The Difference Between Bookkeepers and Accountants
Helping you do right by your business is important to us, which is why we feel strongly about clarifying the differences between bookkeepers and accountants and helping you choose accordingly. In this article, we’ll dive into the three main differences between bookkeepers and accountants which are:
- Accountants will provide a truer representation of reality,
- Accountants typically prefer accrual accounting over cash accounting, and
- Accountants will ensure greater accuracy through adjusting journal entries.
This discussion will center around how these services relate to your business and will provide insight into which service is right for your company.
Tell Me About Bookkeeping
So in 1494, Frater Luca Pacioli literally wrote the book on bookkeeping and is known as the father of bookkeeping (he was also friends with Leonardo Da Vinci – COOL)! Later on, during the Industrial Revolution, the rise of manufacturing, trade and shipping made accurate record keeping a necessity, boosting the bookkeeping industry and bringing us to today’s discussion of the qualitative differences in bookkeeping services and accounting services.
Bookkeeping is the act of recording and classifying the financial transactions of a business through the single-entry or double-entry method and provides the information from which accounts are prepared (more on that next). However, a bookkeeper rarely (in our opinion) assigns any context to the transactions. Typically, you can expect a bookkeeper to complete tasks like:
- Assigning income and / or expenses into appropriately named accounts in your accounting software
- Following simple bookkeeping policies and procedures
- Making additions or deletions to your chart of accounts
- Maintaining financial records and posting transactions
- Maintaining and balancing the general ledger and reconciling (although often incorrectly) bank and credit card entries
What is Accounting?
This is where we will highlight our first major difference between bookkeeping and accounting. Where bookkeeping helps a business owner stay organized, accounting takes these transactional records a step further giving business owners a way to distill and process their financial transactions into something that is a truer representation of reality and hence considerably more meaningful to the business – THAT is accounting.
Accountants are bookkeepers on STEROIDS! They apply wider, more sophisticated concepts to the simple components of bookkeeping. They understand the correct rules and regulations of accounting (think about how your financial information is tied to your taxes and viewed by your investors and / or auditors). Accountants also understand the importance of workflows, consistency in reporting and creating a level of predictability within a company’s numbers. Further, accountants dig into HOW the business runs its operations to define WHAT is appropriate in its financial records. Compared to the simple art of bookkeeping, accountants level up the rigor of your procedures and hence credibility to your numbers.
So you might be saying to yourself, “Accountants sound like they have super powers (we might!), what do they really do?” You can expect an accountant to:
- Summarize a business’s current financial status by collecting financial information and preparing balance sheets, profit and loss statements, and other reports.
- Recommend financial actions to a business owner by analyzing trends in their financial data.
- Prepare asset, liability, and capital account entries by compiling and analyzing account information.
- Substantiate a company’s financial transactions by maintaining supporting schedules and auditing legal documents with a nod to their deeper understanding of the business’s operations.
- Maintain accounting and financial security controls by preparing and recommending policies and best practices.
- Comply with federal, state, and local financial & legal requirements by keeping current on legislation, enforcing adherence to legal requirements, and advising management on any needed actions.
While this is not an exhaustive list of the responsibilities of an accountant, it is simple to see that they provide an in depth service beyond just record keeping and help business owners make better decisions based on the financial data of their company.
A Quick Look at Accounting Methods
You could consider accounting the “language” of business because it shows a business owner what they need to know about the company’s resources and finances and a snapshot of the health of the business. Similar to bookkeeping (single-entry and double-entry), there are two accounting methods and they are cash basis accounting and accrual basis accounting.
This method can be considered more simple than the accrual method and works well for service based, small businesses that have no inventory. Essentially, in this method, revenue is recorded upon receipt of cash and expenses are recorded when cash is spent.
Accrual accounting is a bit more complex because revenue is recorded when it is earned (not when cash is received) and centers around the idea of service and / or value transfer.
This brings us to our second big difference between bookkeeping and accounting – their methodology. Most bookkeepers can utilize cash basis accounting as the basis for their transactional recording. However, and this is a big one, bookkeepers typically struggle to implement accrual accounting fully and hence accurately.
In my experience, financial service providers throw around the term “accrual accounting” but in reality they are typically only referring to accounts receivable (AR) and accounts payable (AP). There is so much more to accrual accounting than AR and AP, which we will describe later on when we tackle accounting adjustments and why all of this is so important.
Where Do You Go From Here
When you first start a business, bookkeeping and accounting seem like they are almost interchangeable in their service. This confusion can boil down to a number of variables including confusion around what bookkeepers and accountants actually do. So to understand which service is right for your company and what you may need to outsource, let’s take a closer look at the difference between the tasks of a bookkeeper versus an accountant.
