Without a bookkeeper to keep tabs on your finances and an accountant to analyze bookkeeping details, your business could cave financially. The roles of bookkeeper and accountant are related but different.
In this post, you’ll discover the differences between bookkeeping and accounting and how they help entrepreneurs become and stay successful.
What is bookkeeping?
Consistency is the mainstay of bookkeeping. By making sure transactions, debits and credits, invoices, and payments are recorded on a timely basis, you’ll have accurate records you can depend on.
Bookkeepers make sure company and bank records match and reconcile statements monthly. Bookkeeping is one area of your operation where you shouldn’t take shortcuts or invite disorganization (like keeping records in a shoebox).
Regardless of the method used to complete bookkeeping (spreadsheet, ledger paper, accounting software), the general ledger must be updated frequently. Otherwise, you’ll never know if your business realizes a profit, needs more cash, or is in a position to apply for a small business loan.
Bookkeeping software continues to evolve because business owners prefer to access their data online. You can buy software that allows you to review your financial information anywhere by using a smartphone or another device.
Accurate bookkeeping records are essential when financial institutions, potential buyers, or investors need to verify your company’s financial history.
They can’t lend, buy, or invest unless there’s proof of creditworthiness.
It doesn’t matter if you’re a solopreneur, entrepreneur, consultant, or blogger—you need to be able to keep track of your finances.
Keeping accurate records ensures that you can substantiate business transactions that require supporting documents by the IRS. Examples include receipts for income, purchases, expenses, travel and entertainment, and records regarding your business’s assets.
Because accountants use these records to help business owners make financial decisions, the importance of having a top-notch bookkeeping system and bookkeeper can’t be overstated. Bookkeepers know when it’s time to refer a financial concern to an accountant.
Bookkeeping and accounting are equally important.
What is accounting?
You may ask why does accounting even matter. If you don’t have an accountant, how do you know when you need one?
Accounting isn’t a new concept. The oldest known accounting records are written trade records from Mesopotamia. Then too Luca Pacioli introduced double-entry bookkeeping in 1494.
There’s no way to deny accounting’s importance as a critical component of your business.
Accounting involves examining bookkeeping transactions for accuracy and completeness to come up with a complete financial picture.
As an entrepreneur, you rely on an accountant to make recommendations to improve your business’s financial health and stay compliant with tax laws. You also want to know your business’s value and what areas of your business make money.
Accountants are trained to look for weak areas, like patterns and inconsistencies in finances, and strategize with the business owner on how to make improvements.
For example, they can offer advice on cash flow management or make suggestions regarding business financing. They may also assume the role of a certified financial planner to help you make investment decisions.
In most situations, accountants are well acquainted with both an entrepreneur’s personal and business finances.
Many times a bookkeeper prepares company financial statements; however, the accountant can interpret the documents and make financial forecasts based on current data.
Accountants are experts on cost accounting and advise whether you should raise prices, increase inventory, or reduce spending.
A business owner should have a working knowledge of accounting principles because they are ultimately responsible for their business’s financial success.
That said, an accountant helps implement generally accepted accounting principles (GAAP) within your bookkeeping system with an end goal to reduce any potential income tax you owe and decrease your costs to operate.
Thereby, at the end of the year, your accountant is prepared to complete your tax return without encountering significant surprises. They know every detail about your assets, liabilities, equity, and cash flow.
What is the difference between accounting and bookkeeping?
Why it’s important not to confuse bookkeeping with accounting
As mentioned earlier, bookkeeping and accounting meshes, but each process is distinctively different.
Likewise, the roles of bookkeeper and accountant overlap, but both positions are required for business owners to maximize their business’s financial potential.
For example, a bookkeeper may alert you to review your accounts receivable when customers are overdue or advise when your cash balance is too low. They let you know if your expenses are in line with your budget.
On the other hand, an accountant may encourage you to take out a loan to purchase needed equipment or make building improvements. An accountant stays on top of the financial pulse of your business, so you don’t operate it at a loss.
These skilled professionals have your best interest in mind.
A bookkeeper performs their duties administratively while an accountant assumes an advisory role to oversee financial statements and meet requirements set forth by banks and government agencies.
Business owners need the expertise of both.
When you have a financial report, do you know how to interpret it? The data is only as reliable as how accurate records are kept. There’s no way you can sidestep the importance of bookkeeping and accounting when growing your business into a full-fledged entity.
Both bookkeeping and accounting processes ensure that your business realizes a profit.
Business owners just starting may handle finances initially, but as their business grows, they may need a bookkeeper and an accountant to assume these tasks. Moreover, you’ll be better equipped to manage the day-to-day affairs of your business beyond overseeing your finances.