The Differences Between Bookkeeping and Accounting (and Why You Need Both)

Author: Katherine Pendrill - Knit |

Both bookkeeping and accounting are essential to the success of any small business. However, if you ask most business owners how the processions differ, they’re probably a bit fuzzy on the details.

While both roles share common goals, there are a number of important differences between bookkeeping and accounting. As a small business owner, it's important to understand how each role supports your business at different stages of the financial cycle and why you need both in order to have a complete picture of your business finances.

To help you better understand the key differences between bookkeeping and accounting, we’ve broken down exactly what bookkeepers and accountants do and how they work hand-in-hand. We’ve also outlined why small business owners need both an accountant and bookkeeper on their team in order to take their business to the next level.

The Function of Bookkeeping

To keep things simple, the best way to understand bookkeeping is to think of a bookkeeper as a professional who manages and records all of your business’ financial transactions. Still with us? By keeping track of this information data, bookkeepers ensure that your financial records are not simply organized and complete, but also accurate. Bookkeepers essentially have a bird’s-eye view of your finances because they oversee everything.

At this point, bookkeeping probably sounds pretty straightforward. However, there’s a lot that goes into bookkeeping on a daily basis. Some of the general responsibilities of a bookkeeper include:

  • Consistent recording, storing, and retrieving of daily financial transactions
  • Posting debits and credits
  • Producing invoices
  • Maintaining and balancing subsidiaries, general ledgers, and historical accounts
  • Completing payroll

Of these everyday bookkeeping tasks, perhaps the most important is maintaining the general ledger. A general ledger is a document that bookkeepers use to record the amounts from sale and expense receipts. The general ledger is important because it is a master accounting document that shows a complete record of all the financial transactions of your business. Most importantly, it reveals a snapshot of your business finances by outlining your assets, liabilities, revenues, expenses, gains, and losses.

The Function of Accounting

While bookkeeping is the systematic process of recording financial data, accounting is a far more subjective process. Understood in the most basic terms, accounting is a high-level process that takes financial information and produces detailed financial models based on that data. In other words, accountants take the information from a bookkeeper’s general ledger and use it to reveal the bigger financial picture.

Working with the information provided by bookkeepers, accountants generally carry out the following responsibilities:

  • Preparing adjusting entries
  • Preparing a company’s financial statements, including the balance sheet, income statement, and cash flow statement
  • Analyzing costs of operations
  • Completing income tax returns
  • Advising business owners on the impact of financial decisions

These tasks allow accountants to help business owners understand their profitability and cash flow, strategic tax planning, and forecasting the financial future of the business. Armed with this information, business owners can make informed financial decisions.

Why You Need Both

At the end of the day, bookkeepers are primarily responsible for identifying, measuring, and recording financial transactions, while accountants are focused on summarizing, interpreting, and communicating financial data.

While it’s obvious that there are a number of key differences between accounting and bookkeeping, both roles are highly interconnected. Without the meticulous records kept by bookkeepers, accountants could not produce their analytical evaluations and interpretations. Similarly, bookkeepers depend on the accountants to provide them with a clear idea of what information must be logged and the proper structure for keeping records. In short, bookkeeping and accounting go hand-in-hand—you can’t have one without the other.

To take control of your small business finances, contact Centrosome Inc. for a firm that can handle both your bookkeeping and accounting needs.

Written by Katherine Pendrill. Katherine is the Content Marketing Specialist for Knit—a cloud payroll software for Canadian accountants and bookkeepers.