- Bookkeeping is a direct record of all purchases and sales that your business conducts, while accounting is a subjective look at what that data means for your business.
- An accountant can be considered a bookkeeper, but a bookkeeper cannot be an accountant without proper certification.
- To know whether you need a financial professional, look at your business as it is now and how you want it to grow financially, and decide if you can manage that on your own.
Staying on top of your finances is a key part of being a successful small business owner. As such, it's important that your financial data is current and accurate so that you have the tools you need to make sound business decisions and ensure healthy cash flow.
As your business grows to include more customers, vendors and employees, it can get more difficult to keep track of your finances on your own.
When the bookkeeping and accounting tasks for your small business are too much to handle by yourself, it's time to hire help. But do you need a bookkeeper or accountant? The terms are sometimes used interchangeably, and there can be some overlap in what they do, but there are distinct differences.
Here's what you need to know to decide which is best for you.
Bookkeeping vs. accounting
Bookkeeping is a transactional and administrative role that handles the day-to-day task of recording financial transactions, including purchases, receipts, sales, and payments. Accounting is more subjective, providing business owners with financial insights based on information taken from their bookkeeping data.
"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."
What does a bookkeeper do?
Bookkeeping, in the traditional sense, has been around as long as there has been commerce – since around 2600 B.C. A bookkeeper's job is to maintain complete records of all money that has come in and gone out of the business. Bookkeepers record daily transactions in a consistent, easy-to-read way, and their records enable the accountants to do their jobs.
These are some typical bookkeeping tasks:
- Recording financial transactions
- Posting debits and credits
- Producing invoices
- Managing payroll
- Maintaining and balancing ledgers, accounts, and subsidiaries
One of the main duties of a bookkeeper is maintaining a general ledger, which is a document that records the amounts from sale and expense receipts. Ledgers can vary in complexity from a sheet of paper to specialized bookkeeping software, such as QuickBooks and Xero, to track their entries, debits and credits. [Looking for accounting software? Check out our best picks.]
Each sale and purchase made by your business must be recorded in the ledger, and some items will need documentation. You can find more information on which transactions require supporting documents on the IRS website.
There are not any formal educational requirements to become a bookkeeper, but one must be knowledgeable about financial topics and terms and strive for accuracy. Generally, a bookkeeper's work is overseen by an accountant or the small business owner. A bookkeeper, though, is not an accountant, nor should they be considered to be an accountant.
What does an accountant do?
An accountant analyzes the financial data recorded by the bookkeeper, and provides business owners with important business insights and financial advice based on that information. These are some typical accountancy tasks:
- Verifying and analyzing data
- Generating reports, performing audits, and preparing financial reporting records like tax returns, income statements and balance sheets
- Providing information for forecasts, business trends and opportunities for growth
- Helping the business owner understand the impact of financial decisions
- Adjusting entries
"Accountants look at the big picture," wrote John A. Tracy in his book Accounting for Dummies. 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."
The accounting process produces reports that bring key aspects of your business's finances together to give you a complete picture of where your finances stand and what they mean, what you can and should do about them, and where you can expect to take your business in the near future.
Note that there is 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.
Accountants generally must have a degree in accounting or in finance to earn the title. They may then pursue additional certifications, like the CPA. Accountants may also hold the position of bookkeeper.
However, if your accountant 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. [Read related article: When Should You Hire a CPA?]
How to know when to hire a financial professional
It can be difficult to gauge the appropriate time to hire an accounting professional or bookkeeper, or to determine if you need one at all. While many small businesses hire an accountant as a consultant, you have several options about how you handle bookkeeping tasks.
For example, some small business owners do their own bookkeeping on software their accountant recommends or uses, providing it to the accountant on a weekly, monthly, or quarterly basis for action. Other small businesses employ a bookkeeper or have a small accounting department with data entry clerks reporting to the bookkeeper.
When looking for a certified bookkeeper, you must first decide if you want to hire an independent consultant, a firm, or, if your business is large enough, a full-time employee to keep your books. You can ask for referrals from friends or colleagues, your local chamber of commerce, or search online social networks like LinkedIn to find bookkeepers.
Keep in mind that it may take more background research to find a suitable bookkeeper, because they do not have professional certification requirements like accountants do, so a strong referral or years of experience are important factors to consider. You can check to see if candidates are part of professional governing bodies, such as The American Institute of Professional Bookkeepers.
If you are looking to hire an accountant, it's probably because your taxes have become too complex to manage on your own, with multiple income streams, foreign investments, several deductions or other considerations. An accountant can save you hours of time and help you stay on top of important matters like payroll, deductions and tax filings.
To find a good accountant, ask for referrals from friends or industry colleagues. You can also look at the American Institute of Certified Public Accountants to find CPAs that have skills in certain areas, such as employee benefits or personal finance.
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.
Not sure where to begin? Check out our guide to choosing a business accountant.
Additional reporting by Business News Daily editorial staff. Some source interviews were conducted for a previous version of this article.