On average, the small business owner can spend more than 100 hours annually on bookkeeping and accounting. Yet, 60 percent of owners feel they don’t have adequate financial knowledge or experience to handle these tasks on their own, according to Wasp Barcode Technologies' "Small Business Accounting Report." Some may not fully understand the nuances between bookkeeping and accounting, instead lumping them together under a broad umbrella of financial planning. While the terms are often used interchangeably, bookkeeping and accounting are not the same, but each plays a vital role in the success of your business.
Here, we’ll dig into the differences between bookkeeping and accounting, and how, when used together, this dynamic duo can supercharge your business and put it on the path to success.
Bookkeeping vs. Accounting
This is not an either/or situation; bookkeeping and accounting are both integral to your business operations, and each work to boost your bottom line today and set you up for success tomorrow. While “accounting” is often used as an umbrella term that includes bookkeeping tasks, it is important to clearly define each to fully understand how they support your business’s growth.
Bookkeeping: The focus of bookkeeping is on keeping detailed financial records of every transaction your business makes. This includes income and expenses, as well as accounts receivable and accounts payable. It may also include payroll management if you have employees, invoicing and billing tasks.
Accounting: If the goal of bookkeeping is to collect financial data for your business, the goal of accounting is to analyze it. An accountant will compile financial statements, dive deep into your business’s financial health and provide insight and guidance on tax filing and critical financial decisions.
While both bookkeeping and accounting are necessary and important functions of your business on their own, integrating them and leveraging the benefits of each will maximize the impact on your overall financial health.
Bookkeeping: The First Step in Your Business Financials
Keeping the books is a requirement for business owners, and it’s one that’s doable on your own, if you choose. Most small businesses decide not to hire a bookkeeper, instead managing record-keeping themselves, often through the use of a software program like QuickBooks. Here are some of the key considerations you’ll need to make when setting up your bookkeeping practices:
- Posting Transactions: Your ledger will be your business’s single source of truth when it comes to its current finances. Ledgers today are mostly digital, and while you can certainly create a manual spreadsheet for all the categories you’ll need to track like cash, inventory and payroll, you can also find a software program that makes record entry simple and efficient. Remember, your accountant or tax adviser will need access to your ledger when putting together financial reports and tax returns, so make sure all information is accurate and consistently updated.
- Bookkeeping Methodology: There are two primary ways to manage your books: single-entry and double-entry. Most businesses choose double-entry, which is a lot like balancing a checkbook. Whenever there’s a credit to one account, you must make a debit in another. Double-entry bookkeeping promotes accuracy and efficiency and helps you see the growth and financial health of your business at a glance.
- Handling Problems: Even the best bookkeepers can make mistakes, so as a business owner with no formal training or education in accounting, it stands to reason that you might find some errors slipping through. In this case, it’s important that you set yourself up for bookkeeping success by planning ahead for issues and being proactive rather than reactive. Finding the right software, creating dedicated bookkeeping time and scheduling frequent reviews are all key elements of DIY bookkeeping.
Accounting: The Next Level
Bookkeeping builds the financial foundation of your business, and accounting gives you the blueprint for the future. Most of the time, accounting is not something you want to manage without professional help, unless, of course, you happen to be a CPA or otherwise licensed to practice accounting. Hiring an accountant can be an overwhelming prospect, but the security and stability they provide (when you find the right one) makes it immeasurably valuable. Accountants can forecast your business’s growth based on its current finances. They can prepare financial statements and ensure you receive maximum tax benefits. Here are some of the top accounting considerations for your business:
- Who to Hire: Not all accountants are CPAs, so you’ll need to understand the differences before deciding what’s right for your business. Choosing an accountant or CPA is a hefty decision, as your business’s long-term financial health will be heavily influenced by the candidate you select. Consider your industry when finding an accountant, and look for someone who knows the ins and outs of your field and can help maximize your growth accordingly.
- Accounting Methodology: Just like bookkeeping, accounting also falls into two primary methods: cash accounting and accrual accounting. Cash accounting is the simplest form of accounting, tracking only the money that flows in and out of your business as it happens. Accrual accounting is more complex, but it also offers a more comprehensive picture of your business’s financial health, allowing you to make intelligent decisions to help the business grow. Cash accounting is better for businesses that don’t need to manage inventory or recurring services, while accrual accounting is better for those that do.
- Tax Impact: Taxes are a consideration year-round, not just during tax season. A trained accountant will be able to help you estimate and pay quarterly self-employment taxes, manage forms like 1099s for contractors and ensure your legal business status is getting you maximum tax benefits. Filing personal income taxes on your own might be a snap, but business taxes typically require the guidance of a trained professional to ensure you’re meeting requirements and reduce the chances of an audit.
How Do I Know What’s Right for My Business’s Finances?
Every business is unique, and depending on your industry, the size of your business and volume of transactions, your bookkeeping and accounting needs will vary. Bookkeeping is a must at any level of business ownership, and as long as the workload is manageable, you can likely handle it yourself. Accounting is a different beast, and hiring a qualified professional usually offers the best ROI. Here are some questions to ask when considering your bookkeeping and accounting needs:
What are the advantages of using an automated accounting system vs. traditional bookkeeping?
An automated system will take a lot of work off your plate, which is a relief to any small business owner. By eliminating manual tasks, especially when it comes to invoicing, billing and payroll, you’ll save time and ensure your records are accurate and tasks are completed in a timely manner. Choosing the right accounting software is critical in maintaining your business’s financial health.
What bookkeeping and accounting issues can be avoided, and how?
As mentioned above, errors are a part of life, but they don’t have to derail your financial growth. Common bookkeeping and accounting mistakes are actually pretty easily avoided, with a few proactive and preventative measures. Get started on the right foot by separating your business and personal finances, keep records of every transaction, no matter how small, and find a software that fits your needs and integrates seamlessly with your business.
I can’t do it all on my own. Where can I turn for help?
When your business is still small, it’s easy to want to take on as much of the administrative tasks yourself with the hope of saving dollars you can direct back into the business. But if your goal is achieving business growth, you’ll need to spend money to make money. However, the investment you put into accurate, reliable bookkeeping and accounting services will come back to you, as you see your business’s financial wellness climb. And really, when it comes to something as important as the financial success of your business, no one should have to go it alone. At Incfile, we offer bookkeeping, accounting and tax services at a reasonable price, designed for small business owners just like you. Our free tax consultation is a great place to get started,
Want to learn more about accounting, bookkeeping and tax services from Incfile? Schedule your risk-free tax consultation, and check out the packages we offer to help your business grow and thrive.