Your gut reaction might assume that bookkeeping and accounting are the same things. While they’re related, a bookkeeper and an accountant perform distinct jobs in an organization. A bookkeeper essentially keeps track of a firm’s financial transactions. This includes invoices the company pays out in addition to the payments and revenues a firm receives.
An accountant, on the other hand, takes on a more analytical role. Accountants look at financial statements, such as a statement of cash flows. It’s the accountant’s job to review them for accuracy and analyze them. They look at the overall fiscal health of a company’s operations and make recommendations to business owners or decision-makers.
Below are more details that help answer the question of what is the difference between bookkeeping and accounting.
What Is the Difference Between Bookkeeping and Accounting?
Bookkeeping is the process of organizing all of an organization’s financial transactions and documenting them. A bookkeeper prepares financial statements and reports based on a company’s revenues and expenses. Bookkeeping forms the foundation of accounting, but an accountant has a higher level of analytical responsibilities.
What Is Bookkeeping?
Bookkeeping is the process of maintaining and organizing a company’s general ledger. The main difference between bookkeeping vs. accounting is that bookkeepers essentially create the books. They take things like invoices and payroll taxes and document them, usually in a spreadsheet or software application.
Bookkeepers must record all financial transactions in an organized and linear fashion. They’ll document revenues and expenses as they occur. Bookkeepers will note the dates the payments went out or the company received the income. Accuracy is critical, as bookkeepers record each day’s transactions.
Why Is Bookkeeping Important?
Bookkeeping is critical to an organization because business owners and leaders rely on the financial information bookkeepers prepare. The information bookkeepers put together is what produces a firm’s financial statements. Accountants use these statements to analyze how well the company is doing from a monetary perspective.
If the information that creates those financial statements is incorrect in any way, it will impact the conclusions an accountant makes. An accountant’s recommendations to leadership will then be off base and could cause decision-makers to make a wrong move.
For instance, if a company’s balance sheet indicates it is more liquid than it actually is, leadership might decide to expand or reinvest in the business when it would be better to maintain the status quo. Shareholders of publicly traded companies also rely on the integrity of financial statements to make investment decisions. Incorrect financial statements could cause a firm’s stock to become overvalued and put shareholder’s investments at risk.
What Credentials Does a Bookkeeper Need?
Necessary credentials are tied to what bookkeepers do. Although they do not have to get any certifications or licenses, quite a few do. Bookkeepers also do not necessarily have to complete a formal degree program. However, some go to trade school or complete bookkeeping courses.
For aspiring and current bookkeepers, professional licensure is possible. The National Association of Certified Public Bookkeepers and the American Institute of Professional Bookkeepers both grant professional bookkeeping licenses. This can help distinguish a bookkeeper from others when seeking employment. Some employers may prefer to hire and retain bookkeepers with professional credentials.
Certifications and licensures require a certain amount of work experience in the profession, such as two years. Bookkeepers also have to pass exams and complete continuing education courses. Certification through the National Association of Certified Public Bookkeepers can expand into specialties like payroll.
What Is Accounting?
Accounting involves analyzing the firm’s financial transaction through statements such as the balance sheet, statement of cash flows, income statement, and statement of shareholders’ equity. These statements usually summarize a company’s financial position for a designated period. For example, a set of statements might cover a quarter or an entire fiscal year.
An accountant interprets the information in the financial statements and presents it in a way that makes sense for all stakeholders. An organization’s stakeholders can include employees, investors, financial analysts, and community members. Accountants help shape management’s analysis of the firm’s financial position and the factors that led to growth or might pose a threat.
Why Is Accounting Important?
Accounting is important because the analysis and interpretation of financial statements guide decision-makers. A firm’s management depends on an accountant’s analysis and financial projections to make strategic decisions. From the statements and analysis, an organization’s leadership can understand the company’s financial performance.
What Credentials Does an Accountant Need?
Can a bookkeeper call themselves an accountant? Not unless that bookkeeper also has a bachelor’s degree in accounting and a certified public accountant (CPA) credential. After they complete their four-year degree, a person also has to pass the CPA exam.
The exam process and requirements can vary between states, but there is typically a Uniform CPA exam in each. Different states may also have additional accreditation and professional licensure requirements, including continuing education. The CPA exam and continuing education stipulations are more advanced than those for bookkeeping.
To help answer the question of what is the difference between bookkeeping and accounting, it helps to look at the main tasks each accomplishes. A bookkeeper will often perform the following:
- Send out invoices to clients and record when payments come in.
- Perform bank statement reconciliations.
- Document and categorize day-to-day transactions.
- Prepare financial statements each month.
- Process payroll.
- Organize and provide yearly tax and financial documentation.
- Prepare the firm’s general ledger.
In comparison, an accountant usually completes the following tasks:
- Makes adjusting entries.
- Audits financial information.
- Analyzes financial statements and operational costs.
- Prepares financial projections.
- Provides financial advice.
- Handles tax returns and planning.
Many businesses have to decide whether to find an accountant, hire a bookkeeper, or do both. Knowing the differences between each role can help owners decide whether they need both. Typically, larger organizations employ both bookkeepers and accountants. Smaller firms might keep a bookkeeper on staff and consult a CPA for more advanced analysis, including tax preparation.
To learn more, visit our Canadian account and bookkeeping resources page.