Difference Between Accounting and Bookkeeping

Accounting and Bookkeeping difference

Difference Between Accounting and Bookkeeping

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In this blog post, we’ll cover the difference between small business accounting and bookkeeping. Accounting is a broad term that covers many different activities, but in general, it can be defined as any process of measuring financial information for a designated period. Bookkeeping is simply the recording of financial transactions in an organized way.

The two are often confused because they share similar aspects, such as the need to calculate the balance at a specific time and maintain records until final closing procedures have been followed. However, accounting has much broader implications on how you run your business day-to-day while bookkeeping only concerns transactions during a given time.

The role of a bookkeeper:

Bookkeeping is an essential part of your business because it allows you to track transactions as they happen. It’s the first step in evening out accounting books and can help correct errors before being recorded into a ledger. However, bookkeeping is only concerned with what happened during a specific time.

A bookkeeper’s role is to highlight the different transactions in a business with their corresponding values, ensuring accuracy and recording them accordingly. Depending on the company’s size, you may decide to hire an external bookkeeper or keep it in-house instead.

1. Data entry:

Data entry refers to entering each transaction into the general ledger. This is your first step in balancing out books, as you use it as a reference point for what should be included or excluded from your accounting report. The small business bookkeeper will be responsible for checking the journals and codes to ensure accurate recording.

2. Reconciliation:

Accurate communication between the bank and your organization is crucial for smooth business operation as transactions performed by you will need proper record keeping in the accounting system. A cash receipt journal forms one such record which shows the activity of cash received by your business from various sources.

3. Month-end close:

At the end of a month, a bookkeeper will provide management with a journal that shows all of the cash transactions that have taken place. This is also where you’ll find your closing entries – any investment purchases, liabilities paid off, and depreciation adjustments – which close out an accounting period. On top of that, you’ll get a profit and loss statement so you can see the results of your business for the given time.

4. Dealing with external auditors:

Suppose your company makes more than $500,000 in revenue per year or is held accountable to outside agencies such as investors or shareholders. In that case, you’ll likely need to undergo a yearly audit. With this in mind, any company that conducts large volumes of business will most certainly have to deal with an external auditor who specializes in your industry at some point. A good bookkeeper will help make the process go by faster and easier, as they know what information needs to be correctly orchestrated to get the audit done.

5. Preparation for tax time:

At the end of every year, employees will start to make W-2 and 1099 filings with various government agencies. You may also need to report to shareholders or investors to meet any requirements they have to maintain their investment in your company. As such, a bookkeeper will play a significant role in making sure your company can prepare these documents and work with external auditors if needed.

A good bookkeeper ensures all financial transactions are recorded, and business data is organized for smooth internal communication and management decision-making. As such, they refrain from providing analysis or opinions about the information they register and organize, allowing management to draw their conclusions.

6. Expense tracking:

To improve efficiency and track profitability, a bookkeeper will also enable you to classify expenses correctly. This way, costs can be categorized into the different departments they belong to or business-related or personal. Any of these classifications will determine how an expense is accounted for and recorded within the general ledger, along with how it’s taxed.

7. Payroll Processing:

Payroll processing entails calculating and recording time worked by employees for a given pay period, as well as paying them by the hours they’ve worked. Typically this would be done by managers or supervisors, but when it comes to crunch time, you’ll need your bookkeeper to put up their sleeves and do it instead.

8. Business analysis:

Your bookkeeper will also aid you in understanding your business better. For instance, they’ll provide management with a clear picture of cash flow and help improve its overall health by suggesting ways to increase revenue and reduce expenses. This is where analytics comes into play – the small business bookkeeping profession gives the numbers, not opinions or analysis, leaving it up to management to draw their conclusion.

The role of an accountant:

This role is very different from that of a bookkeeper. While the bookkeeper organizes and records transactions, the accountant provides people engaged in accounting opinions about their financial information. They provide analysis after detailed data collection, recording, and organization.

1. Preparing and maintaining important financial reports:

They will be the one who prepares financial statements for shareholders and external users such as tax authorities. These reports include a balance sheet, an income statement, and a cash flow statement. In addition to this, you’ll also receive detailed information about your expenses and the revenue that makes up these numbers.

2. Conduct Risk analysis assessments:

As a necessary process during the audit, the accountant will help the company construct a risk analysis. This helps determine areas of improvement and how to mitigate risks in the future.

3. Assist in value assessments:

They will prepare a valuation of a company’s stock using several methods, including the market approach and the income approach. In addition to this, they’ll highlight any potential benefits or detriments that may arise from threats in the external environment.

4. Identify the firm’s strengths and weaknesses:

They will help create an operating model that highlights the company’s strengths and weaknesses, allowing them to identify where they might have room for improvement. They’ll do this by drawing on information about future projections about customers, competition, suppliers, employees, and technology.

5. Negotiating with the bank:

As part of their role as professionals, they will work closely with banks to access loans and other banking facilities on behalf of clients. This allows them to help businesses capitalize on new opportunities like expansion or mergers and acquisitions (M&A).

6. Analyzing cost of operations:

They will analyze to help management understand the cost of operating their business. This includes direct expenses like rent and utilities and indirect costs like lost opportunities (or sunk costs) due to poor processes or lack of resources.

