Getting your business off the ground requires immense hard work, time and patience.
When your business matures into the living, breathing and evolving entity, it takes forward-planning and smart choices to keep it running.
As a business owner, how do you grow a keen sense to know that something is wrong or is not working for your business?
For this, you can usually rely on your business’s financials through bookkeeping and accounting to tell you what you should do.
But do you understand what these terms actually are and are the same or different?
Here is a quick guide to understanding how both the terms are different and how they can benefit any business.
This blog post is divided into the following sections
- Bookkeeping defined!
- What do bookkeepers do?
- Accounting defined!
- What do accountants do?
- Bookkeeping vs Accounting
- The typical duties of bookkeeping & accounting
- The benefits of bookkeeping
- The benefits of accounting
- When should I hire a bookkeeper?
- When should I hire an accountant?
The bookkeeping is defined as a skill or occupation of maintaining accurate and clear records of business transactions.
Put simply; bookkeeping is recording and organising your business’s financial information.
What do bookkeepers do?
A bookkeeper is an individual who accurately records the financial information of a business.
The main purpose of doing this is to ensure that every entry in books is recorded on a timely basis while keeping the log of all the transactions in the business books.
By doing such tasks, a bookkeeper can calculate and record income, expenses, create sales invoices, reconcile bank transactions and raise purchase orders.
Bookkeepers also ensure that accounts of a business actually balance!
Bookkeepers have the skills to explain important financial information to the business owners and make reports based on this information.
Other responsibilities of bookkeepers contain providing information in report formats, analysis reports and debtor reports, creating and updating daybooks and cash registers.
While accounting is the practice or skill of maintaining accounts and preparing reports on the liabilities, assets etc., of a business.
Financial accounting is one of the branches of accounting that handle the preparation and presentation of several reports popularly known as financial statements.
The financial statements prepared by a financial accountant contain a company’s financial position, cash flows, the result of operations and other information.
Also, note that the purpose of financial accounting is not to report the value of a company but to provide enough information for investors and stakeholders to assess a company’s value.
Read our blog on the financial accounting, to find out more.
What do accountants do?
Accountants are mainly responsible for overseeing accounts and producing financial statements, handling tax returns that are in compliance with the HMRC’s regulation.
Accountants need to have expert skills and knowledge in finance, and ethical issues as part of their role involve understanding business information and providing financial advice that can affect your business.
You will find many types of accountants – some work for accounting firms and handle the finance of multiple companies, while others might just focus on individuals.
In the end, an accountant will adjust the records made by bookkeepers at the end of a financial period.
Accountants do this by preparing and adjusting journal entries and producing documents such as profit and loss statements as well as balance sheet reports.
After assessing all the findings, accountants help businesses make future sound decisions to thrive.
Bookkeeping vs Accounting
|Bookkeeping is generally related to the process of measuring, identifying, recording and classifying financial transactions.||Accounting is generally the process of interpreting, summarising, and communicating financial transactions, which were classified in the ledger account as part of bookkeeping.|
|Bookkeeping is a beginning stage and acts as the base for accounting.||Accounting starts where bookkeeping ends.|
|Management can not make decisions based on bookkeeping.||Management can make decisions based on accounting reports.|
|The main objective is to keep proper & systematic records of financial transactions.||The main objective of accounting is to ascertain the financial position & further communicate the information to the relevant parties.|
|Financial statements are not prepared during the bookkeeping.||Financial statements are prepared on the basis of bookkeeping.|
|Degree of skill required for bookkeeping is significantly different and is more mechanical in nature.||Accounting, on the other hand, needs special skills due to its analytical and somewhat complex nature.|
The typical duties of bookkeeping & accounting
We can not speak for every single bookkeeper or accountant in the world, but there are some typical tasks and duties that each role does, which is what makes them different.
What is important to know, yet, is that some duties and tasks both the bookkeepers and accountants do can vary between the businesses.
Generally, in the case of smaller businesses, bookkeepers might do some basic accounting duties as there is sometimes a bit of an overlap.
- Processing and maintaining a payroll system.
- Processing invoices.
- Processing receipts, payments and other financial transactions.
- Recording business transactions
- Managing accounts receivable and accounts payable.
- Processing expense claims
- Preparing adjusting entries
- Preparing financial statements and reports.
- Completing income tax returns
- Financial analysis and strategy
- Tax strategy and tax planning
- Financial forecasting
- Analysing business performance
- Organising budgets
- Analysing business performance
- Auditing– only trained accountants can do this.
The benefits of bookkeeping
Bookkeeping strengthens the financial aspects of your business and enables you to,
Track business performance
Recurring patterns in your business’s financial information can tell you if you are making more money than you are spending or if you are headed towards a cash crunch.
Manage the cash flow
Bookkeeping gives you alerts about delayed payments, higher costs, sales fluctuations, an upcoming big expense inventory, and late or incorrect payments.
Simplify the tax
Bookkeeping helps ease the tax burden when it is time to file taxes.
You do not have to jog your brain to keep in mind if an expense was professional or personal or hunt for old bills and receipts.
Up-to-date and accurate books give an accountant time to find relevant tax deductions and allowances instead of going through numbers of receipts.
Make you responsive
In case of an auditof your business by HMRC, you will be able to present information, saving you potential late fees.
The benefits of accounting
Accountant crafts a big picture of the business and often plays the role of a financial advisor.
Accounting is essential for your business to –
Plan the strategies
Accounting helps you identify the areas of business that are bleeding and identifies those that are thriving.
Insights given by accounting will inform your business decisions to delve into cutting costs, reorganise your budget, or explore investing more money to prepare for the future of your business.
Borrow money from lenders and banks
Banks and lenders see a business’s financial statements and cash-flow projection before approving your loan.
Accountants can help generate necessary things.
Compliant with tax regulation
Accountants are trained and experienced to spot tax regulations you could be breaking or tax deductions you might have avoided.
Accounting also makes sure your business does not encounter any penalties.
When should I hire a bookkeeper?
Independent or entrepreneurs generally double up as the bookkeeper for their business as it only takes a few hours in a week to manage the books.
In the initial stage of your business, it is practical to use the free software or a basic spreadsheet to record each and every transaction by entering details from your receipts, invoices and business bank account and credit card statements.
But when your business grows in size, intersects more people and different geographies, record-keeping becomes complex and time-consuming.
Incorrect or duplicate entries or categorisation of business income and expenses could cause trouble during the tax season and attract penalties.
A growing or established business that transacts multiple times each day should consider outsourcing bookkeeping either to a professional and have a robust subscription-based accounting software.
When should I hire an accountant?
Accountants are highly qualified individuals and with higher charges than that of a bookkeeper.
Small businesses, that’s why hire accountants once a year to prepare their financial statements, file taxes, and depend on the bookkeeper or the bookkeeping software to maintain the business money trail otherwise.
As your business picks up pace, you find yourself juggling many business tasks altogether.
Many individuals are excited about the challenges of entrepreneurship, but not that much about data entry and bank reconciliation – we can say the finance side.
Plus, limited knowledge and experience can also be the roadblock for preparing your business profit and loss statements.
That’s why cutting-edge cloud software is also an entrepreneur’s accountant or bookkeeper these days.
QuickBooks, FreshBooks, Zoho Books and Xero are just a few names in the market that have reinvented the way you manage your finances.
In summary, the role of an accountant is very different from the role of a bookkeeper, but they work very closely together. Bookkeepers need accountants to give the business data they have recorded a meaning, and accountants need bookkeepers to give them the business data in the first place. The real value is achieved when both the accountants and bookkeepers work together.