Bookkeeping vs Accounting

“OK, what’s the difference between bookkeeping and accounting?”

It might seem like bookkeeping covers all of the finances of your small business, but there’s a lot of other information that bookkeeping simply does not provide. Bookkeeping is really only a slice of the accounting pie, and a healthy business needs more than one slice of pie.

Accounting Basics

Accounting, at the most basic level, is the system of recording and summarizing business finances. Now that might sound really familiar if you read our last blog, but stay with me! It’s more than just recording the transaction like we do when bookkeeping, accounting also means verifying, analyzing, and reporting these transactions. Accounting also includes the theory and method by which you do all of the above.

Bookkeeping is one of the systems that makes up accounting. So you need bookkeeping to do accounting for any business, but successful bookkeeping does not require in-depth knowledge about accounting.

Having a basic understanding of some of the core concepts behind accounting will certainly help you be a better bookkeeper, so let’s get to it!

Adding Method to the Madness

If bookkeeping is a system of recording, what exactly do we mean when we say “a method” of accounting? There are just two methods of accounting:

• Cash-Basis Method: In this method, a business records expenses and income (usually in the form of payments for service) at the time they are paid or received. This is a fairly straightforward and easy way to start your foray into accounting for your small business, and is especially good for new businesses, because it’s based on transaction as they occur, leaving less “guess work” in the decisions.

• Accrual-Basis Method: In this method, a business records expenses and income when they are incurred or earned. This method requires more discretion on the decision-making end, as you can have income recorded, because you did that set of  work, that you haven’t actually received from your customer/client. This also means that you may be recording expenses before they have actually been paid.

If that seems confusing, remember that cash-basis is recorded when you get or give “cash” (although it may be a check, or a transfer), accrual-basis is recorded when you do the work or obtain a product, regardless of when you pay for it.

Here is an extra example to help you sink your teeth into the idea of accrual-basis: you receive a bill from a vendor on a Monday, so your bookkeeper enters the transaction into your system on Monday. Your boss only writes checks once a week though, so that bill doesn’t get paid until Thursday. You’ve recorded the expense as soon as it is presented, not when you actually give the payment.

Accounting Terms

Now let’s go over the basic concepts that inform and define accounting!

• Asset: Any item with a value that can be quantified, especially one that can be exchanged for cash. Examples of this would be equipment, automobiles, inventory, property, actual cash, and your accounts receivable.

• Liability: A legal obligation or responsibility to pay a debt. Examples of this would be taxes, wages, or expenses.

• Equity: The relationship between the worth of your business and your liabilities.

Equity = Assets - Liabilities

• Account: A separate record for a specific asset or liability.

• Chart of Accounts: A complete organization and listing of every account in a given system of accounting. These are frequently unique to a business, but will have many similar accounts across all businesses.

Small Business Accounting

Every company is unique. While it may sound cliche, it just happens to be true. Whether it is due to personal preference or the way that a business has been structured, each business requires its own setup and attention to detail. Despite this, there are common responsibilities across these differences that small businesses need.

Here are some extremely common needs that you may hire an accountant or service for!

Payroll

As a business owner, wages are one your liabilities and you are required to pay your employees. There are actually businesses that specialize in only payroll accounting, and it can be extremely beneficial for your small business to have someone dedicating time to this responsibility. Payroll Accounting is the recording of employee compensations (often in the form of wages, salaries, or commission) as well as state and federal tax withholding.

Taxes

You probably think about taxes and paying them more than you like, and we understand that it can be overwhelming.

One of the most well-known forms of accounting is that of tax accounting. The United States has specific regulations and methods for reporting income and these are detailed in the Internal Revenue Code which is frequently referred to as “tax code.” Since the laws are nuanced and change frequently, tax accounting comprises a large amount of accounting-specific business and is highly recognizable as a practice of accounting.

Tax accounting is very important to both businesses and individuals, and since it can be complicated, hiring a professional is highly recommended. A professional accountant that specializes in taxes can provide large amounts of value to a small business owner in the form of more tax deductions as well as knowledge related to planning and saving for estimated tax payments.

Auditing

Some people may think of an auditor and an accountant being the same, and you may have heard the terms used interchangeably. At its core, auditing involves the review of financial records just like the work of an accountant may, but an auditor (who will have a  similar educational background and skill set as that of an accountant) is really reviewing the work of company accountant, and not the direct financial transactions of the business. Unlike an accountant, an auditor is always hired from an external source, and isn’t on the company’s regular payroll.

Can your bookkeeper and accountant be the same person?

Yes, this is very common practice! A large business may need more energy put into various accounting practices than one person can take care of, but a small business can definitely have one person fulfilling these responsibilities. Just because one person can take care of these responsibilities doesn’t mean that will be the best option for your small business. It may not be practical for your small business to have a dedicated accountant, so you may choose to hire a service to take care of your payroll or taxes if you have decided that your time is spent better elsewhere, but your business will always need someone to take care of your bookkeeping.

Bookkeeping is an essential practice that creates needed records for an accountant to use. In this sense, bookkeeping is a required practice that allows you to pay your taxes or do payroll, without it, you wouldn’t have information to carry out these activities.

Bookkeeping is truly a pillar of accounting, one of the pieces that allows you to build the full picture of the financial health and proceedings of your small business.

Why accounting matters to your small business

We discussed some of the major responsibilities that an accountant has to their business above, so now lets go over why having someone with this specialized knowledge is valuable to you as a small business owner.

In brief, an accountant helps you make better informed decisions about your business. Not only are they educated in depth on the many accounting processes and theories, they can help you make sense of the massive amount of data that can be obtained from the financial records of your business. There are a lot of financial reports that an accountant can prepare and discuss with you that help illustrate parts of your business.

Some of the most commonly used and extremely useful reports include things like a balance sheet, a profit and loss statement, income statements, and statements of cash flow. There are a lot of other incredibly useful things that can be provided, so we’re going to give you a concrete examples that can be applied to a lot of business:

If your business sells services or products across a range of locations or consumer types, an accountant can help you break down your profitability by service and location, or the profitability of a specific service type by the classification of consumer that purchases it.

Alright, great, but what does that really mean to you as a business owner? An accountant can help you grow your business by providing details and analysis of your financial records. This insight into your business records can help you increase your profitability based on how you market your services. It can also show you where you are the most profitable, allowing you to focus on increasing these revenue sources; likewise, you may be able to take a relatively unprofitable part of your business and make it better.

An accountant can also help you with the financial planning of your business. They can help you evaluate the current and future financial state of your business, in turn allowing you to set goals for your business as well as create plans to deal with potential future problems. This includes things like cash-flow analysis, which allows you to plan for the repayments of debt, contributions to savings and/or retirement planning. It also includes risk-management analysis, which allows you to plan and provide necessary coverage to protect your business assets, liability coverage, and possible types of insurance coverages. Long term planning can cover strategic asset allocation or investment decisions. They can also help you with tax-reduction plans or strategies to minimize taxes paid on types of investments as well as changing business decisions or methods to ones that can maximize legal tax deductions and breaks.

There are so many possible ways that an accountant can help your small business be more efficient and better tailored to your customers!

We hope to see you soon!

We’ve been giving you a lot of information in the last few weeks, and next week, we’re looking forward to tieing it up with a bow by covering the best bookkeeping software available to your small business. We’ll look at low and no-cost options, as well as the more robust options that are currently available to you on the market! As always, we look forward to helping you in your financial discoveries, and can’t wait to hear from about what really works best in your given situation!