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If you want to understand how your small business is doing, you need to stay on top of your financial transactions. 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.
While bookkeeping and accounting may seem similar, there are some key differences. Bookkeeping is the process of recording financial transactions, and accounting is the analysis of those transactions.
In this article, we will detail the differences and similarities between accounting and bookkeeping, the costs associated with outsourcing each function, and reasons to consider hiring a financial professional for your small business.
What is bookkeeping?
Bookkeeping is a series of day-to-day tasks designed to organize, record, and track your business's financial details. In other words, it is properly recording the figure, date, and business category of each and every purchase, receipt, sale, and payment.
What are the functions of bookkeeping?
The functions of bookkeeping include reviewing and recording:
- Daily transactions
- Bank statements
- Accounts receivable and payable
- Income statements
- Balance sheets
What does a bookkeeper do?
Think of bookkeeping as the first step in the holistic accounting process, preparing your business accounts for more complex tasks. A bookkeeper must catch tiny or hidden mistakes because even small ones can affect your business.
What credentials do they need?
Unlike accountants, bookkeepers are not required to have a bachelor’s degree. They may take some finance-related classes at the college level, but even this is not a requirement. The American Institute of Professional Bookkeepers offers a Certified Bookkeeper designation, which can set professional bookkeepers apart from others.
How much does a bookkeeper charge?
The average hourly rate for a bookkeeper is $37, but this may vary depending on where you live and how experienced the individual is. Virtual bookkeepers are becoming an increasingly popular solution if you are trying to save.
What is Accounting?
Accounting is not only the systematic recording of financial data but also the analysis, interpretation, and presentation of this data.
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.
While only 30% of small businesses surveyed reported working with an accountant, those who do cite accountants as their most important advisors.
What are the functions of accounting?
The functions of accounting include:
- Optimizing business tax returns
- Finding new tax deductions
- Preparing and filing taxes
- Recognizing problems
- Maintaining cash flow
- Identifying areas of growth
What does an accountant do?
Accountants tend to have specialized knowledge that helps them look at the ‘big picture’ of your business finances and make recommendations.
Accountants are qualified to create financial statements for both employees and investors. They may also create budgets, help business owners plan ahead, and provide specific tax advice.
The strength of an accountant is recognizing a problem, such as disappearing inventory or a customer who is consistently tardy on payments, before it affects the business.
What credentials do they need?
Accountants need to have a bachelor’s degree but may also have a master’s degree. Many tax accountants also have a Certified Public Accountant (CPA) license. An Enrolled Agent (EA) is a specialized type of accountant that can advocate on behalf of your business when you have issues with the IRS.
How much does an accountant charge?
The typical hourly rate for an accountant is between $150 and $400. For a small business, it might make sense to keep an accountant on retainer or just bring them in strategically during the year. For example, some business owners only hire accountants to file their tax returns. This can cost between $300 and $1,500, depending on your business structure and level of complexity.
What are the differences between accounting and bookkeeping?
The main difference between bookkeeping and accounting is that bookkeeping is mainly an administrative task, and accounting requires logic and problem-solving. Below, we summarize additional differences between accountants and bookkeepers.
Difference in scope
- Bookkeepers are expected to maintain a healthy day-to-day financial record for the business.
- Accountants are expected to analyze the business’s financial record and identify issues and opportunities for the business to improve performance.
Difference in skill level required
- Bookkeepers are not required to have a bachelor's degree. They must be detail-oriented, organized, and meticulous.
- Accountants are required to have a bachelor's degree. They should have strong logic and problem-solving skills. They are required to know about tax law, and ideally, they should be able to utilize bookkeeping software.
- While an accountant can be a bookkeeper, a bookkeeper cannot be an accountant unless they have proper certification.
Difference in role and responsibilities
- Bookkeeping is a day-to-day administrative role. It is the first step in the holistic accounting process, preparing your business accounts for more complex tasks.
- Accounting can be a periodic (weekly, monthly, or quarterly) task. It is a systematic subjective look at your data that can evaluate the overall strength of your business.
Similarities between Accounting and Bookkeeping
There are a few similarities between accountants and bookkeepers, such as:
- Both look at financial data
- Both need at least basic financial and accounting knowledge
- Some bookkeepers can handle certain accounting tasks for small businesses
When to Hire a Financial Professional
Many business owners decide to hire bookkeeping or accounting help when their business finances have become more complicated to manage alone.
Even though it will cost you to hire someone else to manage your books or file your taxes, you may also discover more savings by using a professional. A trained accountant can help you take advantage of deductions you didn’t know about. A professional bookkeeper can help you find more time to take care of other business tasks.
Can I Do My Own Bookkeeping?
If you’re willing to take on the responsibility, you can do your own bookkeeping! Having a background in accounting is helpful but not necessary.
You’ll need to make bookkeeping a regular part of your schedule. You can do your bookkeeping in Excel, use business bookkeeping software, and/or employ a bookkeeping service.
The data you collect can help you decide whether to adjust your business’s budget, reevaluate how you allocate cash flow, and more.
Can I Do My Own Accounting?
While sole proprietors and small business owners can do their own accounting tasks, hiring a professional accountant, like a CPA, is generally better for small businesses with a more complex organizational structure. CPAs are trained on the latest tax laws and regulations, which can be too complex for a business owner to implement on their own.
Certified Public Accountants can look at how your business is structured and advise you on how to best set it up. For instance, if you’re currently a sole proprietor who may be better off restructuring as an S-Corp, your CPA can explain why it may be worth the extra paperwork and potential expenses.
Outsourcing accounting can also 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.
Understanding the distinction between accounting and bookkeeping is essential to managing your business finances.
While bookkeeping focuses on the basic 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. You may need an accountant to help with tax preparation, budgeting, and forecasting.
Hiring a bookkeeper, accountant, or both may be worth it to ensure your business’s financial success, depending on your business size, growth, and your comfort working with numbers.
Novo Platform Inc. strives to provide accurate information but cannot guarantee that this content is correct, complete, or up-to-date. This page is for informational purposes only and is not financial or legal advice nor an endorsement of any third-party products or services. All products and services are presented without warranty. Novo Platform Inc. does not provide any financial or legal advice, and you should consult your own financial, legal, or tax advisors.
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