The Business Owner’s Guide To Bookkeeping Vs. Accounting
Businesses specialize in their area of expertise which often doesn’t include finance, and they are confused about the difference between bookkeeping and accounting.
If this sounds like you, you’re not alone. And you’ve come to the right place.
While both disciplines manage finances and help manage your bank statements and receipts, the two are not created equal. Knowing the difference between the two is essential to understand better what your business needs and where it stands financially are crucial.
Succinctly described, bookkeeping is the process of recording your company’s financial transactions into organized accounts daily. While accounting keeps you organized, determines your profitability, helps you save time and money, and guides the plans for the future of your business.
With proper accounting, you have the insights you need from the information derived from your bookkeeping efforts to understand the financial health of your business. Devine Consulting’s straightforward guide will explain the differences between the two functions.
Let’s start with defining each service:
What is Bookkeeping?
Bookkeeping is the practice of recording the financial transactions of your business. Through bookkeeping, you gather the needed financial information to run your business successfully. Accurate bookkeeping requires that you regularly:
- Record financial transactions
- Produce invoices
- Pay Bills
- Prepare Monthly Reports
- Post Sales Receipts
- Create Purchase Orders
- Process payroll
- Bank Reconciliations
- Credit Card Reconciliations
What is Accounting?
Accounting uses financial data from your bookkeeping to produce economic models for your business. Accounting tasks include:
- Producing Relevant Financial Statements
- Analyzing Financial Statements for variances
- Accruing for expenses that have occurred but not been recorded
- Adjusting for prepayments
- Analyzing and reconciling all Balance Sheet Accounts
- Analyzing operating costs
A significant part of accounting is using financial reports to make business decisions and understand your business’s profitability and cash flow.
We use this information in financial planning and forecasting.
Now that we know what they are, let’s discuss why each is important.
Why Is Proper Bookkeeping Important?
- Timely account reporting lets you know if you are profitable sooner rather than later when it might be too late.
- Organizing company financial documentation to be prepared for financing and tax filing.
- A better understanding of your business financials and where you stand.
- Preparation for planning for the future of your business.
- Recording Transactions in Real-Time
- Reconciling Cash Accounts in Real-Time
- Paying bills on time
- Receiving payment from customers on time
- Paying employees on time
Common financial documents needed for your business
- The balance sheet: This sheet explains how much your business is worth. The balance sheet will show your business’s assets, liabilities, and equity. It breaks down what you owe in comparison to what you own.
- The profit and loss statement: This statement shows if your business is profitable. The profit and loss statement summarizes your revenue less expenses for a given period, usually by quarter.
- The cash flow statement: This statement shows where cash is going. The cash flow statement places your business cash flow into three categories of activities:
- Operating: How much does your business earn from one day to the next?
- Investing: How are the assets purchased for the business paying off?
- Financing: How much cash have you invested into your business, including how much you’ve borrowed.
How Should I Manage My Company’s Accounting & Bookkeeping?
Managing your company’s accounting and bookkeeping requires consistent attention and a detailed eye.
To manage your accounting, let’s start by getting familiar with and earning a basic understanding of a few accounting terms:
- A sale is a business transaction for which you receive cash.
- An expense is one of the things that you pay for, like your office supplies or location rental.
- A liability is an item you owe money for, like a small business loan.
- An asset is an item your business owns, like a scanner or computer equipment, if it is not rented.
- Revenue is the income your company brings in on a sale.
- Accounts receivable is the money customers owe to your company when they have been invoiced.
- Accounts payable is the money a company owes its vendors.
Now let’s review some of the basic steps involved with bookkeeping and accounting.
- Tracking income and every business expense. This is where it’s essential to keep your business and personal finances separate. Keep company receipts. We recommend using your business checking or debit card to help you track expenses automatically. When it comes to cash, failing to keep track of cash flow can hinder business growth and your ability to reduce costs due to inaccurate records.
- Consistent bookkeeping. Keeping up with recording all transactions made by your business in real time will help you understand where your cash is going. It will also help to ensure that you do not overdraft your bank account causing unnecessary money to be spent. We recommend getting the appropriate software to help you keep track of this in real time.
