Small business owners always have something to worry about when managing their businesses. There never seems to be enough time in a day for administrative tasks, let alone managing finances to ensure the business runs smoothly. Bookkeeping and accounting, for one, cannot be kept on the backburner as they're the lifeline of the business.
Any business owner needs to keep in mind that bookkeeping is simply the foundation of the entire accounting process. So, if they are consistent with their bookkeeping tasks, then they will have a smooth year-end tax filing. This will likely help eliminate the statistic that one in five small businesses fail largely due to financial management and cash flow problems.
This post highlights the differences between bookkeeping and accounting, including how each plays an important part in helping businesses keep track of their finances.
What Is Bookkeeping?
Bookkeeping is defined as the process of recording financial transactions for a business. Every business needs to bookkeep to avoid bleeding money as it shows its movement in and out of operations.
When bookkeeping, a business will need to maintain a consistent recording of daily transactions. This means every customer invoice, sales receipt, vendor bill, bill payment, and credit card charge that occurs in the day-to-day running of the business. In turn, this helps avoid the nightmare of missing important transactions, late Profit & Loss statement preparation, and failing to meet IRS deadlines.
Bookkeeping sounds simple enough, but it's also prone to some confusion owing to its close connection to accounting. However, bookkeeping does not:
- Deal With Audits
Auditing is mainly done by financial auditors who verify the accuracy of financial statements and tax filing prepared by accountants. Auditors have an oversight role in ensuring accountants prepare financial documents as per the Generally Accepted Accounting Principles (GAAP).
Bookkeepers instead help auditors by generating an audit trail by properly recording all financial transactions. The audit trail will help auditors validate the legitimacy of accounting information.
- Deal With Taxes
While a bookkeeper is capable of filing tax returns for a business, they are more involved in the daily recording of transactions. Preparation of financial statements and completing and filing tax returns is more so the responsibility of an accountant.
Two Types of Bookkeeping
Bookkeeping, in general, involves the record-keeping aspect of maintaining books of accounts. Depending on the business operations, bookkeepers can either apply single-entry or double-entry bookkeeping systems.
As the name suggests, each transaction is recorded with one entry in a log. This method works best for small businesses that don't handle multiple transactions and generate little revenue. This is for a firm that doesn't have accounts receivables and accounts payables and records assets and liabilities separately. The types of records kept are typically cash receipts and cash disbursements.
In this system, each transaction is recorded using two entries (debit and credit), where you debit one account and credit another. This method is more popular among businesses but is also more complicated. However, it provides a true and fair financial position for a business as it applies the matching principle. Expenses and revenues are recorded when incurred and earned, respectively.
What Is Accounting?
Accounting involves the activities of recording, summarizing, analyzing, and reporting transactions. Accountants present vital financial information that helps businesses make important decisions.
Accounting is necessary for any size of business and is a key function. Accounting produces a dashboard, financial statements to present the wellness of a business.
A bookkeeper can handle basic needs, but a CPA should be utilized for accounting services. These include supporting business managers in budgeting, tax planning, and tax preparation.
Three Types of Accounting
Accounting typically fits into the following subfields:
Financial accountants are mainly engaged in the preparation and interpretation of financial statements to inform the firm's stakeholders such as shareholders, customers, creditors, suppliers, and the IRS.
Financial accounting starts with bookkeeping and finalizes with generating final financial documents: the income and profit, cash flow, and balance sheet. Transactions are recorded using the double-entry method and are based on historical data.
This method produces accounting information to help management make decisions that will benefit the company. Terms such as capital budgeting and trend analysis, and forecasting are commonplace to help reach business objectives. Similar to financial accounting, it relies on historical data generated by the financial department.
For example, a Sports Drink company that wants to introduce a new line of drinks will need a comprehensive financial projection of the costs, revenues, and profits before venturing into this new field.
Cost accounting helps a business control costs by enabling the management to predict the cost and selling price of a product or service. It also helps the managers to determine if a line of business in the firm is profitable or not. It analyzes elements such as materials, labor, and expenses in an in-depth manner, classifying them into direct and indirect costs. It is most valuable to manufacturing firms.
What Are the Differences Between Bookkeeping and Accounting?
Bookkeeping is just a foundation of the whole accounting system. Accounting uses information provided by bookkeeping to prepare financial statements and reports.
Accounting is broader than bookkeeping, encompassing various sub-branches and consolidating financial information for stakeholders. Bookkeepers record financial transactions in a timely and accurate manner to make it possible for accountants to close the accounting cycle with reliable financial data.
An accountant can easily handle a bookkeeper's job but not vice versa. Financial insights and strategic advice usually come from accountants, not bookkeepers. Bookkeepers ensure the completeness of the books while accountants are responsible for accurate presentation of the financial status.
The main goal of bookkeeping is to maintain a complete record of transactions. This has to be done consistently and promptly to avoid missing important financial information. A full-charge bookkeeper may also generate customer invoices, apply customer payments, enter vendor bills, and create bill payments.
An accountant aims at meaningfully reporting the financial strength and operating activity of a business. However, the bookkeeper has to play their part by staying on top of day-to-day business operations for the accountant to get a true picture of business performance and produce important reports.
Accounting and bookkeeping are essential to the accounting cycle; however, they perform in different stages.
Bookkeeping is handled by bookkeepers who don't necessarily have a certification. However, accounting is handled by an accountant or CPA who has more advanced skills. Training to be a fully qualified accountant takes hours of study and requires a certification to be able to handle high-level tasks such as generating financial reports, tax preparation, and interpreting data. In addition, they are held to a strict code of professional conduct.
Bookkeeping does not require special knowledge or skills. It is simply keeping records of financial transactions. In general, the bookkeeping role requires a person with attention to detail, analytical and organizational skills. Accounting requires the skills and knowledge of an accountant who knows the laws and regulations. The accounting profession is also much more complex and analytical as they have to sit through rigorous details of tax forms, cash flow projections, and other financial documents and communicate their interpretation to others.
Anybody can call themselves a bookkeeper or accountant, but only the ones who passed the most extensive accounting exams can become CPA.
Get Help With Your Books
Having a bookkeeper and accountant on payroll allows small business owners the peace of mind to focus on other leading tasks. Their roles will become even more apparent as the tax season approaches, as everything has to be in place to meet the tax deadlines. In the long run, understanding the clear roles of bookkeeping and accounting will enable a business to optimize its positive impact on its financials.
If you're a small business owner in New Jersey, Schwartz & Associates is your one-stop-shop for bookkeeping and accounting services. We're CPA experts committed to helping our happy clients to reach their potential by providing tax, accounting, and business consulting services. Get in touch with us today.