What is Your Accountant Doing that Your Bookkeeper is Not?
A bookkeeper keeps simplistic records in a general ledger of the financial transactions of your business often with the support of an accounting software similar to QuickBooks, Xero, Netsuite, or Sage and not a physical journal (like Pacioli did in ye olde days). Generally speaking, that’s it – the baton of responsibility is passed on. Since the accuracy of your general ledger and how you use that financial data is central to your company’s finances and overall health – a super someone needs to take that baton and run with it.
The complexity of the accounting requirements for your business will largely depend on the size of your company, your business model and the number of transactions it completes on a daily, weekly and monthly basis. If you’re just starting out or your business is quite small, the necessity for both a bookkeeper and an accountant may be cost prohibitive. This is why working with a service provider, like Simple Startup, where clients can have access to bookkeepers, accountants and controllers* through one provider can be very useful.
*Side Note: What is a Controller?*
If an accountant is a bookkeeper on steroids, then a controller is an accountant on the steroids of the FUTURE! A controller owns the accounting functions of a business and uses their financial expertise, operational know-how and creative thinking to influence the financial strategy of a business and affect its future trajectory (end of side note).
When your business is growing quickly and because of the necessity for accuracy in your accounting, outsourcing your accounting service to a firm where you can have a controller (preferably a CPA) and an accountant’s guidance to oversee bookkeeper entries will ensure all best practices are met and the vision of your company is clear.
Our discussion of accounting adjustments will clarify a third major difference between bookkeeping and accounting. Adjusting general ledger entries is a way for an accountant to make a change to how a financial transaction is reflected on the books so that it matches the correct accounting period. Remember when we mentioned, bookkeepers are okay with cash basis accounting, but not necessarily accrual accounting? This section is what we’re describing and it’s an IMPORTANT clarification.
Why Are Adjustments Necessary?
As a business owner, an accurate financial view of your company is EVERYTHING. When you can see your company clearly, you will know if you have enough runway in your cash reserves to make it through the next quarter, or if you can hire a new member of your sales team, or what your profit margins really are – all important things.
When an accountant reviews your monthly financial transactions they will make adjusting entries, to ensure that the activities of your business are recorded accurately in time and reflected correctly in your financial statements. You wouldn’t want your books to show that you’re generating revenue prior to actually delivering a service or selling a product – that would provide an inaccurate view of your business. Similarly, you wouldn’t want your costs of delivering a product or service to be captured three months after you generate the revenue (#matchingprinciple) as this would have a major impact on your margins which, as a business owner, are crucial to understand and monitor closely.
A True and Accurate Image of Your Company
I hope it has become more clear that an accountant brings so much added value to the table, beyond simply recording the books. They make sure the financial data is creating a true and accurate image of your company, they dot the i’s and cross the t’s to help you meet managerial needs and tax obligations, AND they provide deeper insight into your financial trends so as to form the foundation for financial metrics and make recommendations for financial actions you could take.
Why Is All of This Important?
Let’s recap this conversation to highlight the important differences between a bookkeeper and an accountant to start.
- A bookkeeper helps a business owner stay organized by recording daily financial transactions, while an accountant digs into how the business is run to define what the appropriate financial records are, and they apply workflows, reporting consistency, regulation and overall CREDIBILITY to your numbers.
- They differ in methodology. Where bookkeepers typically use cash basis accounting, accountants use a full accrual basis of accounting to provide a more accurately reflected picture of a company’s financials.
- An accountant makes adjustments to transactional records which make it possible to develop accurate reporting, identify trends, meet tax obligations and provide insight to a business owner to scale and improve their operations.
These three big differences between bookkeeping and accounting are why it’s important to consider the difference in quality and / or type of service (bookkeeping, accounting, controller) to understand any differences in pricing. You simply can’t compare a bookkeeper to an accountant or an accounting service to an outsourced CFO. Some companies say they do accrual bookkeeping but are really only delivering accounts receivable (what your customers owe you) and accounts payable (what you owe your vendors) which means they are unlikely to manage, monitor and capture things like accrued expenses, accrued revenue, deferred expenses, deferred revenue, depreciation, amortization etc. (which an accounting service would). Moral of the story – keep your eyes open to be sure you’re comparing apples to apples when comparing two service providers.
Which Service is Right for You?
Do you need someone to make this decision for you and then take care of everything? That would be quite a weight off your shoulders, am I right? Each company has different needs when it comes to bookkeeping and accounting services. At Simple Startup, we offer a variety of accounting solutions. We value accurate and consistent financial data so we can help our clients see and interpret trends in their business. When the credibility and accuracy of your numbers is lost, you’re essentially flying blind – we don’t want that for you! So, if you’re struggling with this, simply book a call with us and we can work through the decision together.