hen it comes to understanding how your small business is doing, staying on top of your financial transactions should be a top priority. From ensuring tax returns are filed correctly to forecasting cash flow accurately, there are many reasons to maintain healthy bookkeeping and accounting practices for your small business.

But what’s the difference between bookkeeping and accounting? Understanding the difference is crucial to submitting appropriate documentation and finding accurate data. The main difference is that bookkeeping involves you or a professional gathering financial data and sorting them into the right places. If your business is large enough or you need another set of eyes, a CPA (Certified Public Accountant) can help to take it one step further and help you analyze your financial data.   

What is Bookkeeping?

Bookkeeping is a series of tasks designed to organize, record, and track your business's financial details. More specifically, it ensures all your income and expenses are recorded and organized correctly, such as dates and business categories. 

Bookkeeping involves reviewing daily transactions, balance sheets, bank statements, accounts receivable and payable, income statements, and more. Some small business owners decide to do their own bookkeeping, while others hire a bookkeeper to help with bookkeeping tasks, from bank reconciliations to recording journal entries. They’ll either use manual processes such as recording data on spreadsheets or rely on the help of business bookkeeping software or bookkeeping services. 

A bookkeeper’s job is to ensure your financial records are as accurate as possible to help the accountant with their tasks like filing taxes. Think of bookkeeping as part of the entire accounting process — you’re getting your business accounts ready for more complex tasks. A bookkeeper (even if that’s you) must catch tiny or hidden mistakes. Even a small one can affect your business. 

Bookkeeping records can also provide you with a better understanding of your business finances. This data, in turn, can help you decide whether to adjust your business budget or reevaluate how you allocate cash flow.  

What is Accounting?

While part of the accounting process is bookkeeping, accounting goes beyond looking at a business’s financial numbers on the surface. Instead, it also involves analyzing them. Accounting work includes looking at financial data to help suggest ways to help optimize your business tax returns, such as tax preparation and tax filing. Accountants will also have a good grasp of tax deductions that your business can take advantage of.  

Accountants are tasked with these types of responsibilities since they’re the ones who tend to have the specialized knowledge to look at the ‘big picture’ of your business finances and make recommendations. In general, accounting requires more logic and problem-solving skills than bookkeeping. It relies on bookkeeping to organize and ensure the accuracy of your financial records but then goes a step further to draw conclusions about your business finances. This, in turn, helps business owners make better financial decisions.

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What is the Difference Between Bookkeeping vs. Accounting?

Accounting and bookkeeping differ in how they involve financial data. Bookkeeping records the day-to-day financial transactions for a business. Accounting looks at the data in financial statements and uses it to focus on the bigger picture for a business. Simply put, bookkeeping focuses on the details, like putting the numbers in the right places (such as income or expenses) and the proper categories. For instance, bookkeepers will need to look at a business checking account to ensure they’ve recorded all bank deposits within a specific period.  

Accounting will take these transactions and complete tasks such as forecasting future needs for the business or conducting audits. For instance, an accountant or accounting software can look at how much your small business could pay in taxes in the current fiscal year and suggest action items to help reduce your tax obligation. They could also look at what business expenses seem excessive or unnecessary and make suggestions to adjust the budget accordingly.  

Can I Be My Own Bookkeeper?

Yes, you can if you’re willing to take on the responsibility and are patient with yourself while learning the ropes. You’ll also want to be comfortable with being extremely detail-oriented, organized, and up-to-date on your booking tasks. Having a background in accounting is helpful but not necessary.

To make it easier on you, you can enlist the help of automation — in other words, bookkeeping software. Novo integrates with bookkeeping software such as Quickbooks and Xero to make bookkeeping for your business more efficient and organized. In just a few clicks, you can have your financial data syncing automatically between the two platforms. All you have to do is review the transactions to ensure they’re all accurate and recorded correctly.  

Can I Be My Own Accountant?

While sole proprietors and solo business owners can do their own accounting tasks or use accounting software, hiring a CPA is generally better for small businesses with a more complex organizational structure. CPAs, or Certified Accounting Professionals, are trained on the latest tax laws and regulations and have obtained a bachelor’s degree and additional certification. They can provide you with expert advice on what you can do to help your business from a financial standpoint. They can also help to implement a robust accounting system for your small business. Think of this person as being on your team to help you understand the big picture and complex tasks.  

Enrolled Agents, a specialized type of accountant, can help advocate on your business’ behalf when you have issues with the IRS. Certified Public Accountants can also look at how your business is structured and advise how to best set it up. For instance, if you’re currently a sole proprietor and may be better off restructuring as an S-Corp, your CPA can explain why it may be worth the extra paperwork and potential expenses.  

Accountants can also help give a better picture of your business’s financial information and health using your financial reports. Hiring an accountant can give you a solid return on your investment: while it may seem like a lot to pay for an accountant’s services up front, a CPA may be well worth it by saving you money on taxes and helping with business growth. 

Outsourcing your bookkeeping or accounting tasks could be a smart idea no matter what size your business is, depending on your business needs. Doing so can free up your time to focus on other aspects of running your business. Plus, you’ll receive valuable insights and financial advice from experienced professionals on achieving business growth and stability in the long run.

The Takeaway

Understanding the distinction between accounting and bookkeeping is essential to managing your business finances. While bookkeeping focuses on the details of your financial data, ensuring that your transactions are recorded accurately and your financial statements are up to date, accounting focuses on the big picture. It is invaluable to tax preparation, budgeting, and forecasting.

Hiring a bookkeeper or an accountant may be worth it to ensure your business’s financial success, depending on your business size, growth, and your comfort working with numbers. Whether you need to record transactions or take a big picture look at your financials, remember that successful business decisions rely on good record-keeping and financial accounting. It may be time to consider outsourcing your bookkeeping or accounting, even if you don’t hire someone full-time. Decision-making for your business can become much easier if you have a solid understanding of your business’s financial picture through both bookkeeping processes and accounting tactics. 

This page is for informational purposes only and is not intended to be relied upon as legal, financial, or accounting advice. Please consult your own professional if you have any questions.

August 31, 2022
Banking 101