What would be your answer if you were asked to differentiate between accounting and bookkeeping? For most people, especially those outside of the industry, the answer to the question would not be obvious. With this in mind, to help you understand the functional differences between accounting and bookkeeping and to choose whether you’d prefer to be an accountant or a bookkeeper, we’ve created a handy guide which should leave you in no doubt as to which career to choose.
Bookkeeping and accounting are two functions which are extremely important for every business organisation. In the simplest of terms, bookkeeping is responsible for the recording of financial transactions, whereas accounting is responsible for interpreting, classifying, analysing, reporting, and summarising the financial data.
Bookkeeping and accounting may appear to be the same profession to an untrained eye. This is because both accounting and bookkeeping deal with financial data, require basic accounting knowledge, and classify and generate reports using the financial transactions. At the same time, both these processes are inherently different and have their own sets of advantages. Read this article to understand the major differences between bookkeeping and accounting.
Before delving further, you should understand that bookkeeping and accounting have common goals but make up different stages in the financial cycle. Bookkeeping comes before accounting, but their functions may overlap. Let us start by looking at the functions of each of the two careers.
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.
There is often a misconception that bookkeeping and accounting are the same things. While they both work to assist you with your finances, there are some important distinctions between the tasks of a bookkeeper and an accountant. From the outset, it is important to understand that both bookkeepers and accountants are integral parts of your business. While their tasks can sometimes overlap, there are definitely certain aspects of your business that you would specifically entrust to an accountant, and others that you would give to your bookkeeper.
In simple and very general terms, a bookkeeper will likely be the person that assists you with the ongoing financial recording and transactions that keep your business running smoothly. Your accountant, on the other hand, will be the person who analyses the data produced by your bookkeeper, reports on it, and is best suited to give you financial advice. Your accountant will also have a strong understanding of your taxation requirements and will be best able to assist in that area.
To understand more comprehensively the benefits that both bookkeepers and accountants can offer to your business, it can be helpful to be aware of the tasks that each could be expected to undertake.
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
- Maintaining and balancing ledgers, accounts, and subsidiaries
- Processing invoices, receipts, payments, and other financial transactions
- Processing and maintaining your payroll system
- Preparing initial financial statements
- Reconciling accounts and preparing reconciliation reports
- Managing your accounts receivable and accounts payable, i.e. amounts owing by debtors, and amounts owing to creditors
- Calculating GST
- Preparing and lodging your BAS
- Designing, establishing and reviewing accounting systems
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 specialised bookkeeping software, such as QuickBooks and Xero, to track their entries, debits and credits.
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 ATO 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 is bookkeeping?
Bookkeeping is predominantly concerned with recording financial transactions and ensuring information is up to date. Suppose you have a bookkeeper working at your business, for example. In that case, they will note down transactions on a daily or weekly basis to ensure you have a chronological record of incoming and outgoing payments. Bookkeepers are responsible for looking after the books and preparing information for accountants. The principal objective of bookkeeping is to keep a record of transactions in a logical, organised manner.
What does an accountant do?
While an accountant will also be qualified to assist you in these areas, it is important to be aware that there is likely to be a substantial difference in fees charged by bookkeepers and accountants. In order to best utilise your budget, extensive consideration into which tasks are to be delegated to a bookkeeper or an accountant is advised.
The role of an accountant in your business, while potentially encompassing some bookkeeping tasks, is often more advisory and analytical in nature. An accountant will be in a position, through analysis of past performance, to offer financial projections and advice on future financial elements of your business.
An accountant analyses 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 analysing 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
- Taxation advise and planning
- Business establishment assistance
- Corporate reporting and compliance
- Superannuation fund advice
- Financial management advice
“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 ATO 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.
What is Accounting?
Accounting involves using the information provided by bookkeepers to analyse, evaluate, summarise and interpret the financial situation of an individual or a business. Accountants take this data and use their expertise and skills to create reports and communications that provide the client with accurate information about their financial status. Accountants can provide tailored advice based on a client’s finances, and they can also provide services such as preparing and filing tax returns. In this case, an accountant will use financial records and accounts to work out how much the client owes in tax, prepare and fill in the return, and arrange for payment to be made on time.
Bookkeeping and accounting can appear to be the same profession to the untrained eye. Both bookkeepers and accountants work with financial data. To enter either profession, you must have basic accounting knowledge. Bookkeepers in smaller companies often handle more of the accounting process than simply recording transactions. They also classify and generate reports using financial transactions.
They may not have the education required to handle these tasks, but this is possible because most accounting software automates reports and memorises transactions making transaction classification easier. Sometimes, an accountant records the financial transactions for a company, handling the bookkeeping portion of the accounting process.
