Understanding your finances is one of the key components of having a successful business — and making money! Accounting helps you record, organize and understand financial information, and is an integral part of your business, whether you hire an external accountant or have accounting employees.
Think of accounting as an umbrella — underneath, there are a variety of specializations that branch out from accounting. One of these specializations is bookkeeping, which is sometimes confused with accounting. In this blog, we will discuss the difference between overall accounting and bookkeeping, and which will benefit your small business the most.
What is Accounting?
Accountants specialize in financial theory and develop their expertise to help build a solid financial foundation for individuals and businesses. For individuals, we may think of accountants as the professionals that handle our taxes. For businesses, on the other hand, accounting can be categorized into three main categories:
- Financial: Done with investors in mind, this type of accounting assesses the financial health of a business.
- Managerial: Used to generate financial statements for companies such as product costs, cash flow reports, profit and loss statements.
- Tax accounting: An essential part of your business, tax accounting helps you understand your finances while you file your annual taxes.
Accountants take your raw financial data and information, such as records of your taxes, business transactions and projections, and turn those into a story about the financial state of your business. Having an accountant for your small business not only helps you evaluate overall business performance and file tax returns, but also identifies areas where you can improve and increase your profits.
What is Bookkeeping?
Bookkeeping is a specialization that falls under the umbrella of accounting. Essentially, a bookkeeper records and tracks business transactions, including bills, receipts, purchase orders, and payroll. Business transactions are any activity or event that involves your business’s money, and they need to be recorded in your company ledger—which is what a bookkeeper is for. Businesses count on accurate and reliable bookkeeping to keep track of their daily finances for not just internal uses, but for reporting to external users such as investors and financial institutions.
By accurately recording these daily business transactions, bookkeeping provides information for your business to make general strategic decisions and create benchmarks for revenue and income goals. It also helps better prepare your business for tax season. Spending money upfront by hiring a bookkeeper or using an external agency to maintain proper records is crucial to the success of a business, especially when you’re just starting out.
Sounds easy enough to just do yourself? It’s important to remember that if you don’t have the time or expertise to do your own bookkeeping, it’s likely that things may get missed, and keeping track of every penny earned and spent is a critical component of doing business.
Accounting Vs. Bookkeeping Distinctions
Bookkeeping tends to take care of the day-to-day aspects of your business finances, while accounting takes more of a look at the big picture and goes more in depth. Accounting reviews and analyzes the financial statements prepared by a bookkeeper, and also conducts audits and files relevant tax returns. Where bookkeeping zeroes in on the administrative side of a business’s financial past and present, accounting uses the data from bookkeepers and is much more subjective.
Many small businesses choose to hire a bookkeeper or external agency rather than an accountant because it costs less. Should your business require an accountant for those overarching tasks, having reliable data from good bookkeeping helps them provide business owners with the insight they need to make informed financial decisions.
If you’re deciding whether to hire a bookkeeper or an accountant, think about the primary needs of your business as well as your budget. A lot of the work done by accountants and bookkeepers overlaps, but if you’re looking for someone to handle your daily business transactions, a bookkeeper is a better choice and is generally cheaper than hiring an accountant. That said, if you’re seeking sound business advice based on your finances and need to file tax returns, you will need to hire an accountant. Keep in mind that an accountant’s job is made easier by having good bookkeeping records, so hiring a bookkeeper or bookkeeping service is a great place to start for a new business!
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Leave the numbers to us — our trained accounting technicians at Balncd offer tiered solutions in both bookkeeping and accounting that are right for you and your business. Whether you are seeking monthly accurate and timely bookkeeping or want the knowledge of a CFO without the high salary, we have a solution for you. Contact us today to learn about our services and how you can start making more informed decisions for your business.