Accounting vs Bookkeeping: What’s the Difference?
In this first instalment of a two part series on managing business finances, we look at the practice of bookkeeping and accounting, and help breakdown everything you need to know to make informed decisions.
Getting a business off the ground requires immense hard work, patience, and time. When the business matures into a living, breathing, evolving entity, it takes smart choices and forward-planning to keep the wheels turning. As an entrepreneur, how do you develop that keen sense to know that something is not working for your business?
Besides your natural instincts, you can usually rely on your company’s financials through bookkeeping and accounting to tell you what to do. Here’s a quick guide to understanding how the two work, and how they can benefit any business.
What exactly is bookkeeping?
Bookkeeping refers to the day-to-day practice of recording, categorizing, and reconciling or cross referencing every financial transaction a business makes in a day. The term bookkeeping comes from the use of physical books or ledgers in the past.
A bookkeeper’s role involves maintaining a general ledger where they document and track income and expenses, money owed to the company (accounts receivable), and money the company owes (accounts payable). They also compare (reconcile) company books with bank statements to check for discrepancies.
When to hire a bookkeeper?
New or independent entrepreneurs usually double up as the bookkeeper of their business as it only takes a few hours per week to manage this aspect. Initially it’s practical to use a free software (more on the options available in our next piece) or a basic spreadsheet to record every transaction by entering details from your invoices, receipts, and bank and credit card statements.
When the business grows in size, intersects more people and different geographies, record-keeping becomes cumbersome and time consuming. Duplicate entries or incorrect categorization of income and expenses could cause trouble during tax time, and attract penalties. A growing business that transacts multiple times in a day should consider outsourcing bookkeeping either to a professional, or to a more robust subscription-based software. When you see this outsourced resource unable to keep up, you know your business is ready to hire a full-time bookkeeper.
What are the benefits of bookkeeping
Bookkeeping strengthens the financial reins of your business, and enables you to do the following –
- Track performance: Recurring patterns in your financial data can tell you if you’re making more money than you’re spending or if you’re headed towards a cash crunch.
- Manage cash flow: Bookkeeping alerts you to delayed payments, higher than normal costs, an upcoming big expense, sales fluctuations, inventory, and incorrect or late payments.
- Simplify tax time: Bookkeeping through the year helps ease the burden when it is time to file taxes. You don’t have to jog your brain to remember if an expense was personal or professional, or hunt for old bills. Up-to-date books give an accountant time to find relevant tax deductions instead of going through countless receipts.
- Responsive: In case of an audit by the Canada Revenue Agency (CRA) your information is ready to present, saving you potential late fees.
What is accounting?
While bookkeepers record data, accountants turn that data into insights. An accountant will analyze and interpret all the information that a bookkeeper (or you) collect to prepare financial statements that summarize business performance. Accountants forecast future cash-flow, advise on long-term strategy, file statutory returns, and help you get the most out of your tax return.
What are the benefits of accounting?
An accountant draws the big picture of a business and often plays the role of an advisor. Accounting is essential to –
- Plan and strategize: Accounting identifies the areas of business that are bleeding and identifies those that are growing. Insights derived from accounting will inform your business decisions to potentially reorganize your budget, delve into cutting costs, or explore investing more money to prepare for the future.
- Borrow money: Banks and lenders see a company’s financial statements and cash-flow projection before approving a loan. Accountants can help generate these.
- Tax compliance: Accountants are trained to spot tax rules you could be breaking or tax deductions you might have skipped. They also ensure your business doesn’t encounter penalties.
When do you need an accountant?
Accountants are highly qualified professionals, and usually charge a couple of hundred dollars an hour for their services. Small businesses, therefore hire accountants once a year to prepare financial statements and file their taxes, and depend on their bookkeeper or a bookkeeping software to maintain the money trail otherwise.
As a business picks up pace, owners find themselves juggling many responsibilities. Many are excited about the challenges of entrepreneurship, but not so much about data entry and bank-reconciliation. Limited knowledge is also a roadblock for preparing their profit and loss statements.
That’s why cutting-edge cloud-software is every busy entrepreneur’s accountant or bookkeeper today. Wave, QuickBooks, FreshBooks, and Xero are just a few of the options in the market that have reinvented how business owners manage their finances. Most of these companies offer features like receipt scanning, invoicing, and accounting for free or a small fee. Advanced features like online payments and payroll come at a monthly subscription fee of around $20 per month, with a small fee for every employee it enrolls.
But is a cloud accountant or bookkeeper enough or do you need a professional who you meet in person? What are the pros and cons of both? Read the second part of this series which discusses the Key Role of cloud Accounting Software and Accountants in your Business.
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