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ResourcesAccounting and Taxes

Bookkeeping vs. Accounting: What's the Difference?

Accounting and TaxesMay 08, 2023

Self-employed people often feel most comfortable putting out fires and working in the trenches of their businesses. That may be the most rewarding work, but you can’t get so caught up in your daily responsibilities that you neglect your bookkeeping or accounting.

Both processes are essential for fulfilling your tax obligations, making informed business decisions, and achieving long-term financial success. You must understand them and how they relate to each other.

Let’s explore what you need to know about small business bookkeeping vs. accounting, including exactly what they mean and how they differ.

What is Bookkeeping?

Bookkeeping refers to the process of recording your business’s day-to-day financial activities. It primarily involves documenting the details of your cash and credit transactions, such as receipts and expenses.

Bookkeepers also perform the administrative tasks necessary to organize large amounts of financial data and ensure its accuracy. For example, that includes:

  • Creating a chart of accounts: This refers to the master list of your business's asset, liability, equity, revenue, and expense accounts. Bookkeepers and accountants reference it when recording activities and categorizing transactions. 

  • Reconciling account balances: This process involves comparing your financial records to your bank account and credit card statements to ensure your records are accurate. Bookkeepers typically do this every month.

  • Creating financial statements: Bookkeepers usually prepare the income statement and balance sheet. However, they only build the first draft, then give it to an accountant for adjustments.

Ultimately, the role of bookkeeping in your organization is to create accurate financial records in a timely manner. That gives your accounting team the raw data they need to fulfill their most important responsibilities.

As a notable example, bookkeepers are responsible for tracking your tax-deductible expenses. Accountants must include those costs on your tax return to reduce your taxable income and minimize the amount you pay in taxes.

What is Accounting?

Small business accounting involves interpreting and analyzing financial data to make better-informed business decisions. It generally requires more expertise and critical thinking than bookkeeping does.

For example, here are some typical tasks an accountant would be responsible for:

  • Finalizing financial statements: Accountants ensure that financial statements are ready for internal or external use. In addition to checking for accuracy, that includes adjusting for things bookkeepers might not know to record, such as non-cash transactions like depreciation.

  • Tax planning and preparation: Accountants can help you develop a strategy to minimize your tax burden, calculate your annual tax bill, and file the forms necessary to remain in compliance with regulations.

  • Budgeting and forecasting: Accountants can help create spending plans and forecasts for your business. They can also compare your projected numbers to your actual results, analyze the reasons behind any variances, and help get you back on track with your goals.

If bookkeeping is about recording your financial data, then accounting is about using it to inform your business strategy. That can mean anything from determining how much you owe in self-employment taxes to analyzing the best way to spend working capital.

Main Differences Between Bookkeeping vs. Accounting

Bookkeeping and accounting are closely related, but they’re still distinct. Knowing the differences between them is beneficial, especially if you’re considering paying for help with one or the other.

Let’s contrast small business bookkeeping vs. accounting in more detail to help you better understand the role each one plays in your business.

Scope and focus

Bookkeeping has a narrower focus than accounting, as its only purpose is to document your business’s financial history. Bookkeepers typically spend much of their time repeating straightforward tasks, like posting transactions and reconciling accounts.

Accounting has a much broader scope since it involves using financial data to inform a variety of decisions. As a result, accountants may spend time working on many different aspects of your operation.

For example, your accountant might prepare your tax return in the morning. In the afternoon, they might help you determine how much product you should keep on hand to meet demand while minimizing storage costs.

Timeframe

Bookkeeping and accounting also differ significantly in their timeframes. A bookkeeper's work is continuous, and they should perform their primary tasks daily. That includes recording financial transactions and posting them to the financial statements.

Even their less frequent duties should be performed monthly, such as bank account and credit card reconciliations. After all, timeliness is essential for good bookkeeping. It doesn’t matter how accurate your records are if they come a year late.

Not only would that cause you to miss all of the relevant tax deadlines, but your data would also be so outdated that it wouldn’t be useful for short-term business decisions.

In contrast, accountants perform most of their tasks periodically, such as every quarter or calendar year. Many of their responsibilities revolve around quarterly and annual tax deadlines and require at least a few months of historical data.

Skills and qualifications

Bookkeeping and accounting involve vastly different skill sets. An accounting degree will make a new bookkeeper more effective initially, but it’s usually not necessary for an entry-level position.

A talented and eager employee can quickly learn basic bookkeeping with on-the-job training. Many of their responsibilities require little more than an aptitude for clerical work and attention to detail.

However, accountants need more extensive expertise. Entry-level roles require at least an accounting or business degree, and positions with more responsibility go to people with advanced qualifications, such as Certified Public Accounting (CPA) licenses.

In fact, the law requires that an accountant have a CPA license to offer certain services. That includes preparing audited or reviewed financial statements, which provide users with some assurance of accuracy.

Use of technology

The straightforward and repetitive nature of bookkeeping tasks makes it relatively easy to automate them. In fact, most small businesses use bookkeeping software to help track their transactions and perform monthly reconciliations.

Once you connect these tools to your bank and credit card accounts, they can automatically download your transaction data and organize the information. That includes classifying most activities and generating initial financial statements.

While you can automate some accounting functions, most still require manual effort. For example, small business accounting software can calculate your tax liability automatically. However, it can’t tell you how to prepare your business for a recession like an accounting expert could.

Should You Hire a Bookkeeper, Accountant, or Both?

Self-employed people often wear many hats, especially in the early days of their businesses. When you’re on a shoestring budget, you have to be responsible for every aspect of your operation.

Unfortunately, accounting and bookkeeping for a small business can be pretty time-consuming. As your business grows, you might not be able to handle both functions on top of your other responsibilities, even if you have the necessary expertise.

That can cause you to burn out and start making costly mistakes. For example, you might miss a tax deadline and incur a penalty or misrecord a deductible expense and pay more taxes than necessary.

If you’re struggling with these kinds of issues, it may be time to consider hiring someone to manage the tasks you can’t afford to take on. Fortunately, many types of assistance are available, and you can find something appropriate for just about any circumstance.

Here are the primary choices to consider:

  • Freelance bookkeeping services

  • In-house bookkeeping employees

  • Certified public accounting firms

  • In-house accounting employees

The size of your budget and the complexity of your needs are the primary factors to consider when picking from these options. Fortunately, those usually scale together, making it easy to find assistance that satisfies both.

To give you an idea of the typical progression, most self-employed people pay an independent CPA an annual fee for tax services first. As their operations grow, their next hire is often a freelance bookkeeping service on a monthly retainer.

That’s enough for many small businesses, even some with millions of dollars in annual revenue. Meanwhile, in-house bookkeeping and accounting teams are for companies that need direct control over the function and can afford multiple employees.

How Found Can Help

Found is a business banking platform built with one goal: making self-employment easier. We offer a suite of tools designed to help you run your business, including several that can lessen the burden of bookkeeping and accounting. 

For example, Found includes an auto-save feature that tracks your income and expenses, calculates your tax liability in real time, and sets aside the right amount of funds to cover your estimated payments.

Our mobile app also lets you create professional, customized invoices and send them to your clients in seconds. You can use it to accept the most popular payment options on the go, including credit cards, Venmo, and PayPal.

Found’s powerful, easy-to-use tools make all the paperwork involved in self-employment simpler than ever. Create an account for free and get started today!

The information on this website is not intended to provide, and should not be relied on, for tax advice.

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