As a small business owner, you need your financial data to be current and accurate so you can make good business decisions and ensure you have a healthy cash flow. But as your business grows and you take on more customers, vendors, and employees, keeping track of how much money you have coming in and going out of your business gets complex – and time-consuming.
When the accounting tasks for your small business are too much to handle by yourself, it's time to hire help. But do you need an accountant or a bookkeeper? The terms are sometimes used interchangeably, and there can be some overlap in what they do, but there are some distinct differences.
Here's what you need to know before placing that help wanted ad.
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Bookkeeping vs. accounting
A bookkeeper handles the day-to-day task of recording financial transactions, including purchases, receipts, sales and payments. Many small businesses use software such as QuickBooks or Xero to keep track of their entries, debits and credits. [Looking for accounting software? Check out our best picks.]
"Bookkeeping is designed to generate data about the activities of an organization," said D'Arcy Becker, chair and professor of accounting at the University of Wisconsin Whitewater Department of Accounting. "Accounting is designed to turn data into information."
The role of an accountant is to verify the data, analyze it, and use it to generate reports, perform audits, and prepare financial reporting records, like tax returns, income statements, and balance sheets. An accountant's analysis can provide information for forecasts, business trends and opportunities for growth. They can also advise you 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). Tracy explains, "[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."
If your accountant also does your bookkeeping, you may be paying more than you should for this service, wrote Bryce Warnes in a Bench blog post, as you pay more per hour for an accountant than a bookkeeper.
Note that there's also a difference between an accountant and a certified public accountant (CPA). Although both can prepare your tax returns, a CPA is more knowledgeable about tax codes and can represent you before the IRS if you're audited.
Hiring a financial professional
While many small businesses hire an accountant outside the company as a consultant, bookkeeping is more diverse. Some small business owners do their own bookkeeping on software their accountant recommends or uses, 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.
Whether you hire an accountant, a bookkeeper, or both, it's important that the individuals are qualified by asking for client references, checking for certifications or running screening tests. Bookkeepers "may not always be certified and … the onus is more on experience," noted Angie Mohr in an Intuit blog post.
Not sure where to begin? Visit our guide to choosing a business accountant.
Additional reporting by Sammi Caramela, Emily Schmitt and Marci Martin.