If you run a business, you know how important it is to keep accurate financial records. But do you know the difference between accounting and bookkeeping? Many people use the terms interchangeably, but they actually refer to different processes that serve unique purposes. 

In this post, we’ll break down the key distinctions between accounting and bookkeeping. We’ll explain what each entails, the different qualifications needed, and when it makes sense to use one over the other. Whether you’re looking to better manage your own finances or build out your team, understanding accounting vs. bookkeeping is essential.

Let’s start by defining each area.

What is Accounting?

Accounting is a pretty broad term that encompasses a lot of different financial management functions. At a high level, accounting involves:

– Processing and recording financial transactions

– Producing financial statements like income statements, balance sheets, and cash flow statements

– Conducting analysis to uncover insights from financial data 

– Ensuring compliance with relevant regulations and standards

– Communicating financial information to stakeholders, auditors, and tax authorities

So accounting paints the big picture financial view of a company. It helps quantify the health and performance of a business through consistent tracking and strategic analysis. 

Accounting relies heavily on processed data to generate those high-level assessments. It takes raw inputs and transforms them into meaningful conclusions that inform major decisions.

Some of the day-to-day tasks accountants handle include:

– Entering and posting transactions

– Performing reconciliations

– Processing payroll

– Calculating tax liabilities

– Producing monthly/quarterly/annual financial statements

– Identifying cost reductions or growth opportunities from reports

Accounting departments oversee everything from journal entries to advising long-term financial strategy. They ensure rigorous compliance with accounting regulations and standards.

So in essence, accountants both create financial records and leverage them to provide guidance. Their broad scope encompasses everything from quantifying performance to guiding future success.

What is Bookkeeping? 

Now that we’ve defined accounting, what exactly is bookkeeping? 

Bookkeeping represents the systematic documentation of a business’ financial transactions – it’s maintaining the detailed records that feed into accounting processes.

The key role of bookkeepers is to accurately record all money coming in and going out of a business on a daily basis. This means documenting transactions like:

– Invoices

– Payroll

– Receipts 

– Bills

– Purchases

– Sales

– Expenses

– Income

Bookkeepers classify, organize, and file every financial transaction chronologically in a company’s bookkeeping system. This creates a paper trail for accountants to later analyze.

Bookkeepers don’t interpret or summarize data – they focus on meticulously logging the granular transactions that underpin financial statements.

Here are some of the specific tasks bookkeepers regularly handle:

– Entering daily transactions from invoices, receipts, bills etc.

– Logging all cash and credit purchases and sales

– Updating accounts payable and accounts receivable 

– Calculating totals for income, expenses, and profit

– Issuing checks for accounts payable

– Preparing invoices for monies owed

– Organizing and filing records for each transaction

So in summary, bookkeeping documents the raw inputs – every dollar in and out. This data feeds the higher level accounting process.

Key Differences Between Accounting and Bookkeeping

While accounting and bookkeeping are very interconnected, they serve distinct functions. Understanding the core differences between the two is crucial for managing finances and staffing properly.

Job Duties and Responsibilities 

The clearest difference comes down to job responsibilities:

Bookkeepers handle documenting daily transactions, maintaining records, and categorizing finances at a granular level. They focus on the data entry components.

Accountants take care of big picture strategic functions like financial report generation, data analysis, ensuring compliance, auditing, and communicating insights to advise strategic decisions across the business.

Accountants may oversee part of the bookkeeping process and use that hands-on data to inform high-level work. But bookkeepers don’t perform accountant responsibilities.

Education and Qualifications

The education and qualifications for each role also differ quite a bit:

Bookkeepers typically need some post-secondary education like a certificate or associate’s degree focused on bookkeeping basics. Many learn on the job. Some choose to get certified through voluntary programs like the American Institute of Professional Bookkeepers certification to demonstrate their skills.

Accountants are required to have at minimum a bachelor’s degree in accounting or a related field to start. To advance into higher level accounting careers, they must pursue rigorous professional credentials like becoming a Certified Public Accountant (CPA). That requires passing the uniform CPA exam and meeting experience requirements – no easy feat!

So bookkeepers can enter the field with less education, while accountants need to invest significantly more time in academics and licensing.

Focus and Scope

While bookkeeping and accounting are very interconnected, they deal with different levels of financial information:

Bookkeeping zooms in on the details – recording individual transactions, tracking specifics, and categorizing finances on a granular level. Bookkeepers document the what, when, where of money moving in and out.  

