how to streamline the accounting processes or help you build a company budget, while an accountant may recommend ways to reduce your tax liability or help you determine whether to integrate your company. Bookkeepers support clients with the particulars of day-to-day business activities, while the accountant or CPA is broader and more focused on big picture goals.

Some jurisdictions have started to limit who can label themselves an accountant as the distinction between bookkeeping vs. accounting has become less clear. In certain states, in order to refer to themselves as accountants, a person has to be a CPA (certified public accountant). In certain jurisdictions, though, the word “accountant” or “accounting” needs no training or credential. Thus, it is necessary to ask the provider of financial services what positions they can fill for you.

Still struggling to understand the difference between what the job of an account is vs. a bookkeeper?

Let us break it down and look at the roles they each play in the financial year:

Income/Accounts Receivable:
The client makes his or her own calculations and invoices, then collects refunds against those invoices. In their accounting scheme, the bookkeeper balances the accounts, so that the business records accurately reflect the bank balance at the end of the month. 

Expenses/Accounts Payable:
A cash flow program may be used by the bookkeeper to handle all vendor payments of an organization. When the vendors email or fax their bills directly to the client’s account, the bookkeeper is notified and then assigns the correct vendor, expense category, and client as an approver.

The client gets informed, then checks the vendor bill and accepts it for payment. Then, the bookkeeper pays the vendor bill, which syncs the bill and bill payment to their accounting program. As they do for withdrawals, the bookkeeper will  match the income and receivables with the bank statements.

Accounts Reconciliation:
Bookkeepers match purchases in their accounting tools against transactions flowing in from the bank feed as the month goes forward. For transactions created outside their accounting software (such as debit transactions, miscellaneous checks, and credit card transactions), bookkeepers add them by assigning payees and/or cost categories as they come in from the bank feed. Bookkeepers collect the customer’s bank / credit card receipts at the end of the month and reconcile each record

Throughout the Year:
To ensure that all expected payments are to be charged, the accountant may check interim financial statements periodically. They can make monthly or quarterly depreciation changes or pay out any prepaid liabilities, such as insurance. In addition , in some cases, they could provide verified financial records

Year-End:
Bookkeepers may aid with processing 1099s for contractors towards the end of the year, because if the customer has payroll, bookkeepers can ensure that all the quarterly returns tie up to the W-2s to support the customer plan and issue W-2s. Bookkeepers collaborate alongside the accountant / tax preparer to guarantee that they provide all the documents they need from the corporation of the customer to prepare the annual reports. The CPA schedules the returns, and they can join them at this point if they have not undergone any changes in the year. They would also assess the total fees that the consumer has to spend in the next year and offer all other tax preparation suggestions.

Does your small business need an accountant or bookkeeper?

Any small business should, as soon as they plan to open their business, work with a trained accountant.

Hiring a good accountant will help a small business owner settle on the proper corporate entity, understand the criteria for tax reporting, and give financial guidance to increase income or mitigate their tax liability.

So do you need a bookkeeper or an accountant for your small business?

Many small business owners struggle to understand the responsibilities of an accountant and bookkeeper and will just have them both. However, when starting a business the owner can efficiently fill the role of a bookkeeper and consider hiring a bookkeeper as the business grows. The bookkeeper compiles the financial data, and manages the day to day transactions, and looks out for changes or financial events that need to be addressed. At the start of your business you will probably be able to do it yourself, considering that your business is still new and small, this will make sure that you understand the financial processes and operations of your business.

However, it is vital to consult with an accountant, especially at the start of your business. This may seem costly at the start of your business, but look at it as investing in good advice, this can be very valuable in the early days, and save you time, energy and money in the long run. This will help you understand your financial structure and responsibilities for your business. They will also help you pick out the correct corporate structure for your business. Also, when filing taxes it is important that you have them reviewed by an accountant, they will ensure that you are filing correctly and not overpaying. It is best when starting a company to be on top of your financials, and doing the bookkeeping for your business will help you achieve that. If you have any questions regarding the financial data you collected an accountant can help you make sense of it, and provide recommendations.

In Summary

When you have a complete understanding of your accounts, it enables your business to perform well, and bookkeepers and accountants each look at the figures of an organization from different perspectives. The advice of both a bookkeeper and an accountant will ensure that you get the right advice for your business. You get a balanced view of your finances from the viewpoints of each, which helps to put your mind at ease and devote your energy to do what you enjoy, operating your company.

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