The Difference Between Bookkeeping & Accounting for Small Businesses
Updated: Mar 16
Are you new to the world of owning a business and have little experience managing finances? Does the word accounting make your blood pressure go up? Don't worry. Many new entrepreneurs are in the same boat. Making a mistake doing your own accounting could end up being more costly than if you hired an expert in the first place.
Common challenges without an experienced accountant include:
Knowing when to make new investments in equipment or hire new employees, limiting your ability to grow profitably
Understanding your true profit margins and where to focus your efforts
Erroneously understating your profit may lead to potential IRS audits
Erroneously overstating your profit leads to overpayment of IRS taxes!
Accurately predict your cash flow which can result in crisis moments for a new business owner (how am I going to make payroll this month?!)
Ultimately, it is important to remember that DIY-ing your bookkeeping could result in mismanagement and mistakes that could hurt your small business. It’s important to know the difference between bookkeeping and accounting and how hiring an accounting professional can help you.
Bookkeeping focuses on recording and tracking all of the detailed daily transactions of your business. Day-to-day small business bookkeeping tasks include filing and categorizing daily transactions, sending bills to customers, tracking received payments, recording invoices from vendors, making disbursements from the checking account, monthly bank reconciliations, financial statement preparation, balancing books, ledgers, and accounts, producing financial documents, and providing needed records to your tax preparer or CPA.
Bookkeepers record all of the company’s transactions in the general ledger, usually using some type of small business accounting software. The detailed information in the General Ledger is then compiled into the financial statements where an owner can see summary totals for revenue, expenses, assets, liabilities, equity and cash flow.
To use an analogy, a bookkeeper is like a scorekeeper. They record all of the baskets (or touchdowns/field goals) and keep a running tally of the score. However, when the game is over they can only tell you the final score and who won, but they cannot tell you who on the team performed well, where your team needs to improve, and what to focus on for the next game.
Accounting incorporates all of the activities of bookkeeping but it doesn’t stop there. Accountants also perform more analytical, advisory, and strategic roles for businesses. Tasks for accountants include analyzing operations costs, reviewing gross margin %, financial statement analysis, financial health assessment, cash flow forecasting, tax strategy and planning, tax preparation and filing, budgeting and planning, and advising owners in areas such as acquiring another business, opening a new location and optimizing their financial performance.
Accountants advise small business owners based on the financial insights they gather and analyze. Optimizing financial performance is crucial for better understanding the health of your business, helping you make adjustments, and viewing the business from an expert's perspective.
Continuing the analogy from above, an accountant is like the team statistician. They are recording who took the shots, where on the court the shots were taken, which shots were made vs. missed, assists, steals, blocked shots, etc. After the game they take that data and develop a summary that provides not only the final score but also the analysis to help the coach understand what led to the results that they can use to better prepare the team for the next game. They work closely with the head coach (the entrepreneur) to develop a strategy and game plan.
Accountants vs. Bookkeepers: The Key Differences
There is some overlap between the duties of an accountant and a bookkeeper. Whereas, the bookkeeper's role is mainly administrative and focused on recording historical transactions, accountants will utilize the historical transactions to analyze the business performance and provide advice and suggestions to help the business increase revenues and profits. Generally, accountants and accounting firms are doing the work of the bookkeeper as well as providing additional analysis and insights. Bookkeepers do not have the training or experience to perform the work of an accountant.
Every entrepreneur who is looking to grow their business and increase profitability should employ an accountant or accounting firm to fuel the growth of their franchise or small business. Bringing accuracy and insights to a company’s finances empowers small business owners to make better business decisions.
Working With Ceterus
At Ceterus, we deliver tech-enabled accounting solutions, tax preparation and filing, and clear financial insights so that you can focus on your role as a franchise or small business owner, knowing your books are in good hands. Pairing top-of-the-line technology with a team of highly experienced accountants with industry expertise means we can handle all of your accounting and tax needs.
Our consistently accurate financial insights delivered on time are a critical ingredient for your success and will help you gain peace of mind. Start reducing your workload by talking to an expert at Ceterus today.