Ensuring your financial statements are in order can often feel like another full-time job. Adobe’s Future of Time Report found 65% of small and midsize business (SMB) leaders agreed that filling out forms like expense reports got in the way of their regular work.
When you first start your business, you may find it easy enough to prepare your own financial statements. But as your company grows, you’ll probably want to look into hiring a bookkeeper or an accountant. The question is: Which one is right for you?
To answer this question, you’ll need to understand the main differences between bookkeeping vs. accounting, the primary reasons you need help with your finances, what your budget is, and whether you need to hire someone full time or work with an external accounting firm or bookkeeping service.
What is the difference between accounting and bookkeeping?
While the duties of bookkeepers and accountants can overlap, there are a few key differences. Bookkeeping is much more focused on data entry and involves preparing many of a business’s financial statements. Meanwhile, accounting looks into whether these statements are accurate, how they interact, and what they say about your company’s health.
Bookkeeping tasks involve tracking and recording a business’s financial transactions. A bookkeeper handles most of the data entry and administrative work related to your business’s financial transactions.
Some of the documents you track in the bookkeeping process include:
- Bank statements
- Financial statements (like your balance sheet or income statement)
Bookkeeping involves a lot of data entry, and you need to ensure the information is accurate. A bookkeeper will also do the first check on your general ledger to ensure your accounts are balanced.
You may have followed single-entry bookkeeping (where each transaction is recorded in one account) when you first started out. But you’ll probably need to switch to double-entry bookkeeping (where each transaction is recorded as credit to one account and debit to the other) as your company grows.
This form of bookkeeping adds another check on balancing your books, and it’s generally accepted accounting principles (GAAP)-compliant. Most bookkeeping software follows this system since lenders prefer it too.
Accounting is a bit more interpretive when compared to bookkeeping. While it often involves preparing some financial statements and can handle bookkeeping duties, accounting tasks also include budgeting and summarizing, as well as analyzing your financial statements.
Part of the accounting process may include checking the statements prepared by a bookkeeper for errors and adjusting entries as needed. It can also include auditing any statements or financial information to ensure the data is accurate.
Accounting can also help you interpret your financial statements to understand the health of your business and develop forecasting to predict future costs.
There may be times when companies will find hiring an accountant helpful. According to Olivier Wagner, CPA and founder of expat tax firm 1040 Abroad, businesses may need to hire an accountant “when preparing tax returns, auditing financial statements, or developing long-term financial strategies.”
The accounting process is vital to filing your business taxes correctly. An accountant can help you go over your statements and ensure you find all possible deductions and avoid overpaying.
What is the difference between an accountant and a bookkeeper?
While accountants may handle some bookkeeping duties, there are a lot of differences between an accountant and a bookkeeper. Some of the major differences include their training and day-to-day work, and each has its pros and cons to consider.
Bookkeepers often have an associate's degree or higher, but it’s not required. Some bookkeepers may only have a high school diploma or have taken some trade school courses, but may go to college later in their career for further training.
On the other hand, accountants almost always have at least a bachelor’s degree in accounting. Many have master’s degrees, particularly if it’s a requirement of your state’s certified public accountant (CPA) board.
A CPA is generally viewed as an expert in their field and may be more qualified than a regular accountant in performing specific auditing or taxation tasks. For example, only a CPA can file audited financial statements with the US Securities and Exchange Commission (SEC). They can also represent a business client facing an audit by the IRS.
Speaking of CPAs, you may have seen this term used interchangeably with accountant. While all CPAs are accounting professionals, less than half of accountants have gone on to obtain CPA certification, according to data extrapolated from the US Bureau of Labor Statistics (BLS) and National Association of State Boards of Accountancy (NASBA).
A bookkeeper’s work includes preparing your financial reports and handling the day-to-day recording of financial transactions for your business. Their tasks are essential to keep your organization up and running without going into the red. A lot of bookkeepers work with online bookkeeping software like QuickBooks.
Meanwhile, an accountant interprets your financial data and monitors for compliance. They help you with tax preparation, especially if you have a complicated filing. They can also help you make big changes, plan for the future, and advise you on financial decisions.
Lastly, while bookkeepers can adjust to many different types of businesses, accountants tend to specialize. Some accountants only prepare taxes, while others work in health care accounting, auditing, or a specific industry.
Pros and cons of bookkeeping vs. accounting
Below are some of the pros and cons associated with both bookkeeping and accounting.
- Generally less expensive to work with than an accountant
- Easier to find applicants since requirements aren’t as strict
- Training takes less time for new hires
- Unable to offer financial advice
- Not trained to handle taxes
- Legally can’t prepare some forms
- Understand how financial statements affect your business
- Better equipped to offer financial advice
- Can answer tax questions and prepare returns
- Specialized training and certifications are available to deal with more advanced financial issues
- More expensive to work with than bookkeepers
- Limited number of trained accountants
Do I need an accountant or bookkeeper or both?
When comparing bookkeeping vs. accounting, which one you need will depend on your business needs. In general, either can help with your productivity and efficiency.
Both choices will probably save you money as well. A 2022 survey conducted by QuickBooks found small businesses reported an average of $39k in savings by hiring an accountant or bookkeeper.
Some companies choose to outsource all their accounting needs to a third party.
“This enabled us to keep track of our day-to-day financial data, but put the responsibility on a professional accountant while we focused on growing and scaling the business,” says Jim Trevors, CEO of tire review website We Review Tires.
A bookkeeper might be enough to have on your payroll if you’re just starting out. But you might want to hire an accountant to help set up your initial books and processes for your bookkeeper to use. This can be helpful for your general financial health and for quarterly or end-of-year tax filings.
Even if you don’t have an accountant on staff, having a contract with an outside accounting services firm to handle audits and taxes can be helpful.
Sometimes it makes sense to hire both. Fran Haasch, a personal injury lawyer and founder of Fran Haasch Law Group, notes, “We chose to work with both because it saves us the headache of handling financial data when we should be focused on our clients and their cases.”
In-house or a third party?
You can reduce miscommunication by working with in-house bookkeeping and accounting staff. Clutch surveyed over 300 small business owners in 2021 and found the top reasons businesses decided to hire accountants in-house were for knowledge of their business practices, flexibility, and easier communication.
However, in-house staff can be more expensive than working with a third-party bookkeeping or accounting firm. Plus, working with a third-party firm reduces your hiring and turnover costs. It also lowers the downtime that small companies with in-house accounting often experience during staff changes.
Your decision in hiring a bookkeeper vs. an accountant will depend partially on the size of your business, how complex your financial situation is, and what tasks you need help with.
A small, family-run restaurant that’s registered as a sole proprietorship might be able to get by with some bookkeeping software and an annual meeting with their local accountant. But a growing retail business that’s run as an LLC in multiple states probably needs more complex help.
You can call an accountant for a consultation. They can advise you on how complex your business’s needs are and help you make a good decision for your financial future.
And whether you choose to hire a bookkeeper in-house or contract with an outside third-party accounting firm, make sure you’re working with good accounting software to make the process smoother.