You have found our guide of the difference between bookkeeping vs accounting.
Bookkeeping and accounting have many similarities between their approach and objectives that it’s easy to wonder “what’s the difference?” Well, in fact it’s true that there’s a Venn diagram between the two roles, but there are significant differences that are important to understand.
You might also find our posts on online bookkeeping services helpful on this topic.
This list includes:
- An overview of the fundamental differences
- The bookkeeper’s role
- The accountant’s role
- Qualifications for a bookkeeper
- Qualifications for an accountant
- When to hire a bookkeeper vs. an accountant
The differences between bookkeeping & accounting
Both bookkeepers and accountants are involved in the preparation of financial statements, while it’s typically the accountant who is involved in the analysis of financial statements. Financial statements – the most common ones being the Profit & Loss and the Balance Sheet – are how business owners and shareholders understand the financial health and growth of the business.
As a general rule, a bookkeeper records daily income and expense transactions, ensuring every number is accurate and accounted for. The accountant makes calls on the larger adjustments needed to produce the financial statements, analyzes the financial statements and provides guidance on financial decisions.
The Bookkeepers Role
Bookkeepers are responsible for the proper recording and categorization of daily transactions. The most typical responsibilities of the bookkeeper are:
- Categorizing revenue or sales
- Categorizing expenses being paid
- Recording payments on loans or debt
- Recording interest payments
- Entering bills to vendors and recording payments
- Creating invoices to clients and recording payments
- Keeping track of receipts
- Reconciling accounts
There can be dozens, or hundreds, or thousands of transactions coming in and out of a business every day. The bookkeeper’s job is to make sure they are in the right place, that they are all captured and none are missing, and that they are all reconciled to the bank, credit card, or loan statement.
Part of a bookkeeper’s job is to communicate with the business owner, manager, or employees, or even customers and vendors to ensure the proper categorization of income and expenses. A few examples would be:
- A business may have reimbursable expenses that are billed back to the client (for instance, travel expenses on behalf of client work). It’s the bookkeeper’s job to communicate with the person who incurred those expenses and make sure they’re properly tagged as “reimbursable” so that the client is properly billed.
- The business may use cash for receiving payments and paying bills. While the bookkeeper probably won’t be handling the cash, they will be responsible for reconciling the cash balance with customer invoices and vendor receipts to make sure no cash is unaccounted for.
- The business may receive a payment from a customer that doesn’t match any existing invoice. The bookkeeper would need to either contact the salesperson who created the invoice, or perhaps even the customer to understand which invoice to apply the payment to.
The bookkeeper’s main areas of responsibility are accuracy and completeness. Their main domain is the transactions that are entering or leaving the business accounts.
The Accountant’s Role
Accountants are responsible for the larger decisions and adjustments that need to be made to produce accurate financial statements. Outside of financial statement preparation, they can be responsible for a wide range of jobs that are focused on strategizing and taking action on the financial data.
For financial statement preparation, the accountant’s role is to make adjustments on financial statements. Besides income and expenses, there are other adjustments that affect the financials. These adjustments can include:
- Accrual adjustments (if the business is on accrual accounting). This would involve setting up and maintaining Prepaid Expense accounts, accruing revenue or expenses that have been earned or used but not yet paid, and ensuring that all financial activity has been captured in the correct period. Find out more about accrual vs cash accounting.
- Setting up fixed assets and liabilities on the Balance Sheet. Fixed assets like equipment and furniture need to be expensed over time. The accountant would determine the useful life of the asset and set up a depreciation schedule.
- Managing investments, dividends or owner’s draw. Depending on the business structure, there may be owner’s contributions or draws, or investor deposits or dividends. These need to be properly assigned so they show up on the right Balance Sheet account.
- Creating book/tax adjustments at year end. In many cases, the tax advisor will make adjustments to the financial statements for tax purposes that may differ from what’s in the financial statements. It’s the accountants job to determine which adjustments should be reflected in the books, if any.
These types of adjustments typically involve a bigger picture view and require the input of the owner or tax advisor. There can be multiple ways to treat certain transactions, and the proper way depends on the tax treatment of the business or other high-level factors.
Beyond financial statement preparation, the accountant could be responsible for many different jobs depending on the size and complexity of the business. Accountants can:
Create and maintain budgets. Businesses or departments often utilize monthly, quarterly or annual budgets. Budgets can be particularly important for nonprofits because often certain donations are allocated to a particular time period, or a particular line item, and a budget is needed to make sure the spending stays within budget. The accountant usually compares the budgeted-to-actual to see how close the business stayed within budget over the time period in question. If there’s a large variance, the accountant will present them to the decision makers so the budget can be adjusted or the expense category can be reduced.