Accounting zooms out to the 30,000 foot view. Accountants analyze the big picture reports, identify any issues, and communicate key insights about the overall financial health and performance of a company. They focus more on the why behind results.

Financial Statements Produced

The outputs each role creates also demonstrate their distinct scopes:

Bookkeepers may produce some routine monthly reports, but they focus on data entry. The bulk of their time centers on transaction logging rather than big picture summaries.

Accountants produce the full set of formal financial statements required on a quarterly and annual basis like income statements, balance sheets, statements of retained earnings, and statements of cash flows. They also create more detailed management reports for internal strategy decisions.

Compliance Responsibilities  

Adhering to regulations and standards is another area where accounting and bookkeeping diverge:

Bookkeepers need to follow the proper protocols and conventions set by accountants for recording transactions accurately and categorizing everything correctly in the bookkeeping system. Their compliance role is focused on data entry best practices.

Accountants have a much broader compliance oversight role. They ensure financial statements adhere to General Accepted Accounting Principles (GAAP) or other reporting standards. Accountants also guide compliance with tax laws and regulations relevant to accounting procedures.

Core Skills Utilized

The types of skills leveraged daily also differ between the two roles:

Bookkeepers rely heavily on organizational skills and extreme attention to detail. Everything they do centers on meticulous documentation, so bookkeeping requires precision and accuracy above all. Being comfortable with data entry and needing little oversight is crucial.

Accountants utilize more strategic analysis skills, critical thinking, and problem solving. They need to derive insights from complex reports and then communicate guidance in a clear, understandable way to senior leaders and clients. An eye for patterns and details is key.

So in summary – bookkeepers create the crucial data foundation while accountants interpret the data for strategic insights.

When Should You Use a Bookkeeper vs an Accountant?

When should you hire a bookkeeper for your business accounting needs compared to bringing on an accountant? Here are some key factors to consider:

Consider a Bookkeeper When:

– Your business has relatively simple finances and limited transactions per month. You don’t require complex reporting.

– You want to maintain control over high-level financial strategy and accounting procedures internally instead of outsourcing. 

– You already have an experienced accountant or Chief Financial Officer on staff responsible for compiling reports, forecasting, taxes, and compliance.

Consider an Accountant When:

– Your business growth has expanded operations, inventory, locations etc. making accounting more complex.

– You want not just record keeping support but strategic guidance translating financial statements into business insights.

– You need assistance improving accounting processes and ensuring compliance across locations. 

– You require support achieving monthly close, quarterly/annual reporting, tax filings, and audits.

For many small business owners, partnering with a bookkeeper makes sense for daily data entry while leveraging an accountant periodically for bigger picture oversight and reporting. But as demands grow, adding a full-time in-house accountant can provide huge strategic value.

Key Accounting Services Accountants Provide 

When you do need more robust accounting support, what exactly will an accountant provide? Here are some of the key services offered:

Day-to-Day Accounting

– Transaction processing  

– Payroll preparation

– Payables and receivables management

– Expense and revenue analysis

– General ledger reconciliations

– Journal entry creation

Financial Statements and Reporting 

– Income statement preparation

– Balance sheet creation

– Cash flow statement generation

– Statement of retained earnings 

– Owner’s equity statement

– Specialized management reports

Analysis and Strategy

– Trend analysis 

– Data mining for insights

– KPI and benchmarking tracking

– Budget forecasting

– Growth planning guidance

Compliance 

– Tax strategy and preparation

– Audits

– Governance and accounting regulations

– GAAP standards

Accountants can provide as much or as little day-to-day support as needed – from high level oversight to getting into the transactional weeds. And they provide immense value translating numbers into strategy.

Key Bookkeeping Services Provided

If your needs are more specialized around data entry and organization, bookkeepers offer:

Daily Transactions

– Invoicing clients 

– Entering bills, expenses, and payments

– Processing payroll

– Logging receipts and purchases 

– Recording sales transactions

Account Maintenance

– Managing accounts payable and receivable

– Maintaining inventory records

– Performing account reconciliations

– Tracking fixed assets

Process Oversight  

– Maintaining orderly records

– Catching discrepancies 

– Managing documentation flows

– Optimizing bookkeeping systems

Bookkeepers act as the data stewards – managing inputs that feed higher level reporting. They keep processes running smoothly through meticulous organization.

Should You Outsource Accounting and Bookkeeping?

