Bookkeeping and accounting sound pretty similar, right? While the two disciplines have many parallels, they also have many differences. For example, accounting covers complex topics like auditing, tax law, and estate planning. Conversely, bookkeeping is used for more simple, but vital processes like managing a company’s income statement, processing payroll, and basic tax concepts. Accounting takes the financial statements that the bookkeepers create and uses them to positively impact the business’s growth strategy. Both processes deal with financial statements and processes, with each professional having different credentials and skill sets.
What is bookkeeping?
Bookkeeping has been referred to as business accounting and it manages the day to day financial transactions of a business. Bookkeepers do routine tasks like invoicing clients, managing income and expenses, processing payments, paying bills, along with reconciling bank statements. Luckily, this process has become much easier thanks to technology like Quickbooks and Xero. These two platforms have made it easier to pay bills and taxes online, separate business vs personal expenses, and create financial reports.
Prior to these tools, bookkeepers had to use hard copy books called journals to record financial transactions. Bookkeepers would segregate transactions based on categories like sales and purchases into separate transactions. They’d also have to keep boxes of receipts from financial transactions to calculate business expenses. Fortunately, bookkeepers can upload receipts to these platforms and organize them based on the business transaction type. Not only does this save time, but it also prevents errors among financial data as old fashioned journals were written by hand and didn’t have automatic calculations.
Unless a small business only has one person, it needs to have proper payroll, accounts receivable (AR) and accounts payable (AP) systems. Payroll will ensure that employees are being paid properly and that it’s in compliance with tax law. Payroll can be a tricky subject, which is why it could be wise to consult a small business payroll provider like ADP or Paychex. These firms provide payroll services, compliance and can help a bookkeeper properly manage it. Accounts receivable(A/R) represents the money that is owed to a business by its customers. Accounts payable (A/P) is the money that is owed to creditors and/or vendor suppliers. These two line items are crucial for accrual accounting and ensure a business will stay on top of its cash flow.
Profile of an average bookkeeper
Unlike accountants, most bookkeepers don’t need to have a college degree or specialized licenses like a CPA or EA. However, they usually have 2 to 4 years of on the job training. Some bookkeepers might have a 2 year or associates degree in accounting or business. Competent bookkeepers should be well versed with major accounting software and can show their past successes.
While many bookkeepers don’t need degrees or certifications, getting relevant credentials really differentiate candidates with two common options being:
- Quickbooks Certification. This certification requires students to take either online self-paced training courses or a two-day in-person class. Then, candidates can find a Certiport testing center and take the exam.
- NACPB or National Association of Certified Public Bookkeepers. This organization helps prospective bookkeepers earn certifications in subjects like tax, excel, payroll and more. It also offers training and continuing education for licenses like the Certified Payroll Specialist and the Certified Public Bookkeeper. Licenses differ from certifications because they demand longer training processes, continuing education requirements, and more comprehensive exams.
Also, bookkeepers should be organized, detail oriented and good communicators. They will need these skills to create and manage financial statements as well as transfer the information to an accountant. Bookkeeping is an ideal role both for introverts and extroverts, but it’s important they have proficient written and spoken communication skills. Some bookkeepers work for agencies, while others are solo entrepreneurs. Either option would be helpful, but it’s wise to ensure they have good reviews, experience, and professional traits.
What is accounting?
The accounting process is very similar to bookkeeping as it analyzes key financial statements like the income statement, balance sheet, and cash flow statement, to determine the overall health of a business. An easy way to distinguish between the two roles is that accountants supervise a bookkeeper’s work.
Accounting is a fairly broad discipline and some forms include:
Financial accountants take complex financial information, which includes a general ledger, and turn it into external reports. This niche requires detailed knowledge of financial statement regulations like Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). GAAP is primarily used in the US while IFRS is used by international firms.
If a company is publicly traded, it’s financial accountants should be aware of the Securities and Exchange Commission (SEC) regulations. The SEC regulates US financial markets and seeks to protect investors from fraud.
Not every accountant deals with taxes, but this field deals with a variety of tax code topics. Tax accountants prepare and file individual, corporate and even foreign tax returns. They work to save to maximize their clients’ business expenses and achieve an optimal refund situation. Tax accountants that have an EA, CPA, or are a licensed attorney can even represent clients before the IRS, which is helpful in case of an audit. Being audited means that the IRS has found discrepancies between a tax return and what they’ve calculated, which can lead to steep fines along with other penalties.
Internal auditing closely examines a company’s systems and transactions to discover weaknesses, waste, and mismanagement. This branch works with management to maximize its accounting practices to improve efficiency. Some accountants even niche down to information systems or environmental auditing. Information systems auditors implement practices to make information technology processes more efficient and environmental auditors take factors like conserving national resources into play.
Personal accounting/Financial planning
Financial planners work with clients to help them with their taxes, retirement, investing, estate planning, and insurance needs. Many financial planners aren’t accountants and have licenses like the CFP or the Series 7. However, many accountants are going into this field and offer tax as well as investment advice. Accountants that have a CPA, can obtain an additional certification called the PFS. The Personal Finance Specialist is a powerful tool that gives the CPA more education on financial planning.
