Bookkeeping vs. Accounting: What Business Owners Need to Know

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Bookkeeping vs. accounting: it can be tough for people to grasp the difference. Both involve a business’s financial management, and both are necessary for a smooth tax season. But beyond those similarities, there are some key differences that are important for business owners to know.

Being aware of exactly what accountants and bookkeepers can do for your business means you can hire smarter and outsource wisely. Xero found that hiring an accounting professional can increase revenue by up to 16 percent, so it pays to make sure you’re using bookkeepers and accountants in the right way. Getting a handle on the differences can help you decide when, and how, to start working with professionals from each sector, and how they can help optimize business performance.

In this post, we’ll examine the contrasts between bookkeeping and accounting and dive into what startups need to know when working with professionals from each discipline.

Bookkeeping vs. Accounting: The Basics

The TL;DR version goes like this. Bookkeeping is said to be transactional, meaning it deals with the day-to-day financial transactions and administration of a business. Accounting involves taking the information produced by bookkeeping and extracting insights and forecasts.

In practice, that distinction can get blurred. Changing technology, especially cloud computing and automation, has freed bookkeepers from repetitive tasks and allowed them to take on more advisory tasks from time to time. For example, bookkeeping software can automatically produce financial statements and forecasts, meaning that bookkeepers can offer some of the guidance once confined to accountants.

So bookkeeping vs. accounting isn’t perhaps as clear a contrast as it once was. Let’s take a closer look at the nitty-gritty of each profession right now.

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What is Bookkeeping?

Bookkeeping involves all daily recording of financial transactions, including:

  • Accounts receivable and payable management (invoicing)
  • Bank reconciliations
  • Expenses and petty cash management
  • Production of financial statements including cash flow, income statement, and balance sheet
  • Payroll transactions

Good bookkeeping relies on accuracy. That’s why bookkeepers often use software like QuickBooks to manage and track transactions, which cuts down on human error and speeds up the bookkeeping process.

Looking for a bookkeeping service that combines expert bookkeepers with powerful software? Try Pilot.

What is Accounting?

Accounting is a broader term than bookkeeping. In its loosest application, accounting can refer to both the recording of financial information (like bookkeeping) and the synthesis of that information into useful reports for both business people and tax agencies.

When comparing bookkeeping to accounting, the latter usually refers to tasks such as:

  • Financial forecasting
  • Financial audits
  • Strategic planning
  • Tax returns
  • Performance optimization

It helps to think about both bookkeeping and accounting being part of the same accounting process. The recording of financial data (bookkeeping) is stage one of that process, and the interpretation of that data (accounting) is stage two.

Bookkeepers vs. Accountants: What’s the Difference?

On an individual level, bookkeepers and accountants have different qualifications and, to a certain degree, different skill sets.

Bookkeeping vs. Accounting Qualifications

The most obvious difference is that there’s no standardized, obligatory qualification for practicing bookkeepers. The U.S. Bureau of Labor Statistics states that bookkeepers are required to hold at least a high school diploma, backed up by at least two to four years of on-the-job experience.

Because of this lack of required qualifications, a lot of U.S. bookkeepers get a certification from the American Institute of Professional Bookkeepers (AIPB). This guarantees to employers that the bookkeeper has signed up to the AIPB’s Code of Ethics and reached their certification standards.

Bear in mind that in most states no qualification is necessary to be a bookkeeper. So if you’re hiring a bookkeeper, focus on previous experience and training.

Accountants need to get at least an undergrad degree in accounting or, in some circumstances, finance. If accountants want to practice in larger companies, they have to qualify as a CPA, a Certified Public Accountant. CPAs can represent a client before the IRS in an audit, work in a public company, and bring an extra level of expertise to financial management.

Bookkeeping vs. Accounting Traits & Skills

Bookkeepers’ most valuable asset is accuracy. Bookkeeping, particularly if it’s done by hand, can be an error-prone and repetitive process. The best bookkeepers have to be detail-oriented and organized to avoid losing or misrecording important information.

