As a new business owner, you may hear the terms bookkeeping and accounting used interchangeably. While both bookkeepers and accountants work with financial data and help business owners manage their finances, they have complementary but different responsibilities. This blog post will distinguish between the functions of each and their respective roles in a business.
A bookkeeper completes the clerical side of accounting functions, recording transactions and maintaining accurate records. Bookkeepers record, or “post,” the sales, expenses, cash, and bank transactions of the business. This enables a business owner to easily understand how much money is entering and leaving the business.
The complexity of the bookkeeping process depends on the size of the business and the number of transactions conducted daily, weekly, and monthly. However, the following are common bookkeeping tasks:
- Recording income and expenses
- Managing payroll
- Creating invoices and making payments
- Comparing the balances in a business’ books against bank transactions and reconciling any discrepancies
- Tracking accounts payable (money owed by the business) and accounts receivable (money owed to the business)
- Maintaining the general ledger, the master accounting document containing all of the business’ financial transactions
Most businesses use the double-entry bookkeeping system, in which every debit to an account requires a corresponding and opposite credit to another.
An accountant uses the data recorded in the business’ ledgers to interpret, analyze, and report on the financial health of the business. Accountants offer detailed insights that inform business decision-making, including:
- Preparing big-picture financial statements to assess the financial health of the business, such as balance sheets and income and cash flow statements
- Analyzing journals and ledger entries and making any necessary adjustments
- Providing tax advice and completing and filing tax returns
- Offering financial advice and insight regarding the consequences of financial decisions
How a small business handles bookkeeping and accounting can vary depending on the size of the business and the owner’s areas of expertise. At a minimum, a business owner must keep records of expenses and sales and, if the business has employees, manage payroll. You may decide to handle those functions yourself initially and just retain an accountant or CPA as an advisor.
Very simple bookkeeping and accounting may be done manually. There are also a variety of accounting software packages available for business owners who are inclined to do their own. QuickBooks is the most popular brand and has the largest market share. It is used by most bookkeeping services and can be used to generate financial reports.
As your business grows, you may decide to hire someone to join your company or you may hire a third party to provide bookkeeping, accounting, and/or tax advisory services.
For more information about bookkeeping and accounting, as well as other aspects of business operations for new startups, visit our BizVids Tutorials or register for a NaperLaunch Academy workshop. NaperLaunch coaches and SCORE mentors are also available to provide one-on-one virtual assistance.