Ask most people about the difference between accounting and bookkeeping and they would probably ask right back, “There’s a difference?” In fact, there is. A bookkeeper and an accountant do share some goals, but they still support a business in different ways.
Since most people aren’t entirely certain of the difference between accounting and bookkeeping, they also wouldn’t know that both are needed for the financial health of literally any business (nonprofits, too). In short, the role of bookkeeping is to record financial transactions; the role of accounting is to analyze, interpret, classify, summarize, and report financial data.
The biggest difference between accounting and bookkeeping is the analysis and interpretation of data, which is something accounting does that bookkeeping does not do. For a more in-depth look, keep reading.
Bookkeepers make a chronological and consistent daily record of financial transactions. Bookkeeping is comprised of:
- Recording financial transactions
- Posting credits and debits
- Creating invoices
- Maintaining and balancing historical accounts, subsidiaries, and general ledgers
- Completing payroll
Special software can automate many processes, so some people who do the bookkeeping for small organizations are able to also classify and summarize the data in financial reports. Such bookkeepers are often called “full-charge bookkeepers.”
Maintaining a general ledger is a major part of bookkeeping. The general ledger is a basic document in which a bookkeeper records amounts from sale and expense receipts (also known as “posting”). Ledgers can be set up with special software, a standard computer spreadsheet, or just a lined sheet of paper. The complexity of any bookkeeping system typically depends on how big a business or nonprofit is and how many transactions are completed daily, weekly, and monthly. All sales and purchases made need to be recorded, and certain items need supporting documents. The IRS lays out which business transactions require supporting documents on their website.
As noted above, the accounting process involves the recording, interpretation, classification, analysis, reporting, and summarization of financial data. Bookkeepers are responsible for the recording part, which is the beginning and the foundation of the entire accounting process; accountants handle all parts of the process. Accounting is more subjective than bookkeeping, which is largely transactional. Accounting involves:
- Preparation of adjusting entries (the recording of expenses that occurred but aren’t yet recorded by bookkeeping)
- Preparation of financial statements
- Analysis of costs of operations
- Completion of income tax returns
- Helping others understand the impact of financial decisions
The process of accounting creates reports that bring important financial information to the fore. This leads to a better understanding of actual profitability and an awareness of cash flow. Accounting converts ledger information into statements that show the bigger financial picture as well as the road the company is on. Businesses and nonprofits will often look to accountants for help with financial forecasts, tax plans, and tax filing.
To an untrained eye, bookkeeping and accounting can look like the same profession. Bookkeepers and accountants both:
- work with financial data
- must have basic accounting knowledge
Sometimes, an accountant will also record financial transactions, which covers the bookkeeping part of the accounting process.
Particularly with the advent of modern accounting and bookkeeping software, bookkeepers in smaller companies and nonprofits might take over more of the accounting process than just recording transactions; they can also classify and generate reports using the data gleaned from the transactions. It’s important to keep in mind that they may not have the education necessary to handle the tasks on their own, but it’s still possible because most accounting software will automate reports and memorize transactions. It makes transaction classification easier for bookkeepers and helps to blur the traditional lines between the two.
Taking courses and acquiring a basic understanding of accounting will qualify someone to be a bookkeeper. A good bookkeeper will have from two to four years of experience or an associate’s degree, be knowledgeable about key financial topics, and be a stickler for accuracy. To be an accountant, someone must have at least a bachelor’s degree in accounting; to gain greater expertise, an accountant can go further and acquire other professional certifications, such as becoming a certified public accountant (CPA).
Accountants are qualified to carry out the entire accounting process, while bookkeepers are qualified to carry out the recording of financial transactions. Bookkeepers record and classify financial transactions, laying the groundwork for accountants to analyze the financial data. To ensure accuracy, accountants will often serve as advisors and review the work bookkeepers do.
How it Comes Together
The bookkeeper organizes financial records and balances finances. Combined with the accountant’s financial strategy and proper tax filing, both contribute important information that can be used to directly impact the long-term success of a business or nonprofit.
Some businesses and nonprofits may learn to manage their finances independently, while others choose to go the professional route so they can focus on doing what they love. Whichever option you choose, investing—be it time or money—in your financials will only help your business or nonprofit grow.