Bookkeeping and accounting are closely related, and the terms are often used interchangeably.
But they are not exactly the same thing.
A simple way to think about it is: bookkeeping is primarily about accurately recording and maintaining the daily financial activity of your business.
Accounting uses that financial information to understand, analyze, report, and make decisions about the business.
You need both.
And in many small businesses, the lines between bookkeeping and accounting overlap.
Let’s look at the difference.
What Is Bookkeeping?
Bookkeeping is the process of maintaining the day-to-day financial records of a business.
Depending on the services being provided, a bookkeeper may:
- Record and categorize transactions
- Reconcile bank accounts
- Reconcile credit card accounts
- Record customer payments
- Maintain Accounts Receivable
- Enter vendor bills
- Maintain Accounts Payable
- Record loan payments
- Track payroll activity
- Record sales tax payments
- Monitor Undeposited Funds
- Identify fixed asset purchases
- Review transactions for proper classification
- Maintain supporting documentation
- Prepare routine financial statements
Good bookkeeping creates the financial foundation of the business. A good bookkeeper should never be undervalued!
If the bookkeeping is incomplete or inaccurate, everything built from those records is affected, including the business decisions you are making!
What Is Accounting?
Accounting generally takes the financial information created through the bookkeeping process and goes a step further.
Accounting may include:
- Reviewing and analyzing financial statements
- Making adjusting journal entries
- Reviewing Balance Sheet accounts
- Analyzing profitability
- Comparing current results with prior periods
- Reviewing cash flow
- Creating budgets and forecasts
- Analyzing financial trends
- Reviewing job or departmental profitability
- Helping establish accounting procedures and internal controls
- Advising business owners about financial issues
- Preparing information for lenders or other outside parties
- Coordinating year-end adjustments
- Assisting with tax planning and tax preparation
Accounting is less about simply asking: “What happened?” and more about asking: “What do these numbers tell us?”
An Example: A Business Loan Payment
Suppose your business makes a $3,000 monthly loan payment.
The bookkeeping side involves determining how that payment should be recorded. Perhaps $2,400 reduces the loan principal and $600 is interest expense. Recording the entire $3,000 as an expense would make both the Profit and Loss Statement and Balance Sheet incorrect.
The accounting side may go further.
Why has the loan balance changed?How much interest is the business paying?How is the debt affecting cash flow?Can the business comfortably service its debt?How will additional borrowing affect the company’s financial position?
The bookkeeping gets the transaction right.
The accounting helps you understand what it means.
Another Example: Accounts Receivable
Bookkeeping may include:
- Creating invoices
- Recording customer payments
- Applying payments correctly
- Reconciling customer balances
- Maintaining an accurate Accounts Receivable Aging Report
Accounting takes another look at that information.
For example:
Why is Accounts Receivable increasing? How quickly are customers paying? Are certain customers consistently late? Does the business have a collection problem? Is increasing Accounts Receivable contributing to a cash flow problem?
The bookkeeping tells us who owes the business money.
The accounting helps us understand what that means for the business.
And Another Example: Profitability
Your bookkeeper may prepare a Profit and Loss Statement showing:
Revenue: $750,000Expenses: $675,000Net Income: $75,000
That information is useful.
But accounting asks additional questions.
How does the $75,000 compare with last year?Has gross profit improved or declined?Which expenses increased?Is the business actually generating enough profit for its size?Is one department, service, or job more profitable than another?Is the business generating profit but struggling with cash?
Those questions turn financial statements into management information.
Bookkeeping Is Not Just Data Entry
This is where the distinction can become confusing.
Bookkeeping involves recording financial transactions, but professional bookkeeping requires more than knowing where to click in QuickBooks.
A knowledgeable bookkeeper should understand basic accounting principles.
For example, a bookkeeper should know that:
- A credit card payment is generally not an expense.
- The principal portion of a loan payment is generally not an expense.
- Customer payments should be applied correctly to Accounts Receivable.
- Sales tax collected from customers generally creates a liability rather than income.
- An equipment purchase may need to be recorded as an asset rather than an expense.
- Owner transactions need to be recorded differently from ordinary business expenses.
- Balance Sheet accounts need to be reviewed and reconciled.
- A bank feed is not the same thing as a bank reconciliation.
A bookkeeper does not need to be a CPA to do good bookkeeping.
But the person maintaining your financial records should understand the accounting principles behind the transactions they are recording. There is no “become a great bookkeeper in 6 steps or become a bookkeeper in 6 weeks” program. A great bookkeeper has both education (some amount of accounting courses or on-the-job-training) and experience.
Your Tax Entity Type Matters, Too
Your bookkeeper and accountant should understand not only your legal entity but also how your business is taxed.
For example, an LLC might be taxed as a:
- Sole proprietorship
- Partnership
- S corporation
- C corporation
That distinction can affect how certain transactions are recorded.
An S corporation shareholder who performs services for the corporation generally needs to receive reasonable compensation through payroll.
A partner in a partnership, on the other hand, generally should not be treated as an employee of the partnership. Payments for services may instead involve guaranteed payments.
Owner distributions, contributions, loans, reimbursements, and benefits can also require different treatment depending on the entity and circumstances.
For example, health insurance and certain other fringe benefits for a more-than-2% S corporation shareholder may require different payroll and tax treatment than those same benefits provided to a non-owner employee.
Your bookkeeper does not need to replace your tax advisor.
But the person recording these transactions needs enough accounting and tax knowledge to recognize when entity type matters and when a question should be referred to your CPA or tax professional.
Where Does a CPA Fit In?