Produce cash flow forecasts. Maintaining a healthy cash balance is essential. Without cash, the business is over. Accountants can create forecasts to consider all the factors that contribute to the inputs and outputs of cash. This requires special attention because many expenses don’t equal cash out of the bank (credit card expenses, for instance). It’s the accountants job to work with the decision makers and forecast what the expected inflows and outflows will be. Like with budgets, the accountant will typically compare forecast-to-actual after a period closes, and update the forecast based on the latest financial data.
Run analysis business performance. Accountants can analyze financial statements by comparing months, quarters or years and finding fluctuations in expenses and income. Many businesses have seasonal periods of higher and lower revenues, and an accountant can help to measure and plan for periods with more cash flow, and prepare for periods that may require cost-cutting. This allows the business to evaluate whether or not to hire more, reduce overhead, ramp up marketing efforts, etc.
Conduct internal and external audits. Auditing can be done in-house and informally or externally and highly regulated. Public companies and nonprofit organizations require external audits, while private companies may choose to do internal audits of finances and operations to mitigate against fraud or financial misconduct. An audit may also be required during the sale or merger of a company. An accountant can do an internal or external audit, but an external auditor requires specific certification. More information on internal vs. external audits here.
Manage tax planning and compliance. Tax planning involves looking at the year’s performance, forecasting future performance, and estimating the taxes due based on actual and forecasted data. In addition to tax planning and tax return preparation, accountants can also be involved in a myriad of tax compliance activities: paying sales tax, payroll taxes, state and local taxes, etc.
Implement financial control systems. Business need strong control systems to ensure financial transparency and security. Accountants can craft policy, run stress tests, and investigate situations that need stronger controls. Controls that an accountant may suggest to the decision makers could be: separation of duties, periodic reviews, authorization requirements for transactions, implementation of audit trails, and creation and distribution of clear financial procedures and policies.
Provide consultancy on financial decisions. Accountants may be able to provide guidance on decisions like banking relationships, future cash flow needs, investment in new property or equipment, tax strategy, debt management, and mergers or acquisitions.
Qualifications of a bookkeeper
A bookkeeper does not require a college degree or a certificate to perform bookkeeping tasks. However, a good and experienced bookkeeper will usually have the following qualifications.
- An understanding of the basics of accounting. Debits vs credits, balance sheet transactions vs income statement transactions, double-entry accounting.
- Familiarity with accounting software. Usually small businesses are utilizing Quickbooks or Xero, while larger businesses use Netsuite, Oracle, or another ERP. Look here for our list of the best bookkeeping software.
- Detail-oriented. Bookkeeping is about accuracy and completeness. A good bookkeeper won’t gloss over questions or make guesses – they need curiosity and attentiveness to do their job right.
- Efficiency. While bookkeeping (formerly called write-up work) used to be very time-consuming, technology has enabled all kinds of efficiencies that bookkeepers should take advantage of. If a bookkeeper is doing everything manually, it’s likely they need more training or initiative to research what they could be utilizing to make their work go faster.
- A bookkeeping certification. This is not required, but it’s an efficient way of proving they know their stuff. Many community colleges offer bookkeeping certifications, there are reputable online certification classes, and many of the larger accounting software companies offer their own certifications. You can find a list of the best free and paid online bookkeeping courses here.
Qualifications of an accountant
Not all accounting functions require a college degree, but many require both a college degree, several years of experience, and passing a state board of accountancy exam.
The functions that require a professional certification include: Certified Public Accountants (CPA), Certified Certified Management Accountant (CMA), Chartered Financial Analyst (CFA), Certified Internal Auditor (CIA), Certified Fraud Examiner (CFE). These designations are required by many government and industry regulations to perform specific advice, attestation, or representation.
A tax accountant will typically be a CPA, but they can also be EAs (Enrolled Agent) which is narrower in scope and requires less education than a CPA.
An accountant who is not certified and doesn’t prepare tax returns usually has a bachelor’s degree in accounting, although it is not required.
A good accountant will have:
- A strong understanding of financial statement preparation and analysis and a strong understanding of generally accepted accounting principles (GAAP).
- Strong attention to detail. While an accountant won’t be as involved in the day-to-day transactions, big picture accounting still requires detailed analysis and attention.