This field involves the recreation of financial statements when records aren’t available. It can be used to reconstruct financial records in cases where a business is destroyed, convert cash basis to accrual basis and even prevent fraud. Forensic accountants have played a crucial role in bringing down financial fraud as seen in the Enron case. Enron was an American energies, commodities, and services company that manipulated their books to appear “successful.” This scam resulted in millions losing their retirement funds and forensic accountants helped bring this company to justice. Forensic accounting also attracts auditors and consultants with some working in the insurance industry, providing legal support, or working for a specialized audit firm.
Profile of a typical accountant
Accounting is broader and has more complexities than bookkeeping. In fact, some states have specific requirements that mandate accountants to have a CPA or accounting degree. Most accountants have a bachelor’s degree in accounting with the CPA and EA being two important certifications. The CPA or certified public accountant is the highest credential an accountant can achieve. This exam requires at least 150 hours of accounting courses, relevant work experience and passing four levels of testing. The exam and 150 hours are universal requirements, while each state has its own requirements.
Another popular certification an accountant can achieve is an EA or enrolled agent. Like the CPA, an enrolled agent certification is highly respected and it allows the certificate holder to represent taxpayers before the IRS. This gives the clients more confidence, reduces errors and helps positively differentiate accountants from the rest. One of the main differences between the two programs is that the EA is awarded by the IRS while a CPA is regulated by the state.
An EA specializes in tax accounting while CPAs can go into a variety of fields like auditing, forensic, and internal accounting. This certification isn’t easy to achieve as it requires passing a four-part exam along with continuing education requirements. Yet, CPAs can do everything an EA does, so it might make sense to get that certification provided that one has the time and resources.
Unlike bookkeepers, accountants can perform complex duties like auditing, filing federal and state taxes, giving tax along with financial advice. Accountants also have access to mid-level software that their clients generally don’t use. For example, Exact Globe is an enterprise resources planning software (ERP) that consolidates data that serve a wide variety of business purposes like covering financial administration, warehouse management, supply chain management, and production onto one platform. It also has multi-currency functions for dealing with foreign transactions as well as inventory control systems. On the other hand, clients generally use bookkeeping software like Quickbooks and Xero since they’re less complex.
Accounting and bookkeeping overlap
Accounting and bookkeeping have some similarities which include working with financial statements, tax planning, and day to day financial operations of the business. Both bookkeepers and accountants also act as consultants to their clients. Bookkeepers could consult clients on budgeting, credit card debt, creating financial statements, payroll, and paying bills. These professionals can also assist with paying sales and payroll taxes. Bookkeepers can also spot intricate tax problems and refer the business owner to a qualified accountant.
Both roles must know the fundamentals of accounting like important ratios, debits vs credits and Accounts receivable vs Accounts payable. An accountant or bookkeeper must be honest, organized, detail oriented and a good communicator. Also, each role must be proficient with technology, as it has drastically changed each career path. Therefore, it’s wise to ask what tools they use to run their practice and if they have any certifications in any specific platforms. Advanced technology has also automated many routine data entry bookkeeping tasks. It has saved significant time which has resulted in many bookkeepers and accountants adding advisory services to their clients.
Differences between these two disciplines
The main differences between these two disciplines are the scope of topics, educational background technology and how they impact business decisions. Accounting has many unique sub-niches like forensic accounting, financial planning, financial accounting, managerial accounting, and auditing. Bookkeeping mainly focuses on daily financial business tasks. Bookkeepers create financial statements, reconcile bank accounts, pay taxes/bills and can provide high-level advice on these topics. Budgeting is another area bookkeepers can help with.
Accounting goes into more detail, especially when it comes to taxes. Bookkeepers might prepare and reconcile statements like 1099s and W2s, but the accountant actually files the taxes. Accountants also project estimated tax payments and work to minimize tax liability. Most accountants also have a CPA or EA, which allows them to represent the client before any IRS office. Also, these professionals are likely to have a college degree, passed rigorous exams, and have continuing education requirements. Bookkeepers are less likely to have a degree or certifications. Accountants also use more complex technology like ERP systems that the client doesn’t utilize.
If a small business has a shoestring budget, the owner could do the bookkeeping by him or herself. Hiring a bookkeeper would make sense if the small business owner needs to free up more time. If a business has to choose to hire between the two roles, an accountant could be a wiser choice as he or she can perform more tasks. They can also fulfill many bookkeeping tasks and consult on complex topics. Accountants can also help businesses choose the business type which includes being an LLC, LLP, S corporation, or C corporation. This decision shouldn’t be taken lightly, and a competent accountant can help businesses choose the proper business entity.
Accounting and Bookkeeping are erroneously referred to as one and the same. These disciplines have some overlap, but they also have important differences. For instance, most accountants have a CPA or EA, while many competent bookkeepers just have on the job training. Bookkeepers work on vital, day to day tasks like managing the income statement, high-level tax tasks, and payroll.
Accountants use the information bookkeepers create to make important decisions that will improve a company’s bottom line and can offer tax and estate planning advice. Knowing the similarities and differences between these two roles will help the connection between bookkeepers, accountants, and business owners which will improve a company’s bottom line.
Disclaimer: This is not tax advice, but education. Consult a tax adviser or CPA for tax advice.