As a small business owner, keeping a close watch on your organization’s finances is critical for its survival and scalability. Part of this process is knowing the difference between bookkeeping vs accounting to help budget for your business, run things efficiently, and prepare for tax returns. 

Although small business bookkeeping and accounting are integral to organizational sustainability, they have subtle differences. Differentiating both processes will allow you to understand the strategic value that each brings to small businesses.

This guide compares and contrasts bookkeeping and accounting for small businesses and explains how entrepreneurs can combine both processes for maximum effectiveness.

What is Small Business Bookkeeping?

Bookkeeping involves the recording and maintenance of day-to-day financial information. Bookkeepers naturally use double-entry accounting to record all your business’s financial transactions.

However, bookkeepers do more than record a business’s money movements. The following are some of their other roles.

• Organizing and categorizing transactions: A bookkeeper will review your business’s pending bills and prepare them for payment.
• Paying bills: This process ensures your business maintains a good vendor relationship.
• Maintaining petty cash: The bookkeeper ensures your business efficiently manages and disburses petty cash.
• Writing invoices: The bookkeeper sends out invoices to customers so that you can receive payments on time.
• Preparing financial statements: Although analyzing financial statements falls on the accountant, it is often a bookkeeper’s responsibility to prepare them. The preparation of financial statements can occur monthly, quarterly, or annually, depending on organizational needs.
• Recording customer payments: Finally, a bookkeeper will maintain an accurate depiction of your accounts receivable balance by recording customer payments on time. This ensures you do not send past-due notices to already paid customers.

What is Small Business Accounting?

Accounting involves collecting, classifying, and summarizing a business’s financial transactions to streamline decision-making. An accountant will typically interpret financial data to create financial statements such as cash flow statements, balance sheets, and income statements.

Accounting enables small business owners to track money movement in and out of their ventures. The objective is to facilitate an understanding of financial data and provide entrepreneurs with professional financial advice and in-depth accounting expertise.

This way, a business owner can understand their organization’s financial performance and make excellent decisions regarding expenditures, investments, and other financial obligations.

The following are the essential duties and responsibilities of an accountant.

• Formulating financial statements: Although bookkeepers can create financial statements for a business, the mandate often falls on accountants due to their superior expertise. In addition, an accountant will run the reports based on these documents to ensure business performance improvement.
• Tax handling: Another reason to hire an accountant is for tax purposes. Some of the principal activities that they can undertake for you include filing tax returns, tax planning, and reducing tax liability.
• Financial planning: Another duty involves helping small business owners with strategic decision-making. For example, an accountant can advise you on how to cut expenses, expand revenue collection, and improve the value of your goods or services. You can also receive advice about business structure and development.
• Cost and revenue analysis: Finally, an accountant will use financial ratios and formulae to better understand your revenue and costs. For example, by using historical data, an accountant can calculate the return on investment (ROI), gross margin, operating margin, earnings before interest, taxes, depreciation (EBITDA), and return on equity (ROE). Interpreting these ratios enables business owners to cut expenses, improve revenue, and augment profitability.

Small Business Bookkeeping vs. Accounting: The Key Takeaways

As we have shown, bookkeeping and accounting are essential to business growth and sustainability. Both processes deal with financial transactions. Although bookkeeping is more about recording financial transactions, accounting focuses on financial transactions and document analysis.

The table below covers the fundamental differences between the two procedures.

BOOKKEEPING INVOLVES	ACCOUNTING INVOLVES
Organizing and recording financial transactions	Reviewing financial statements and ledger balances
Creating invoices and posting business payments	Preparing and adjusting closing entries
Reconciling bank statements	Using accounting ratios to analyze business profitability, debt, and revenue
Focusing on small business day-to-day activities	Focusing on overall business strategy
Handling month-end closing balances	Handling tax returns and tax planning
Maintaining financial statements	Creating financial forecasts and budgets

How Small Business Owners Can Leverage Both Bookkeeping and Accounting

You must invest in bookkeeping and accounting for your business to run seamlessly and maintain an upward economic trajectory.

Although you can make do with bookkeeping only during your early business days, combining it with accounting over time is always advisable. This will enhance your ability to review financial entries, collaborate with vendors, analyze business performance, and make strategic decisions.

Nevertheless, we must admit that undertaking both processes simultaneously and by yourself is often challenging, so it is crucial to outsource business accounting to a professional accountant if you need more technical know-how.

Another alternative is to invest in accounting software, although you will require training so that you can be able to utilize the technology.

It is vital to work within your business budget and implement solutions that align with your firm’s mission and vision.

The Bottom Line: Small Business Bookkeeping vs. Accounting

Small business bookkeeping and accounting are essential to financial record maintenance and strategic development. However, the two processes differ based on the activities involved and the duties and responsibilities of bookkeepers and accountants.

The main takeaway is that while bookkeepers focus on the day-to-day financial running of a business, accountants are tasked with aligning business finances with long-term strategic plans.

Contact Two Arrows Admin today if you need help with your bookkeeping.