Bookkeeping vs Accounting: A Guide for Small Businesses

What are the key differences between bookkeeping and accounting? All businesses will use both bookkeeping and accounting to produce financial reports. Depending on your time and ability will depend on your need to hire a bookkeeper or accountant.

Bookkeeping is the process of recording financial transactions of the business. It may include posting sales and purchase invoices and recording bank transactions and other items in the general ledger.

Accounting reviews the transactions and interprets the reports to provide insights into the business.

A small business may prefer to complete bookkeeping themselves and hire certified public accountants (CPAs) at year-end to keep costs down and ensure accuracy and compliance. A more significant firm may outsource both bookkeeping and accounting or employ staff for the job.

To look deeper into the difference between bookkeeping and accounting, we will break down each one’s tasks.

What is Bookkeeping and Recording Financial Transactions?

Bookkeeping focuses on recording daily financial data consistently, including maintaining bookkeeper records such as the general ledger and recording amounts from sale and expense receipts, which is a key component to building a successful business. A bookkeeper keeps detailed ‘books’ of purchases, sales, payments, receipts, and other financial transactions.

Bookkeepers can involve tasks such as:

• Sales Invoices – Issuing sales invoices to customers and sending them by either post or internet.

• Aged Debtors – Chasing payments from customers.

• Purchase invoices – Receive payments and record purchase invoices.

• Aged Creditors – Pay creditors, check statements and ensure accurate supplier accounts.

• Payroll – Setting up and running a regular payroll

• VAT returns – If the business is VAT registered, produce and submit VAT returns

• Maintain the general ledger – Check that the accounts are correct and make any adjustments

• Reconcile bank statements – Ensure that the bank statements match the records recorded in the accounting software.

For example, if a small business makes a sale, it’s the bookkeeper’s responsibility to record this revenue accurately in the company’s financial records. The same goes for any expenses the business incurs.

Small business owners may be able to complete all these tasks themselves or hire a bookkeeper to complete them for you.

What is Accounting and Preparing Financial Statements?

Accounting is a higher-level process that uses the information compiled by a bookkeeper to generate financial models and provide strategic advice. It involves summarising, interpreting, and communicating financial transactions recorded in the ledger account. Accounting tasks typically include:

• Preparing adjusting entries (recording expenses that have occurred but aren’t yet recorded in the bookkeeping process)

• Produce financial statements – Reports, including balance sheet, profit and loss and forecasting. These reports help managers make decisions.

• Interpreting the accounts –  Accountants can help by explaining the reports; there are ratios to see how the business is performing.

• Submitting reports – A Limited company is required to submit annual accounts. An Accountant will prepare them in the correct format and send them to Companies House.

• Taxation and advising – Tax rules are complicated, and a good accountant can advise on taxation issues and ensure payment of the correct amount.

• Tax Filing – Completing taxation returns for VAT, corporation tax and self-assessment tax returns.

For instance, an accountant might advise a small business owner on how to structure the business (as a sole proprietorship, partnership, limited liability company, etc.) based on their analysis of the company’s finances and their knowledge of tax laws and regulations.

Most businesses will benefit from using an accountant, although small businesses may complete everything themselves. Additionally, accountants are responsible for forecasting future business needs based on financial information, playing a crucial role in strategic planning and advising for the future.

The Synergy Between Accounting and Bookkeeping

While bookkeeping and accounting are distinct, they overlap in many ways. Bookkeeping’s accurate records become the accountant’s financial statements; the accountant’s strategic advice helps the business owner make savvy decisions. Together, they enable effective financial management.

Bookkeepers provide the groundwork for accountants. Without the diligent work of the bookkeeper in maintaining accurate financial records, the accountant wouldn’t be able to do their job effectively. On the other hand, the insights provided by the accountant can help the bookkeeper in their role, offering them a broader understanding of the business’s financial picture that can inform their day-to-day work.

What Qualifications Bookkeepers and Accountants Have?

The qualifications for bookkeepers and accountants differ significantly due to each role’s different responsibilities.

The demand for accounting jobs is rising, offering many career opportunities for those interested. Positions such as controller, accounting manager, senior tax accountant, and internal auditors are just a few examples of the various roles available, each with its own set of responsibilities and qualifications. This diversity in job titles underscores the importance and versatility of accounting skills in the business world.

Bookkeeper:

A bookkeeper’s role is transactional – they’re responsible for recording daily financial transactions consistently and accurately. As such, there are no strict qualification requirements for becoming a bookkeeper. However, having a good understanding of basic accounting principles and using bookkeeping software are important skills for this role.

Some bookkeepers may have an associate’s degree in business or accounting, but this is not a requirement. There are also certification programs available, such as those offered by the Institute of Certified Bookkeepers (ICB), that can enhance credibility and demonstrate competence.

A self-employed bookkeeper will also require Anti-Money Laundry (AML) and insurance to comply with legal requirements. Read our guide on starting a bookkeeping business for more information.

Accountant:

On the other hand, accountants are required to have more advanced education. Most accountant positions require at least a bachelor’s degree or qualification in accounting or a related field. This role involves more complex tasks such as preparing and analysing financial reports, performing audits, and providing strategic financial advice.

When hiring bookkeepers or accountants, always check their qualifications, experience, Anti-Money Laundering (AML) checks and references to ensure you’re getting the best service for your business.

