Small businesses live and die by their cash flow and accountability. Accurate recordings of transactions, coupled with proper assessment and processing, give small business owners a firm base on which to make decisions and create plans for growth.
Recording and understanding the sales, expenses and other basic business data should be easy enough for small business owners. But understanding the accounting needs of a business is not always so simple. What type of activity is considered bookkeeping, and when do you need an accountant instead? Is there even a difference between the two?
There is, and it is a simple but important one: Bookkeepers record a company's day-to-day transactions, while accountants verify and analyze that information. [Best Accounting Software for Small Businesses]
Bookkeeping versus accounting
A bookkeeper's territory is daily financial transactions, which include purchases, receipts, sales and payments. Recording these items is usually done through a general ledger or journal. Many small businesses use software such as QuickBooks or Peachtree to keep track of their entries, debits and credits. Their efforts culminate in a trial balance, which means the final total of debits and credits match.
"Bookkeeping is designed to generate data about the activities of an organization," said D'Arcy Becker, CPA and chairwoman of the Department of Accounting and Finance at the University of Wisconsin. "Accounting is designed to turn data into information."
The role of an accountant, therefore, is to verify the data entered, and then use that data to generate reports, analyze the account, perform audits and prepare financial reporting records, like tax returns, income statements and balance sheets. An accountant's analysis of the financial information can provide information for forecasts, business trends, opportunity for growth and when to restrict spending to manage cash flow.
"Accountants look at the big picture," wrote John Tracy in his book, "Accounting for Dummies" (For Dummies, 5th edition, 2013). "[They] step and back and say, 'We handle a lot of rebates, we handle a lot of coupons — how should we record these transactions? Do I record just the net amount of the sale or do I record the gross sale amount, too?' Once the accountant decides how to handle these transactions, the bookkeeper carries them out."
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Hiring a financial professional
Regardless of the size of your company, it is critical for ongoing success to ensure the financial accuracy of daily transactions and use that data to make decisions for the future of your business. If you feel your business is growing too quickly for a "do-it-yourself" approach to finances, you should look into hiring someone to help you keep track and make sense of your business transactions. Business News Daily has published a guide to choosing a business accountant if you're not sure where to begin.
While many small businesses hire an accountant outside the company, bookkeeping is more diverse. Some small business owners do their own bookkeeping on software recommended or used by their accountant, providing it to him or her on a weekly, monthly or quarterly basis for action. Other small businesses are large enough to employ a bookkeeper, or have a small accounting department with data- entry clerks reporting to the bookkeeper.
Further information on accounting versus bookkeeping can be found on following websites:
- "What's the Difference Between a Bookkeeper and an Accountant?" (Intuit)
- "The Difference Between Bookkeeping and Accounting" (Dummies.com)
- "When to Hire a Bookkeeper or Accountant" (Entrepreneur)
Additional reporting by Business News Daily contributor Emily Schmitt.