- Choosing the appropriate accounting method for your business. There are two accounting methods that most companies use – cash basis and accrual. The cash basis method is the easiest; you just record income when cash is received and record expenses when a bill is paid.
- Under the cash basis method, if Corinne sells a laptop on Monday, the payment isn’t due for another thirty days. When that payment is collected, she will record the sale. When Corinne purchases office supplies, the invoice must be paid in thirty days. When she makes that payment, she will record the expense.
- Under accrual accounting, the revenue is paired with the expenses no matter when the cash is collected. If Corinne uses the accrual method of accounting and sells the laptop on Monday, she records it then, not when the payment is collected. When Corinne purchases office supplies today, she records the expense today, although her bill isn’t due for another thirty days.
- Ensuring that you are prepared for tax time. Make sure that you understand when all taxes are due. This includes not only income tax but payroll tax and sales tax. For payroll tax, you will need a Federal Employer Identification Number, and you must deposit these taxes on a regular schedule and must be reported each quarter. Businesses that sell products and some services must collect sales tax. Make sure that you get advice on the correct amount to collect.
- Managing Accounts Receivables and Payables. The process of keeping track and paying bills for businesses is essential. It ensures that money is flowing smoothly in and out of your company. A lot can go into ensuring your accounts receivable get paid when they should — from sending estimates to invoicing to sending payment reminders.
- Setting up payroll. Depending on the size of your business, payroll is a time-consuming process that requires proper accounting software to be truly effective. Without the right tools for payroll management, your company could end up overpaying or underperforming due to payment processing errors. In addition, you must file several state and federal reports. Even managing a single employee can be challenging if you are not entirely aware of all of the laws.
Turn to a professional, at least to get you started. It’s imperative to have accounting and bookkeeping professionals to ensure the accuracy of your business books. Certified Public Accountants (CPAs) are trained and regularly receive continuing education. Bookkeepers can manage your bill payments and take care of other financial duties. This doesn’t mean you have to have someone on your payroll full-time; you can outsource to Devine Consulting or Frankly Bookkeeping. We will discuss this further in a moment.
Who Should Manage Your Growing Company’s Bookkeeping & Accounting
There are several ways to manage your growing company’s bookkeeping and accounting. You could handle it yourself, hire an in-house accountant and bookkeeper, choose a freelancer, or use an outsourced company.
Let’s discuss the benefits and drawbacks of each.
Do-it-Yourself or DIY Bookkeeping and Accounting
Many businesses fail due to cash flow issues, with half of all new companies closing shop in the first year. But if you feel comfortable managing the company’s daily financials accurately, you can manage your bookkeeping and accounting.
- Every business owner or manager should have a basic understanding of the business’s financials. When you manage everything independently, you get a deeper understanding of your business and are in control.
- DIY bookkeeping saves you money. When you’re just starting, professional services can be expensive.
- Getting a summary understanding of your business finances doesn’t mean that you have the expertise or the time to keep up to date with modern technologies and processes.
- You will have to devote much time to accounting and bookkeeping tasks. This is especially true when you are first implementing your systems. After that, you will have to set aside time weekly and sometimes daily to update your financials and your books. As you scale, there will likely come a time when you have to pass this role to a professional, as you won’t have the time or expertise to manage each transaction accurately.
- Inaccuracies and procrastination happen when you’re multitasking. When you set aside financial matters, things tend to pile up, causing you to have out-of-date financial records, file invoices late, and more. Inaccurate bookkeeping can lead to a miscalculation of business profits and expenses. This can leave you in bad shape with vendors, the Internal Revenue Service, and unsure of where your business stands financially.
- Choosing to do your own bookkeeping and accounting may be inexpensive initially but cost you more over time. This could be in taxes, penalties, cash flow issues, and an inaccurate picture of where your business stands. Accurate and up-to-date financial records will open up your options for financing and business growth.
In-House Accountant & Bookkeeper
Some businesses prefer to have an in-house accountant or bookkeeper. Many employees serving as a company’s bookkeeper or accountant perform other tasks like human resources and administrative work besides accounting duties.