Many businesses choose to outsource their bookkeeping and accounting functions rather than handle in-house. Here are some of the major benefits to outsourcing:

Access Specialized Expertise

Outsourced accounting firms and bookkeepers focus exclusively on financial management. They implement industry best practices refined over years of experience across many companies.

Reduce Costs 

Bringing on full-time accounting and bookkeeping staff requires salaries, benefits, payroll taxes, software, desk space and supplies. Outsourcing reduces these fixed costs significantly.

Gain Efficiency

Experienced outsourcing partners use the latest tools and technology to optimize workflows. They handle tasks faster with less waste.

Focus on Core Business

Trying to take on finance tasks without expertise distracts from your core competencies and growth efforts. Outsourcing lets you redirect energy to what differentiates your business.

Scale Support 

Outsourced services can easily ramp up or down as your financial needs change seasonally, with growth phases, or busy times of year.

Take the time to assess your available resources, costs, growth plans and internal capabilities. In many cases outsourcing makes optimal strategic sense.

Key Accounting Software Worth Investigating

One area that’s evolved a lot in recent years is accounting software. Cloud-based accounting systems provide powerful tools for both bookkeepers and accountants including:

For Bookkeepers

– Auto-categorizing transactions

– Seamless bank data integration

– Digital receipt capture on mobile

– Bill pay automation

– Payroll integration

For Accountants

– Custom reporting dashboards 

– Data visualization and drilling 

– Journal entry automation

– Version control and audit trails

– Client collaboration portals

Top platforms like Quickbooks Online, Xero, Sage Accounting, FreshBooks and Wave provide many of these features. Pairing skilled staff with the right technology provides huge efficiency gains and insights.

Career Paths in Bookkeeping vs Accounting

If you’re debating pursuing either bookkeeping or accounting as a career path, understanding the trajectories and outcomes is helpful.

Here’s an overview of each area:

Bookkeeping

Bookkeepers usually begin in entry-level clerical roles before advancing to senior bookkeeper positions as they gain experience. Some move into focused specialties like payroll administration or collections. According to the Bureau of Labor Statistics, the average salary for a full-time bookkeeper is around $40,000 annually.

Accounting

Accountants can follow various career ladders in public accounting firms, corporations, government agencies, and non-profits. Common advanced roles include Certified Public Accountant (CPA), auditor, tax accountant, forensic accountant, budget analyst, and Chief Financial Officer (CFO). The 2021 average salary for accountants was $77,250 per year according to the Bureau of Labor Statistics.

Accounting requires more extensive education, but opens doors to higher earning potential, leadership roles, and strategic impact.

FAQs – Accounting vs Bookkeeping Questions

Should I hire both an accountant and bookkeeper?

Many small businesses partner with a bookkeeper for daily transactions and an external accountant for periodic oversight of financial statements, taxes, and advising. As needs grow, bringing on a full-time in-house accountant can provide huge value.

What tasks do bookkeepers handle that accountants don’t?

Bookkeepers focus almost solely on documenting detailed transactions, accounts payable/receivable, payroll, inventory, and categorizing everything properly. Accountants handle analyzing the big picture, compliance, taxes, auditing, and advising strategy based on financials.

Can bookkeeping serve as a stepping stone into accounting?

Yes, bookkeeping experience can be great initial exposure and preparation for further accounting education. Many accountants start out in bookkeeping roles before pursuing CPA credentials.

Is bookkeeping or accounting a better career choice?

Bookkeeping provides great organizational skills and attention to detail. Accounting applies strategic thinking and analysis to guide business success. So your strengths may fit one area better.

How much does an accountant cost compared to a bookkeeper?

On average, bookkeeping services cost $30-50 per hour while professional accountants range from $50 per hour for basic services up to $200+ per hour for strategic CFO support.

Key Takeaways – Accounting vs. Bookkeeping

Let’s recap some of the key differences between accounting and bookkeeping:

– Bookkeeping focuses on documenting detailed transactions while accounting produces summarized, big picture financial statements and insights.

– Bookkeepers record the what, when, where of money in/out while accountants analyze the why behind results.

– Bookkeeping requires great organization and precision. Accounting relies on strategic analysis and critical thinking skills.

– Bookkeepers need some college education while accountants require four-year degrees and licenses like the CPA.

– While interconnected, bookkeeping and accounting serve distinct purposes. Understanding their unique values is key for financial management.

As your business evolves, carefully evaluate when you need bookkeeping support vs. accounting guidance. Often a blend of both will provide the biggest impact. Leveraging the right software, outsourced expertise, and internal capabilities can aid growth and efficiency at every stage.