When it comes to small business financial management, the terms “accounting” and “bookkeeping” are often used interchangeably. However, they are not the same thing. Accounting and bookkeeping are two distinct but related functions that serve different purposes in financial management. In this blog post, we’ll debunk the myth that accounting and bookkeeping are the same thing and explain the important differences between the two.
What is Bookkeeping?
Definition: Bookkeeping is the process of recording and organizing financial transactions for a business. It involves keeping accurate records of daily financial activities such as sales, purchases, receipts, and payments. The primary goal of bookkeeping is to ensure that all financial transactions are properly recorded and organized in a way that makes it easy to create financial statements and reports.
Different bookkeeping approaches include:
- In-house: In-house bookkeeping involves hiring a full-time or part-time bookkeeper to manage your business’s financial records. This approach offers the advantage of having someone on-site to handle daily financial tasks and answer questions as they arise. However, it can be costly to hire and train a bookkeeper, and there is always the risk of turnover.
- Software Only: Using accounting software for bookkeeping is a cost-effective and efficient way to manage financial transactions. This approach can save time and reduce errors, but it requires some level of expertise in using the software, as well as a person to initiate inputs and review outputs. QuickBooks is a popular accounting software.
- Outsourced: Outsourcing bookkeeping to a third-party provider can be a great way to ensure that financial records are accurate and up-to-date without the need to hire an in-house bookkeeper. Outsourcing can be a cost-effective solution, but it requires finding a reputable provider and entrusting sensitive financial data to a third party.
- Blended: Blended bookkeeping combines in-house staff and outsourcing to provide a flexible and cost-effective solution. This approach allows a business to benefit from the expertise of an outsourced provider while still having an on-site team member to manage day-to-day activities.
What is Accounting?
Definition: Accounting is the process of recording, interpreting and analyzing financial data to create reports and provide insights into a business’s financial health. It involves using financial records created through bookkeeping to create financial statements, balance sheets, and other reports that provide a clear picture of a business’s financial performance. It also involves understanding and applying tax law to stay compliant with Federal and State government.
Different accounting approaches include:
- In-house: In-house accounting involves hiring a full-time or part-time accountant to manage financial reporting and analysis. This approach offers the advantage of having someone on-site who is intimately familiar with the business’s financial data. However, same as with bookkeeping, it can be costly to hire and train an accountant.
- Software Only: Software can also be used for accounting tasks, such as creating financial statements and reports. Just remember: junk in, junk out. You need to know what you’re looking at.
- Outsourced: Accountants are even more expensive to hire than bookkeepers, so outsourcing is a cost-effective way to benefit from the expertise of a professional accountant without the need to hire one in-house. Again, trust is key. Find a reputable accountant, and ideally a Certified Professional Accountant, before entrusting sensitive financial data to a third party.
- Blended: Blended accounting combines in-house staff and outsourcing to provide a flexible and cost-effective solution. Most small businesses will need to grow quite large to require both an in-house and outsourced accountant.
How do Bookkeeping and Accounting Work Together?
Accounting my encompass bookkeeping, but bookkeeping is only one part of accounting. Bookkeeping provides the foundation for accounting by recording all of the financial transactions of a business. Accounting builds on that foundation by taking the information provided by bookkeeping and using it to generate financial reports and analysis and stay compliant with Federal and State tax laws.
Does a Small Business Really Need Both?
Yes, a small business needs both bookkeeping and accounting. While it is possible for a small business owner to handle both tasks on their own, it can be time-consuming and prone to errors. Hiring a professional bookkeeper and accountant ensures that financial records are accurate and up-to-date, and allows the business owner to focus on other aspects of running the business.
Working with Haworth & Company, Ltd.
At Haworth & Company, Ltd., we understand the importance of accurate bookkeeping and accounting for small businesses. Our monthly small business program is built specifically for you, utilizing both an assigned bookkeeper and accountant to handle both processes for a fraction of the cost. We offer a range of services to help businesses stay on top of their finances, including bookkeeping and accounting, tax planning and preparation, payroll, and business advisory services. Contact us today to learn more about how we can help your small business succeed.