In summary, while bookkeeping doesn’t necessarily require a formal education, accounting roles typically require a degree and further professional certification.

Do I need a Bookkeeper and Accountant?

Sometimes, a good bookkeeper can complete accountants’ tasks. An accountant can do bookkeeping tasks but prefer to stick to accountancy only. Bookkeepers usually are cheaper but may not have as much experience and qualifications.

When deciding if a bookkeeper is needed, you will review the tasks that you can complete and the time that you have available. It might be more beneficial for you to concentrate on the business and hire a bookkeeper to do the day-to-day tasks.

Some owners prefer to do the accounts themselves, so they are on top of the figures and know the position of the business. A good bookkeeper will also liaise with the accountant.

I always advise a company to use an accountant because they are trained in taxation and know the ins and outs of what the business can claim in expenses. A good accountant will advise on how to move the business forward. An accountant will also submit formatted accounts to Companies House.

Whenever you employ accountants or bookkeepers, check that they have the relevant experience, qualifications and insurance. There are strict guidelines that both need to follow for anti-money laundering.

Large businesses will also need to employ an independent auditor — all companies on the London Stock Exchange and companies that specify it in their articles of association. A qualified external party carries out an audit.

Bookkeeping vs Accounting Costs

Understanding bookkeeping and accounting services costs is vital for small businesses, as they greatly influence financial decision-making.

Bookkeeping Costs

Bookkeeping costs can vary greatly depending on the size and transaction volume of the business. Smaller businesses with fewer transactions may find it more cost-effective to handle bookkeeping tasks in-house. However, as the business grows and the number of transactions increases, outsourcing these services can become more efficient and effective.

Costs for outsourced bookkeeping services can range from an hourly rate for basic services to a monthly fee for comprehensive, full-service bookkeeping. The cost of employing a full-time, in-house bookkeeper must also consider additional expenses such as benefits, office space, and training.

Accounting Costs

Accounting services typically cost more than bookkeeping due to the higher expertise required. Accountants must have formal education and certification, and their services often involve strategic financial planning and advice.

Accountants can be hired on a consulting basis for business planning and tax advice, which is typically charged at an hourly rate. Many accounting firms offer a monthly retainer fee for ongoing services, such as preparing and analysing financial reports. When comparing costs, small businesses should consider the financial outlay and the value that the accountant’s strategic financial advice can bring to the business.

In conclusion, while both bookkeeping and accounting services entail costs, they are investments that can significantly enhance the financial health and success of a small business.

How can I Keep my Own Financial Records?

Maintaining your own financial data can be made significantly easier with the use of accounting software. These digital tools are designed to streamline the process of bookkeeping and accounting, automating many mundane tasks such as data entry and calculations. Forensic accountants play a crucial role in investigating and proving the accuracy of financial documents, ensuring that all financial dealings are transparent and lawful.

Accounting software packages generally have features that allow you to record, track, and manage your business’s financial transactions. The software can automatically update your financial records in real-time by simply inputting the data related to sales, purchases, and other transactions. It ensures that your records are always up-to-date and accurate, reducing the risk of errors that could potentially occur with manual record keeping.

Where accounting software truly shines, however, is in the preparation of financial statements. The software can automatically generate financial reports based on your input data, including profit and loss statements, balance sheets, and cash flow statements. These reports provide a clear snapshot of your business’s financial health, making it easier to make informed financial decisions.

Using software can assist with the accounting process, but if you are a limited company registered with Companies House, it is better to get an accounting professional to produce and file the year-end accounts. It ensures that the reports are in the correct format. Some of the best software is Xero and QuickBooks; read our QuickBooks vs Xero comparison for further information.

FAQ Bookkeeping vs Accounting

Is Bookkeeping Hard?

Bookkeeping is not necessarily difficult, but it does require a certain level of attention to detail and knowledge of financial principles. Keeping up with the daily transactions can be time-consuming, and many businesses find that outsourcing these services is more efficient and cost-effective in the long run.

What Does an Accountant Do?

Accountants typically provide strategic advice on financial matters and assist with complex tasks such as preparing and analysing financial reports, audits, and tax returns. They also ensure the business complies with all relevant regulations and laws.

What Is the Difference Between Accounting and Bookkeeping?

The primary difference between accounting and bookkeeping lies in the required expertise. Bookkeeping typically involves recording and tracking financial transactions, while accounting involves analysing this data and providing advice based on the analysis.

Is Accounting Software Necessary?

Accounting software is not strictly necessary for small businesses, but it can be a great tool to streamline bookkeeping and accounting processes. It can also provide valuable insights into your business’s financial performance, allowing you to make better-informed decisions that could lead to increased profits.

Bookkeeping vs Accounting Conclusion

In conclusion, both bookkeeping and accounting play crucial roles in the successful financial management of a small business. With its detailed and meticulous recording of financial data, bookkeeping forms the foundation upon which accounting builds.

Accounting, in turn, involves more strategic, high-level processing of this data into actionable business insights. Both functions are intertwined, with the outcomes of each impacting the other. Although they are different, both are vital to a business.

Whether to hire a bookkeeper or an accountant will depend mainly on the size and complexity of your business and its transactions. Understanding bookkeeping and accounting is essential for overall financial health and strategic planning.

To read more on the difference between bookkeeping and accounting, look at the bookkeeping and accounting basics section.