Another common misconception is that “accountant” and “CPA” mean the same thing.
They do not.
An accountant is someone who performs accounting work.
A Certified Public Accountant (CPA) has met specific education, examination, experience, and licensing requirements established by a state board of accountancy and must maintain the requirements necessary to keep that license.
CPAs may provide services such as:
- Accounting
- Tax preparation
- Tax planning
- Financial analysis
- Consulting
- Audits, reviews, and other assurance services, when appropriately licensed and qualified
But not every CPA provides every one of these services.
And being a CPA does not automatically mean someone provides bookkeeping services.
Many CPA firms, for example, focus primarily on tax preparation, assurance, or consulting and prefer that clients have someone else maintain the day-to-day books.
Can the Same Person Provide Bookkeeping and Accounting?
Absolutely. In a small business environment, there can be considerable overlap.
A professional with a strong accounting background may handle the monthly bookkeeping while also providing higher-level accounting services. The same person may even own a business where they also prepare tax returns, and even process payroll.
For example, the same person might:
- Reconcile the bank accounts
- Review the Balance Sheet
- Prepare monthly financial statements
- Investigate unusual balances
- Compare financial results with prior periods
- Review Accounts Receivable
- Discuss cash flow
- Analyze profitability
- Coordinate with the company’s tax preparer
This can be especially helpful for a growing business that needs more than basic transaction entry but does not need, or cannot justify, a full-time accounting department.
What About QuickBooks?
QuickBooks is accounting software. It is a tool. It does not replace bookkeeping or accounting knowledge.
QuickBooks can import transactions from your bank. It can suggest categories. It can create invoices. It can generate financial statements. It can automate many processes.
But software does not necessarily know the complete story behind a transaction.
Imagine QuickBooks sees a $25,000 deposit. What is it? Is it customer revenue? Is it a bank loan? Is it money contributed by the owner? Was this a transfer from another business account? Was it proceeds from selling equipment?
The fact that $25,000 entered the bank account does not tell us how it should be recorded.
Someone still needs to understand what happened.
Accounting software is only as useful as the information being recorded in it.
Do I Need a Bookkeeper or an Accountant?
It depends on what you need.
You may primarily need bookkeeping help if:
- Your transactions are not being recorded regularly.
- Your bank or credit card accounts are not reconciled.
- You are behind in QuickBooks.
- Accounts Receivable or Accounts Payable needs to be maintained.
- You need someone to keep your financial records organized.
- You need reliable monthly financial statements.
You may need more accounting-level assistance if:
- You have financial statements but do not understand what they are telling you.
- Your business has become financially more complex.
- You need cash flow projections.
- You want budgets or forecasts.
- You need help understanding profitability.
- Your Balance Sheet contains complicated or unusual accounts.
- You need job costing or industry-specific financial reporting.
- You need stronger internal controls.
- You need someone to coordinate accounting issues with your tax professional.
And sometimes you need both.
What Should I Look for When Hiring Someone?
Do not focus only on whether someone knows QuickBooks.
Ask about their accounting knowledge and experience.
You might want to know:
- How much bookkeeping and accounting experience do they have?
- Do they understand Balance Sheets as well as Profit and Loss Statements?
- Do they reconcile every bank and credit card account?
- Do they review Balance Sheet accounts?
- Do they understand your tax entity type?
- Do they have experience with businesses like yours?
- Do they know when something should be discussed with your tax professional?
- Will they communicate directly with your CPA or tax preparer when necessary?
- What financial reports will you receive?
- Will they explain those reports to you?
- What internal controls do they recommend?
There is a big difference between someone who knows how to operate bookkeeping software and someone who understands the financial information being created by that software.
Your Bookkeeper and Accountant Should Be Part of the Same Team
You should not have to choose between having a good bookkeeper and having a good CPA or tax professional. They should complement each other.
Your bookkeeper helps maintain accurate financial records throughout the year. Your accountant can help analyze those records and address more complex accounting matters. Your tax professional uses accurate financial information to prepare tax returns and provide tax advice.
Depending on the professionals you hire, one person or firm may perform more than one of those roles.
What matters is that everyone understands their responsibilities and communicates when necessary.
When bookkeeping and accounting work together, you are much more likely to have financial information you can rely on throughout the year, not just at tax time.
The Bottom Line
Bookkeeping tells us what happened.
Accounting helps us understand what it means.
But good bookkeeping requires a solid understanding of accounting.
The goal should not simply be to get transactions entered into QuickBooks.
The goal is to create accurate, organized, tax-ready financial records that provide useful information about your business.
Need Bookkeeping and Accounting Help?
At Melton Bookkeeping & Accounting Services, bookkeeping isn’t simply about entering transactions into QuickBooks.
I have been a licensed CPA in the state of Missouri since 2003. I bring an accounting perspective to the bookkeeping process, reviewing Balance Sheet accounts, reconciling accounts, investigating unusual activity, asking questions when something doesn’t make sense, and helping make sure your financial records accurately reflect what is happening in your business.
I can also work with your tax preparer so they receive organized, tax-ready financial information at year-end. I processed business tax returns for S Corporations, Single-Member LLC’s, Partnerships and C Corporations for more than 20 years. I know what your tax preparer needs and I speak their language.
And if your books are behind or you are worried about what I might find, don’t let that keep you from calling. You don’t need to clean up your books before asking for help. That’s what help is for.
Ready to hire? Here is what to expect when you hire a bookkeeper.
If you are looking for professional bookkeeping and accounting services, call Melton Bookkeeping & Accounting Services at 417-630-0057. I want to be part of your extended team!
