As a small business owner, paying close attention to your finances is vital to the survival and growth of your company. You can handle much of your accounting program on your own with some time and resources. But when you look at your books and feel lost, it might be time to call an expert.
Understanding when to use a financial professional can save you time and money. Knowing what kind of professional you need is equally important. Usually, it comes down to satisfying one of these needs: bookkeeping vs. accounting.
Bookkeeping and accounting are connected, but the difference between hiring a bookkeeper and an accountant is significant. Understanding the difference between bookkeeping and accounting can help you optimize your opportunity for growth.
Bookkeeping and accounting defined
Bookkeeping is the record-keeping process of tracking your finances.
Accounting is the process of compiling account information and analyzing information.
Basic breakdown of bookkeeping and accounting
- Record purchases, receipts, and payments
- Invoice customers
- Balance the general ledger
- Process payroll
- Generate financial statements and reports
- Analyze the cost of operations
- File income tax returns
- Advise business owners
How data is used
Bookkeepers record your business’s daily transactions and generate data. They record transactions using a uniform method, recording data in the same way every time.
Accountants verify recorded data about your financial activities. They make sense of your data and turn it into statements. Accountants look at the big picture view of your business’s finances.
Nature of the job
Bookkeeping is transactional. Bookkeepers enter information from each transaction and compute figures. This means bookkeeping is cyclical.
Accounting is subjective. Accountants examine your financial information with a subjective point of view, using their knowledge to interpret data. They look for patterns in your records to help you make business decisions.
When to call a financial professional
Bookkeepers are needed when you could use help keeping your books. For example, your business may be growing too fast for you to do your own bookkeeping. If you have room in your budget, you might consider hiring a bookkeeper so you can focus on profit-making responsibilities.
Accountants are needed when you must make sense of your financial information. You need someone who understands profitability, cash flow, and financial planning. An accountant can advise you on the most financially savvy moves you can make based on your history. An accountant will also help you with year-end business tax planning and filing.
Bookkeeping vs. accounting
While bookkeeping and accounting differ, they have overlapping functions. Both play an important role in informing you about your business’s health and projecting future outcomes.
Bookkeeping is the foundation of your finances while accounting takes care of higher-level processing. For example, let’s say you offer a coupon to your customers. You use bookkeeping to record how many coupons are used. You use accounting to look at how the coupons affect your finances.
As a small business owner, you can record your books with a do-it-yourself approach. If you decide to use a financial professional, make sure you hire someone with credentials that match your needs. The more complex your financial situation is, the more likely you will need an accountant.
Prepare to meet with your financial professional
You can help your financial professional get you accurate, meaningful answers about your finances. Knowing the difference in bookkeeping vs. accounting can help you prepare for working with a financial expert. When you hand records over to an accountant, make sure your ledgers are organized and correctly balanced.
While your accountant examines your books, keep the communication lines open. If you don’t understand financial jargon that your accountant uses, speak up and ask questions. Preparing to meet with your financial professional cuts down on time, which saves you money.
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This article has been updated from its original publication date of February 5, 2016.This is not intended as legal advice; for more information, please click here.