Accounting is a much broader field than bookkeeping. Accountants have experience in bookkeeping, but they have a range of other additional skills, which enables them to analyse, evaluate and interpret financial data. They can create reports, offer advice and recommendations, prepare tax returns and provide a consulting service, whereas bookkeeping is concerned primarily with recording data. Bookkeepers essentially prepare the information and lay the foundations for accountants to take the next step.
Then you hire an accountant, you expect more than well-presented, well-organised books. An accountant has the skills to use the data provided by bookkeepers to benefit your business and provide you with a spectrum of services, which may include completing tax returns and offering advice about lowering expenses and maximising profits.
- Bookkeepers are required for identifying, quantifying, recording, and eventually, classification of financial transactions. In contrast, accountants are required to summarise, interpret, and communicate the latest financial transactions classified in the ledger account.
- Financial decisions cannot be made exclusively based on bookkeeping records but can be considered based on accountant records.
- Bookkeepers are not required to create financial statements, but accountants are responsible for preparing for the same.
- The senior management generally does not get involved in the functioning of the bookkeepers. However, they would take an interest in the work of the Accountants as they require the information for making future management decisions.
- The tools used by bookkeepers are Journals and Ledgers, and that of accountants are the balance sheet, income statement, cash flow statement, etc.
- Bookkeepers do not require any special skills since most of the activities are mechanical. Still, accountants need specialised analytical skills due to the level of complexity involved in maintaining the books of accounts. It will require a professional degree in accounting and also some past work experience in the same.
The bookkeeper role vs the accountant role
Bookkeepers and accountants sometimes do the same work. But in general, a bookkeeper’s first task is to record transactions and keep you financially organised, while accountants provide consultation, analysis, and are more qualified to advise on tax matters.
Typically, bookkeepers aren’t required to have any formal education. To be successful in their work, bookkeepers need to be sticklers for accuracy, and knowledgeable about key financial topics. Usually, the bookkeeper’s work is overseen by either an accountant or the small business owner whose books they are doing. So a bookkeeper can’t call themselves an “accountant.”
To qualify for the title of an accountant, generally, an individual must have a bachelor’s degree in accounting. For those that don’t have a specific degree in accounting, finance degrees are often considered an adequate substitute.
Accountants, unlike bookkeepers, are also eligible to acquire additional professional certifications. For example, accountants with sufficient experience and education can obtain the title of Certified Public Accountant (CPA), one of the most common types of accounting designations. To become a CPA, an accountant must pass the Uniform Certified Public Accountant exam and possess experience as a professional accountant.
The benefits of employing bookkeepers and accountants
In business, there’s nothing more crucial than making money. To stay afloat and achieve goals and objectives, you have to turn over profits. If you don’t have a firm grip on your finances, there’s every chance that you could encounter unexpected obstacles or run into cash flow issues. Hiring a bookkeeper will ensure that your books are in order from day one.
Once you have financial information, it’s wise to use this data to drive your business forward. Whether you’re self-employed and you work alone, or you have a business that employs hundreds of people, an accountant can provide you with an array of services. For many individuals and business owners, getting ready for tax deadlines can be stressful. It’s hugely beneficial to have your books in order as the deadline looms so that your accountant can analyse the data and work out how much tax you have to pay.
Hiring an accountant to take care of your taxes for you eliminates stress and enables you to devote your time to the core elements of running your business. There’s also a lower risk of making mistakes or getting the calculation wrong. If you’re not experienced in accounting, you’ve never filed a tax return before, or you’re unsure about what kinds of expenses you can claim, for example, it’s hugely beneficial to employ an accountant.
If you make errors, or you miss deadlines, you may be fined.
Another benefit of working with an accountant is that it gives you and your employees the opportunity to focus on the tasks that match your skill sets. You can continue to tick off the jobs on your list without worrying about your finances.
Ensuring the financial records are correctly organised, and finances are balanced out by the bookkeeper coupled with smart financial strategy and timely tax filing of the accountant, directly contributes to the long-term success of every business.
Certain business owners manage their finances on their own. In contrast, others may opt to hire a professional so that they can focus on sections of the business they are interested in. Either of the options will help in their business to grow. Additionally, with the advent of technology, multiple software is getting updated for executing the tasks automatically. This aspect will change the definition and requirements with passing time, and hence one is required to be updated with the same.
Organised financial records and properly balanced finances produced by the bookkeeper, coupled with smart financial strategy and accurate tax filing by the accountant, contribute directly to the long-term success of every business.
Some business owners learn to manage their finances on their own, while others opt to hire a professional so that they can focus on the parts of their business that they really love. Whichever option you choose, investing—whether it be time or money—into your business financials will only help your business grow.