- Proficiency in accounting software. The accountant likely won’t be “inside the books” (aka using the accounting platform) as much as the bookkeeper, but they need to know where to find relevant information, how to create proper journal entries, as well as how to find and review reports. Find our guide to the best tax software here.
- Analytical skills. Accountants need to be able to notice patterns and make correct interpretations out of data.
- Excellent communication skills. Accountants must be able to convey complex financial information clearly and concisely to individuals who may not have a financial background.
- Adaptability and continuous learning. The field of accounting is always evolving, so a good accountant should be committed to always learning and staying updated with the latest accounting standards, regulations, and technologies.
Should I hire a bookkeeper, accountant, or both?
If you’re trying to decide what role your business needs to hire for, you should take into account size and complexity of your business, your stakeholders (investors, creditors, board members, etc.), your plans for your business, and your existing systems.
Here is a general rubric that you may find helpful in deciding when and who to hire or outsource to.
You should hire a bookkeeper under the following scenarios
You don’t want to manage your books yourself. Some business owners like to handle their own bookkeeping because it keeps them involved in the operations and makes it easier for them to catch mistakes, fraud, and keep a closer eye on spending. However, if you don’t enjoy bookkeeping or it’s taking too much time, this is a great time to bring a bookkeeper on board.
You need help managing accounts receivable. This is a crucial part of keeping a business afloat. If you don’t have customer payments coming in, your business is in trouble. A bookkeeper can stay on top of your invoices, send reminders to customers when payments are late, and make sure that payments are being applied to the right invoices. A growing AR balance is generally bad news for a business, so having a bookkeeper’s help in this area can make a huge difference.
You need regular bank reconciliations. As a general rule, all bank accounts and credit cards should be reconciled monthly to match your monthly bank statements. Some smaller businesses can get away with quarterly reconciliations although this is less ideal. Reconciliations can get tricky, and unless you know what you’re doing, they’re easy to mess up. A good bookkeeper will ensure that every single transaction is accounted for and that your registers match your statements perfectly.
You need specialized tracking of expenses. Many businesses have expenses that need to be reimbursed by clients, or they want certain expenses categorized under different tags (for instance, tagged by store location or individual projects to track project profitability). A bookkeeper can help create a workflow to communicate with the owner or manager, and then execute the workflow to make sure this specialized categorization is being done properly.
You should hire an accountant under the following scenarios
You have complex entries required to close your financial statements. These usually arise when the business is on accrual accounting. Under this scenario, you need to accrue income and expenses, manage prepaid expenses and understand when to convert them from the Balance Sheet to the Profit and Loss, and track and properly record depreciation and amortization of assets. An accountant should set up this process and either prepare these adjusting entries themselves, or check the work of a bookkeeper who prepares them.
You need tax preparation and planning. All businesses need a certified CPA or EA to prepare their annual tax returns. Most of the time, the accountant who prepares your return will also assist with mid-year tax planning to make sure your estimated payments are on track and you are taking advantage of tax savings. However, an outsourced or in-house accountant can also assist with planning, even if they’re not the ones preparing your return.
You need budgeting or cash flow forecasting. This is a bigger picture view of your financial position. An accountant will need to work closely with the owner, manager, or department head to understand the budget, the upcoming plans of the business, and how they will affect the budget and cash flow. Learn more on the difference between budgeting and forecasting here.
You need an internal or external audit. In some cases, an external audit will be required of your business or non-profit. These audits will require an accountant with a professional certification. However, internal audits can also be useful and sometimes necessary. An accountant without a certification can help to conduct such an audit, although they should have experience in auditing as there are specific procedures that should be followed.
You have regular sales tax, payroll tax, and other tax obligations. Sales tax and payroll tax typically needs to be submitted on a monthly or quarterly basis. While most payroll services handle payroll tax automatically, an accountant should be available to deal with state or IRS disputes and tax notices. Sales tax can also be handled by outside services like Avalara or TaxJar, but often need supervision and quality checks by an accountant.
Understanding and utilizing both bookkeepers and accountants is crucial for the financial success of any business. Bookkeepers lay the groundwork with meticulous record-keeping and organization of financial data, ensuring every transaction is accurately logged. This foundational work is essential for accountants, who then analyze this data, provide valuable insights, and guide strategic decision-making. Together, they form a comprehensive financial team – bookkeepers managing the details and accountants focusing on the bigger financial picture.