Bookkeeping vs Accounting: What They Do & Key Differences

As a business owner, understanding your business’ finances is vital. But, with terms like "bookkeeping" and "accounting" often used interchangeably, it can be confusing to grasp what each function entails and, more importantly, what each can do for your business. 

This article will explain the roles of bookkeepers and accountants, detailing their key responsibilities, when to hire each, and how they individually contribute to the financial health of your business. 

Without further ado, let’s get started.

A bookkeeper's role is to be the keeper of the records of a company's financial transactions. They are responsible for entering data into ledgers, tracking and recording payments and receipts, managing invoices, and reconciling bank statements. 

Additionally, bookkeepers prepare basic financial reports like balance sheets and income statements, which are essential for monitoring the company's financial health.

Andrew Gosselin is a CPA, a former consultant at Pwc, a Big Four financial services firm, and a senior editor at The Calculator Site. He holds degrees in accounting and finance from Bentley University and has extensive experience in bookkeeping and accounting.

An accountant takes on a more analytical role in financial management by using the detailed records prepared by bookkeepers to assess and interpret financial data. They perform audits, assist in tax filings, and offer consultancy on financial planning and risk management. They also often have certifications like CIMA, ACCA, CPA, etc. 

Former Vice President of Tax at Bank of America, Current Partner at Pace & Associates CPAS

The decision to hire a bookkeeper or an accountant generally depends on the complexity and volume of your financial transactions, as well as your business needs.

Typically, a bookkeeper is needed from the very start of your business or when the volume of bookkeeping tasks exceeds your capacity to manage them effectively.

Consider hiring a bookkeeper to manage daily financial transactions and closely monitor operational budgets. 

Bookkeepers are also essential for producing fundamental financial reports like cash flow statements and balance sheets. 

Consider hiring an accountant when financial advice is needed or desired or for compliance reasons.

Strategic planning, such as cash flow analysis or budgetary forecasting, will require the expertise of an accountant. Obtaining appropriate loans or building business credit will require the guidance of an accountant. Building a business plan can also be improved with the advice of an accountant. Tax authorities in certain jurisdictions will also require an accountant to sign off on financial documents.

It’s not typical for business owners to hire accountants early in their business journeys, especially when the benefits are few - for example, tax savings may only come if the company has profits, but companies are generally not profitable early on. Note that if this is what your business’ finances look like, this doesn’t mean your business is doing badly, as an accountant may advise you. It might just be that the financial structure makes it so your business is considered unprofitable as it grows.

Selecting the right software is crucial for effective bookkeeping and accounting. Here, we explore some of the most popular tools tailored to meet the needs of various business sizes and sectors. Most of these tools function as Software as a Service. 

QuickBooks: QuickBooks is an accounting software offering a suite of features for both small and large businesses. It supports automated billing, invoicing, expense tracking, and payroll management and produces detailed financial reports for strategic planning and tax preparation.

Xero: Xero appeals to SMEs with its user-friendly interface. It provides real-time financial monitoring, easy bank reconciliation, integrated payroll, and customizable reporting, facilitating efficient team collaboration.

Xendoo: Xendoo provides specialized bookkeeping and accounting services for SMEs. It offers real-time financial data and integrates seamlessly with other platforms.

Each platform offers unique advantages, and the choice depends on your specific business needs, such as the volume of transactions, the level of detail required for financial reporting, and integration with other tools.

Understanding the key differences between bookkeeping and accounting can significantly impact how well a business can manage its finances and plan for the future. Both roles are crucial; however, they serve different purposes at different stages of your business cycle. 

Knowing when and whom to hire can make a substantial difference in maintaining the financial health of your business.