There’s a common misconception that bookkeeping and accounting are one and the same. People often use the terms interchangeably, which stems from the fact that both roles deal with financial information.
However, there are clear differences between them. Understanding them will help you hire the right person for the job and stay on top of your finances.
Let’s take a closer look at what each entails to clear things up and help you run a successful business.
They Have Different Goals
Bookkeeping is the process of recording a company’s financial data, that is, all the sales, purchases, bank payments, payroll, and other financial transactions.
A bookkeeper records, classifies, and organizes that data with the goal of providing a business with a clear view of its transactions. That’s important for overseeing the entire cash flow.
Accounting is the process of analyzing and interpreting all that financial data. It provides a business with financial insights based on the bookkeeping data to help it understand and measure its financial situation.
That’s vital for maintaining a budget, predicting and ensuring a positive cash flow, and forecasting revenue and growth. It’s also essential for sending accurate financial reports to relevant financial institutions, such as banks, and government organizations, such as tax authorities.
Accounting Is More Complex
Bookkeeping doesn’t require any special skills. Bookkeepers need to have a way with numbers and great attention to detail, but they don’t need any specific qualifications.
That’s because they only make systematic records of financial transactions. They can get a license, which is not a requirement, as it’s based only on full-time work experience.
Accounting is far more complex, as it involves making sense of financial data. Accountants verify, summarize, and interpret it to generate comprehensive reports and conduct financial audits.
That requires a specific skill set, including analytical, mathematical, and problem-solving skills, critical thinking, and industry knowledge. They must have a college degree and can acquire additional certifications and licenses.
Accounting Affects Business Decisions
You can’t make an informed business decision without analyzing your financial data to understand it and identify areas for improvement.
That’s what an accountant’s job comes down to. They help managers make critical decisions for growing a business. By analyzing all the costs, income, key performance metrics, and conducting tax preparation, they consult and guide business owners on a path to a strong financial future.
They can’t do that without a company’s bookkeeping data, which must be consistent and accurate to lead to effective decision-making that gets results. But that data alone isn’t nearly enough to make any decision.
Bookkeeping Doesn’t Involve Analytics
Bookkeepers don’t analyze the books. As we’ve said, they make records of financial transactions.
Their job isn’t to generate reports and communicate insights to managers and third parties. They only make a necessary foundation for accountants, who crunch the numbers to prepare data-driven financial statements and reports.
That’s why accounting services are typically more expensive than bookkeeping.
The Role of Accountants
Accountants perform many duties, each revolving around financial analyses for driving insights important for financial health and regulatory compliance.
Some of their most important duties include:
Assessing and managing financial data
Calculating operational costs and key performance metrics
Analyzing accounts and business plans
Preparing and maintaining budgets
Making income, profit, and loss statements
Performing risk assessments
Assisting in income and expenditure control
Performing financial audits
Analyzing historical data and current business trends
Assisting in decision-making and future planning
Generating financial reports
Providing financial advice on saving costs, increasing revenue, and maximizing profits
Pinpointing issues and recommending strategic solutions
Making revenue and growth forecasts
Preparing tax returns
Ensuring regulatory compliance
That’s quite a lot of duties, so you can understand how complex and challenging accounting can be. Accountants perform some of the key roles in any company, particularly because of all the strategic advice they provide to help businesses seize growth opportunities.
The Role of Bookkeepers
Bookkeepers perform fewer duties than accountants, which doesn’t mean they’re less important. Bookkeeping is the foundation of accounting, as it provides the necessary groundwork for all those financial analyses and reports.
Bookkeepers’ key responsibilities include:
Recording financial transactions, including sales and supplier purchases
Verifying and recording expenses
Posting transactions to various accounts
Processing payments
Making invoices
Managing payroll
Filing documents to maintain financial records
Sending financial reports to third parties, such as banks
Conclusion
Bookkeeping and accounting are key business processes that complement one another. Although they may overlap sometimes, there are distinct differences between them.
And while accountants can be bookkeepers, the latter can’t perform accounting duties without formal education, proper training, and adequate certification.