Accountants need to be accurate and have an eagle-eye for detail as well. However, they must also combine this trait with business acumen and strategic vision. Accountants may also need to have managerial skills, as they may be called on to lead financial departments or teams.

It goes without saying that both roles need to have integrity, as they have daily access to a business’s bank accounts and financial information.

Do You Need an Accountant Or a Bookkeeper?

Solo-preneurs or early-stage startups can often get away with doing their own bookkeeping and accounting. However, as businesses grow, telltale cracks start to show in financial management processes. Signs you need professional help in financial management include:

  • Not performing bank reconciliations at the end of the month
  • Not keeping sufficient financial records
  • Consistent cash flow problems
  • Not using the Chart of Accounts correctly

These issues can be rectified by getting a bookkeeper. Even in small businesses or startups with bootstrapped resources, using a reliable bookkeeper is imperative. Being able to base business decisions off of accurate data is essential as you make strategic decisions.

Many small businesses can get by with a bookkeeper and only invest in an accountant when tax season rolls around. A bookkeeping service can provide all the data accountants need to process tax returns.

For startups seeking investor funding, bookkeepers can be helpful when you prepare pitch deck financials. With accurate data, you’ll be able to speak to due diligence queries, back up growth projections with a grasp on current finances, and plan when to engage in funding rounds based on cash flow.

Most small businesses need a bookkeeper on a monthly basis, and an accountant for tax time or when audits happen. Combining a professional bookkeeping service with an accountant guarantees 360-degree advice and management.

How to Hire an Accountant

Before hiring an accountant, you need to decide if you need someone in-house or if you can outsource. Businesses that need more than bookkeeping services can usually get by with an outsourced CPA firm. This option means you’ll get an accountant assigned to you, but they may not specialize in your business area in particular.

Before taking on an external firm, it pays to do background checks using tools like CPA Verify. This confirms licensing and checks for disciplinary action against CPAs.

Additionally, crunch the numbers and figure out whether an outsourced accountant really will be cheaper than hiring someone in-house.

Looking for more tips? Check out our in-depth post on how to hire an accountant.

How to Hire a Bookkeeper

Bookkeeping is unregulated, which can make hiring complicated. There are also a lot of bookkeepers out there: 1.53 million bookkeeping, accounting, and auditing clerks in 2017 in the U.S. alone.

Again, start by figuring out if you need in-house or outsourced. In-house bookkeepers often take care of payroll and invoicing, but will cost more, and may be more than you need at this stage of your business.

An outsourced solution, like Pilot, can often provide the quality you need without the significant time investment it would take to hire and train a new team member.

Looking to find a new bookkeeper? We’ve written extensively about how to hire a bookkeeper.

Bookkeeping vs. Accounting: Costs

As a rule of thumb, bookkeepers are cheaper to hire than accountants. That’s because accountants can handle more functions and have more official certifications.

How much you eventually end up paying a bookkeeper depends on how much you need them to do, and whether you hire someone in-house. In general, you can expect to pay an in-house bookkeeper approximately $25-$40 an hour, or upwards of $52,000 a year plus taxes and benefits.

Most outsourced bookkeeping services start at $500 a month, which can be a significantly cheaper option.

When it comes to accountants, costs are higher. The Bureau of Labor Statistics reports that the median U.S. salary for accountants and auditors in 2017 was $69,350, with CPA-qualified professionals earning the most.

Bookkeeping vs. Accounting: A Strong Financial Base

Proper financial management and record-keeping by a bookkeeping service, plus strategy and tax smarts provided by an accountant, have a positive impact on business growth, funding success and profitability. The two disciplines work hand in hand to allow business owners to zero in on profit and make smart financial decisions.

Knowing when, and how, to hire the right financial professional for your company, is the first step in setting yourself up for success.

Ready to get your books done right? Try Pilot Now.