Bookkeeping vs Accounting: Key Differences Explained

Managing your finances effectively is essential for any business. It's the cornerstone of making informed decisions that drive your company's success. Two key roles that play a pivotal part in understanding your business's financial health and spotting opportunities are bookkeeping and accounting. Both are integral to financial management, but they serve different functions and offer unique insights.

In the United States, the salary for a bookkeeper can be as low as $39,426, while an accountant can earn up to $108,500. This significant difference in compensation might tempt you to opt for a bookkeeper to manage your finances. However, before making this decision, it's important to understand the distinct roles and contributions of bookkeepers and accountants.

In this blog, we'll discover the differences between bookkeeping and accounting. But first, let's explore their definitions.

What Is Bookkeeping?

Bookkeeping is the financial tracking of your business's daily financial transactions. A bookkeeper uses double or single-entry ledgers to record invoices and payments. Then, bookkeepers consolidate this information into financial statements which they transfer to accountants.

What Is Accounting?

In accounting, a trained professional processes the financial statements they receive from bookkeepers. Accountants create analytical summaries of your company's finances. Additionally, an accountant communicates larger trends in your finances which allows you to make decisions about your business. 

What Are the Differences between Bookkeeping and Accounting?

While bookkeeping and accounting both deal with your business's finances, they're not interchangeable because they're different. These differences come from what they deal with and the result they're trying to achieve.

Here's an overview of the key differences between them:

Let's dive deeper into these differences to discover why they exist and what they mean for your business.

Purpose

The main difference between bookkeeping and accounting is their purpose of use. Your business should use bookkeeping to track daily finances so that an accountant can later use them. Moreover, you can use it to catch inconsistencies between invoices or payment receipts and the ledger. Essentially, bookkeeping ensures you're aware of the status of all transactions through systematic and chronological records.

Meanwhile, accounting's main purpose is to communicate overarching financial information to allow you to make sound decisions. You can even use it to see the effect of past decisions as well. Additionally, accounting provides your business credibility to stakeholders who are privy to this information since it presents your finances in a clear and transparent way.

Duties

Bookkeepers and accountants have different duties because they're trying to create different financial information. In particular, bookkeepers have these duties:

• Recording Finances: A bookkeeper's main duty is to record transactions in a single- or double-entry ledger that notes your credits and debits.

• Classifying Finances: In bookkeeping, you need to separate invoices and payments and arrange them in chronological order.

• Managing Payroll: Bookkeepers often deal with ensuring that they pay your staff on time and in the right amount.

• Tracking Transactions: Bookkeeping requires staying aware and following up on pending bills and invoices.

• Producing Invoices: When your business makes a sale, a bookkeeper will create an invoice to match this product or service.

Conversely, accountants have these duties:

• Financial Statements Communication: Accountants take the financial information from bookkeepers and review, analyze, and summarize it for you to easily understand.

• Budget Management: With the information that accountants have access to, they can help you adjust your budget to reflect your goals and your actual capabilities.

• Tax Management: Accountants manage your tax filings and returns.

• Analyzing Your Operations: An accountant can calculate how effective an operation is by analyzing its cost and benefits over time.

• Advising Your Business: By analyzing your finances, an accountant gains the insights required to help you understand how your decisions will affect your finances.

Skills Required

Since accountants and bookkeepers have different duties, they also have different skills. Here's an overview of accounting vs bookkeeping skills:

Scope

Accountants and bookkeepers work on different time scopes. Bookkeepers usually manage the records of your transactions on a daily, weekly, or monthly basis. Meanwhile, accountants usually work on financial statements on a yearly, quarterly, or monthly basis. Plus, accountants can take into account information from several years. 

Knowledge Required

Another difference you'll notice when comparing bookkeeping vs accounting is the knowledge these positions require. In bookkeeping, you're mostly expected to record transactions and communicate information about it. Therefore, basic math knowledge is suitable. However, if you choose to use technology to record this information, it may also require some tech savvy to deal with spreadsheets and communication.

Meanwhile, accountants require a bachelor of accounting which can take 2 – 4 years to complete. During that time, students learn about:

• Basic Concepts of Accounting

• Formulas and Their Applications

• Accounting Technology

• Auditing

• Accounting Law

• Management

• Economics

• Communication 

• Business Law

• Business Ethics

• Macro/Micro Economics

• Statistics

• Regulatory Issues

Cost

Another bookkeeping and accounting difference is its cost. Due to the difference in time and cost required to attain the skills and knowledge of an accountant, their salaries tend to be larger than that of bookkeepers:

• Average Accountant Salary in the USA: $62,843 – $68,326 

• Average Bookkeeper Salary in the USA: $44,083 – $56,166

Conclusion

Though bookkeeping is a more humble position, it's the accounting basis and you shouldn't discount it. It's just as critical as accounting for your business' health. They work together to allow you to have a better sense of your business' finances so you can make the right decision. 

Bookkeeping is the rudimentary first step in record keeping that allows accountants to review, analyze, and summarize financial information. This difference between bookkeeping and accounting leads to other differences such as duties, purpose, scope, skills, and education level. Since accounting has more requirements when it comes to education level, accountants also have a higher average salary than bookkeepers. So, keep these differences in mind as you look for employees to fill these positions.