- Having someone in-house may be less costly if you have very specialized accounting needs.
- You’re in control of accounting methods, processes, and tasks and have your employee in your office for quick answers.
- You are your accountant and bookkeeper’s only client; they work for your company only and therefore focus solely on your business, clients, and vendors. They will get to know your business intimately.
- A full-time employee will cost the same year-round, even when things are quiet. The average salary for a bookkeeper ranges from $40k – $50K, with benefits averaging $4k per year.
- Your costs of hiring an in-house employee will include not only their salary but also the cost of the accounting and bookkeeping software, overhead, and continual training.
- Make sure you check references and proof of certifications. You’ll need to do a thorough background check.
- You’ll need to trust that your in-house bookkeeper is familiar with proper accounting and bookkeeping, especially for your type of business. Setting up processes, methods, and systems will take some time as they get to know you and your methods.
- Should your employee decide to leave the company, you’ll need to start over.
- We would still recommend an outside audit every year to double-check that the books are accurate. It’s always good to have an outside representative review the financials.
Freelance Accountants & Bookkeepers
Due to lower overhead, freelance bookkeepers usually have cheaper rates than accounting firms. There are additional pros and cons to hiring a freelancer, including:
- Freelancers often offer the ability to hire them only when needed.
- They are flexible and able to offer customized services.
- They usually have access to their software. They’re responsible not only for providing the necessary software but also for keeping it up-to-date.
- You can find specialized bookkeepers whose skills might specifically meet your unique needs as a property manager, realtor, or construction firm.
- Freelancer bookkeepers are either available to work from their own homes or some may work at your office one or two days per month.
- A freelancer may spread themselves too thin to ensure profitability.
- It’s hard to tell how “expert’ a freelancer is before hiring them.
- A virtual freelance bookkeeper might have the challenge of missing out on important communication
- If they don’t have a specific process, items can be forgotten because it’s not on their checklist. You might not be aware of it until it’s too late.
- They can go missing at any time or take a bigger, better-paying project and put it in front of yours.
Outsourced accounting and bookkeeping services are growing in popularity among large and small businesses. Businesses can enjoy cost savings, improve their financial records and processing, and have an accurate financial picture of their business when they choose a remote, U.S.-based team. Outsourcing grew from remote working setups. Outsourced companies like Devine Consulting have knowledgeable, experienced, and trained professionals on their teams.
The keyword is a team.
An outsourced team is more valuable than having one person on the job. With us on your team, you have the actionable information and power to grow your profits, improve your cash flow, and increase revenue.
- Ready Talent. These talented professionals can catch expense and cash flow issues before they affect your business.
- No overhead. There are no overhead costs like health insurance, retirement, vacation, and workers’ compensation.
- No downtime. Since an outsourced team of bookkeepers is working on your project, tasks can be reassigned for a short time, and you won’t have downtime or miss reporting.
- Less risk of fraud. With one person in charge of your accounting, it can be hard to catch misappropriation of monies. When you hire outsourced accounting and bookkeeping services, you have a team that will review your reports objectively. You are not relying on a single person.
- Less time spent onboarding and training. When you have to set up an in-house accounting department or employee, you have to take the time to train them and set up the right systems. When you choose to outsource, your team is ready to go to work for you.
- Scalability. With the flexibility of outsourcing your bookkeeping and accounting, you can expand and contract services as you grow. As you grow, your business might require more frequent reporting and payroll.
- Software. Outsourcing your bookkeeping operations gives you more access to the top tools in the industry. Your financial software is usually included and continually updated, freeing up your time and improving financial security.
- A proven process. Most outsourced accounting teams have a solid process for creating reports, documenting journal entries, backing up financials, and preparing financial statements.
- Hidden costs are found in some companies. Costs can add up when you’re unclear on the scope of the work. Devine Consulting has a straightforward process to understand all costs upfront.
- Less control over processes. You cannot walk into your bookkeeper’s office to ask questions anytime. With Devine Consulting, we take away that stress with an open communication policy and a comprehensive onboarding process that sets out all procedures, expectations, and a communications schedule.