7. Forecasting future trends:

They are responsible for preparing financial forecasts that proactively identify risks and opportunities. They do this by analyzing the current business and external factors like economic growth and government policies that might impact it.

8. Tax planning:

By reviewing the current tax situation, they will help businesses identify potential tax savings or increase profits through specific means such as reducing expenses that aren’t critical to their business.

Bookkeeper Skills:

1. Knowledge:
Strong knowledge of the fundamentals of bookkeeping, managing accounts receivable and payable, preparing journal entries, account reconciliations, and analyzing reports to provide recommendations for improving financial performance. A good understanding of the principles of taxation is also needed.

2. Accuracy:
As a business owner or manager, you are likely to have many demands on your time, so it is vital that you can rely on your bookkeeper’s work. You need someone who pays attention to detail and ensures that all reports are accurate – this is especially true regarding financial statements prepared for tax purposes.

3. Communication:
Good communication skills will help build trust between yourself and other managers in your organization, ensuring that you have access to financial data when it is needed.

4. Punctuality:
As a small business owner or manager, you depend on your bookkeeper to be on time with their work and keep appointments. You need someone who will respond to requests quickly and meet deadlines.

5. Flexibility:
Your bookkeeper will be required to fit in with your organization and adjust working hours to meet business requirements. This might include attending meetings or making extra time for particular projects – you need someone who can work as part of a team.

6. Initiative:
It’s not always necessary that you’ll be looking over your bookkeeper’s shoulder each minute. It would be best if you had someone who could take responsibility for their work and find innovative ways to increase productivity without needing much supervision.

7. Problem-solving:
Bookkeepers will encounter several problems as they go through the ordinary course of their daily tasks – good problem-solving skills will help them resolve issues quickly and efficiently and keep the workflow moving.

8. Drive:
Your bookkeeper will need to follow processes and procedures and meet deadlines. They should be proactive in anticipating problems and looking for ways of avoiding potential pitfalls. You also want someone with a can-do attitude who won’t get discouraged when faced with challenges.

Accountant skills:

1. Knowledge
They should have a strong knowledge of the company’s business practices, financials, and records. s/he is responsible for ensuring that all accounting records are accurate and comply with the relevant laws and regulations in different industries.

2. Analytical skills:
They should be able to interpret numerical data from financial reports and records. s/he should also be able to use that information to identify financial strengths and weaknesses in a company.

3. Business Acumen:
They should understand the business processes and daily operations to work efficiently with other employees.

4. Client relationship skills:
A good client relationship is vital for them to have. s/he should be able to communicate clearly with clients and work together in solving different problems.

5. Communication skills:
They should possess strong written and verbal communication skills to interact easily with managers, employees, customers, etc.

6. Punctuality:
They are expected to follow pre-defined deadlines to complete different tasks. S/he should be able to meet these deadlines in any circumstances.

7. Industriousness:
A professional accountant is required to work for long hours on several critical tasks under tight deadlines. They must possess the initiative and act fast without requiring too much supervision from managers.

8. Problem-solving skills:
They should be able to resolve any issues using analytical and logical reasoning methods. They should be able to identify problems and develop solutions.

9. Creativity:
Creating new ideas is critical for running a business or organization in today’s globally competitive world. They should have the ability to recognize problems and develop innovative ideas that can help a company operate more efficiently.

10. Teamwork:
A professional accountant must possess strong teamwork skills to work as a team and deliver high-quality results on time. They are generally expected to maintain regular contact with other employees through phone, email, etc.

Choosing between hiring a Bookkeeper or an Accountant

Both of them perform similar functions in a company. The main difference between the two is that the responsibilities of an accountant go beyond just maintaining financial records. At the same time, the duties of a bookkeeper are limited to recording transactions, reconciling accounts, and ensuring compliance with local laws and regulations. The best way to know which one your company needs is to ask yourself these questions:

What does my company do?

The activities of a company determine the professional that performs accounting duties. For example, an e-commerce company selling products online cannot operate without maintaining detailed records of transactions, inventory, etc. If you are in this line of business, you will need a professional accountant to perform accounting duties. On the other hand, if you own a small grocery shop or restaurant that does not maintain detailed records of transactions, you will need only a bookkeeper and not an accountant.

What is the size of my company?

The size and structure of your company help determine what kind of accounting tasks your bookkeeping staff should perform. A small company with a limited number of employees does not require a full-time small business accountant or even a part-time one, for that matter. All accounting tasks can be carried out with the help of a single bookkeeper with enough experience in basic accounting principles and practices.

What is my budget?

The answer to this question is very straightforward. If you have a limited budget, you cannot afford to employ an accountant or even a bookkeeper, for that matter. In this case, it is best to hire the services of an accounting firm instead. On the other hand, if your company has sufficient funds to spend on accounting tasks without stretching your budget too much, you should employ a professional accountant.

With knowing the difference between accounting and bookkeeping, it’s time for you to find the right professional or accounting agency for your business. One of the most reliable accounting firms in Florida is Swiftbooks, LLC. Call 786-204-2881 to book a consultation today.

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Further Reading

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