Something I get asked a lot, especially by first time business owners, is what is the difference between a bookkeeper and an accountant? And I understand their confusion. As far as they are concerned, they have money coming in from their business operations and money going out as they pay their expenses, and they need somebody to help them to control what comes in and what goes out.
I start by informing them that the person who controls what money comes in and what money goes out of a business is the person who is making the decisions at the business, the business owner most of the time. Neither a bookkeeper nor an accountant have the kind of power in a business to control the flow of cash in and out of a business. That dynamic is a direct result of the decisions made by management.
But then I tell them that the good news is, if they understand that they are responsible for the cash flow of their business, they should be able to understand the importance of bookkeeping and accounting for their business, and they should also be able to understand the principal differences between the two.
In the most simple of terms, bookkeeping is responsible for recording all the financial transactions of a business whereas accounting is the interpretation, classification, analysis and presentation of the business’s financial data (that same data that has been recorded by the bookkeeper). Yes, both accounting and bookkeeping deal with financial data and require basic accounting knowledge, but the accountant effectively goes one step further than a bookkeeper (I can hear my fellow CPAs screaming at me right now, but please bear with me) and it’s important to understand this if you are in doubt as to whether to hire a bookkeeper or an accountant for your business.
A bookkeeper will help your business to identify, measure and record all the financial transactions for your business. This, we all agree, is essential for any business to function effectively and if you are not actively recording every penny that goes in or out of your business, I suggest that you start right now.
An accountant will organize, summarise, interpret and then, most importantly, communicate these financial transactions to the management team in a way that allows them to make decisions.
The objective of bookkeeping is to keep the records of all financial transactions of a business. The objective of accounting is to evaluate the financial situation of a business and then communicate that information to management so that management can make the best possible decisions for the business.
Sure, there are other differences between the services provided by a bookkeeper and an accountant. Financial statements are not prepared as a part of the bookkeeping process. And if you need financial statements for you business you will need to hire an accountant. Also, if you need to prepare your company’s budgets or you need someone to help you to plan loan proposals, for example, you will need to hire an accountant. Finally, an accountant is fundamental to help you meet your taxation requirements.
Essentially I tell people that the first thing you need to do for your business is get you books in order. You need to be recording every single financial transaction that happens in your business, and you probably need a bookkeeper to help you to do that. Once you have your books under control (or maybe even if you need to get your books under control) and you are starting to make strategic decisions for your business based on your financial situation, you really need to get yourself a good accountant.