When you partner with Devine Consulting, we become an extended part of your financial team, helping you keep your books in order. You are then better able to:
Track Income and Expenses
We keep track of your accounts payable by entering your bills and paying them on time. We also manage your accounts receivable, invoicing your clients, and sending out invoices. We will then receive and apply the payments as they come in. We can then send statements or reminders when payments are late.
In addition to properly maintaining your books, we can help you avoid costly mistakes, fees, and penalties. We will inform you if you’re wasting resources and mismanaging supplies and inventory.
Stay on Top of Cash Flow
It can be easy to lose track of your cash flow, whether you have unforeseen expenses or overdue client payments. When this happens, your costs exceed your income, creating a cash flow problem. Our bookkeeping services can prevent this by tracking your accounts payable and accounts receivable. You’ll know exactly how much is going into and out of your business over a period.
We process your payroll promptly, collecting time and commission data. We reconcile your accounts, credit card accounts, and lines of credit for prepaid. You will be able to see the reporting and gain insight into your company’s performance.
Have Accurate Monthly Reports
We process month-end reports for everything. Whether it’s your balance sheet or profit and loss statement, we usually look at the six-month trend and provide a detailed report on each. With this, you’ll have a better idea of your company’s financial health and the ability to identify areas that need improvement. If we notice anything amiss in your documents, we will ask specific questions to get to the bottom of it. We can also offer customized specialty reports to give you access to the information you need.
Trust the Process
Handing over your finances to someone else requires trust, and we have you covered. We have security measures in place to offer peace of mind. For example, with bill pay, there is an approval process in which you approve us to pay the bill or choose to pay the bill yourself.
This means we aren’t paying for something without your knowledge. We also don’t have access to your bank accounts. We only request access to information to get the information we need. We can’t transfer money or perform other unauthorized transactions.
Focus on Growing Your Business
When you outsource accounting, you gain more time to grow your business and improve your focus on workload management. You gain information to make knowledgeable decisions about your company’s finances. Without the pressure of managing your finances, you can focus more on what matters to you – the future of your business.
There’s much more to bookkeeping than just recording payables and receivables and documenting your company’s financial transactions. At Devine Consulting, LLC, we offer complete outsourcing. We ensure that transactions are appropriately coded, reconcile your accounts and that you have a six-month trend report on your P&L. We also offer full-service bookkeeping to manage payroll, create and maintain monthly financial reports, and manage withholdings.
When you need basic bookkeeping services for your small business but don’t need full-service bookkeeping, Frankly Bookkeeping is for you! As a division of Devine Consulting, Frankly Bookkeeping provides simple, easy bookkeeping services for small businesses using QuickBooks Online. We take care of coding your transactions and reconciliations to ensure your books stay up to date.
How Do I Choose the Right Outsourced Bookkeeping & Accounting Service?
It can be hard to narrow down the field when you’re looking for an outsourced bookkeeping and accounting service. There are a few things you should keep in mind:
Your Goals and Needs
How often will you need service? What do you need the company to manage?
Costs and Your Budget
Figure out how much you can budget each month on accounting services, remember that you’re already saving money when you don’t have an in-house person’s payroll, insurance, and overhead.
How Well You Work with Them
When you meet with outsourced accounting companies, ensure it’s a good match. Find out who will work on your account. Ask about their company values and mission. Find out if you will have a dedicated team or if you will be passed around to different employees.
What Technology They Employ
Cloud-based accounting offers better security and convenience. It also allows you to access your information anytime. Make sure that you outsourced accounting service has new and proven technology to work for their clients. You’ll also want to ensure that they perform regular data backups and take cybersecurity seriously.
What Their Clients Are Saying
Check reviews, ask for references, whatever it takes to determine what their clients have to say about their experience.
Connect with Devine Consulting
Bookkeeping and accounting are both valuable. When you’re on top of bookkeeping, you’ll know what is in the bank at any given moment. Accountants can use the bookkeeping information to provide an exact picture of where your business stands.