Accounting vs Bookkeeping

Accounting vs. bookkeeping - most people don't know the difference between them. So what exactly are they and which one do you need for your organization?

Accounting is the word for all the processes involved in handling a company's financials. This includes everything from recording, summarizing, analyzing, consulting to finally reporting these to shareholders. Bookkeeping is just the recording part of this entire process.

While this overlap exists, the tasks carried out by bookkeepers and accountants are quite different. This is because of a difference in perspective. While the presence and responsibilities of each will depend on the business itself, the responsibilities assigned to bookkeepers and accountants often vary due to the different approaches taken.

Here, you will find how accounting and bookkeeping differ from each other and where they overlap. This information comes from experts with in-depth knowledge of how each of these works. Now, let's jump right into it.

‍What is Bookkeeping?

Bookkeeping is mostly about recording. Documenting daily transactions is an important aspect of any organization since, without this information, you would not be able to make any major decisions. It involves being invested in the details when you zoom in on the accounting process.  

Bookkeeping usually involves recording financial transactions, making invoices, and posting debits and credits. They will also sometimes prepare financial statements like balance sheets, cash flow statements, etc. Bookkeepers will usually manage payrolls and maintain ledgers and accounts.

One of the major functions of bookkeeping is to maintain the general ledger. The general ledger is a document consisting of sales and expenses. Maintaining this is called posting. More sales mean ledgers are posted more often. Ledgers don't have to be physical - nowadays, posting is done using software and spreadsheets. However, you can even use a sheet of paper. If you have a habit of writing down all your expenses, you've been bookkeeping!

Bookkeeping systems can have different levels of complexity which depends on the business itself. Larger businesses that make more sales will naturally post more often. Bookkeeping for businesses doesn't just involve writing down every transaction that takes place, though. Some transactions need some supporting documents to guarantee that the transaction is recorded correctly.

For example, the IRS notes some documents that need to be saved with gross receipts, purchases, expenses, assets, etc.

All of this requires a lot of attention to detail and even some nitpicking.

Managing all the work of keeping the documents in a safe place, cleaning out the data and finding errors, and bringing it in a condition where the data is now readable with proof of their occurrence - that is a bookkeeper's job.

What is Accounting?

Where bookkeeping is concerned with the details of the records themselves, accounting has more to do with the data that is already recorded by bookkeepers and using it to produce financial models for the company to use for decision making.

Bookkeeping, which is about inputting numbers from transactions and making sure they're correct, is a fairly objective process. On the other hand, accounting is more subjective.

Accounting deals with aspects like adjusting entries - this involves recording expenses that have occurred but aren't yet recorded by bookkeepers. These are usually transactions that are not fully complete. An example of this would be that you sell your services to a customer, but the payment is not due till the end of the month.

Since you've sold your services already, an exchange has already begun, which means that the transaction has begun. Thus, you make a record of this, and when the customer pays you for your services, you make an adjusted entry to say that the transaction is complete. This adjusted entry is then taken into account and added to the bookkeeping process.

Accountings are also involved in the review of financial statements and analyzing any costs you may incur due to operations. Accountants are also responsible for budgeting, handling the taxing process, and helping the business owner understand how different decisions made will impact the business, keeping in mind the financial aspect.

 Since analyzing financial reports is a major part of accounting, they are also responsible for communicating the implications to shareholders and others within the company who may not have the technical expertise to get insights from the raw data recorded during bookkeeping.

Accountants take the information from the ledger and turn it into easily understandable insights that are not just easy for the average person to understand but also give a bigger picture of the business itself, instead of focusing on just one aspect.

Most often, when it comes to planning for the business, like managing financial position, understanding cash flows, tax planning, etc., accountants are the ones responsible.

Types of Accountants

On top of bookkeepers having a pretty straightforward job, there are very few variations in the field. On the other hand, accountants have a very wide range of fields they can go into. Let's look at some.

Certified Public Accountants (CPA)

One of the most common accounting designations, Certified Public Accountant (CPA), requires a certain level of education and experience to gain the title.

For the title of CPA, accountants have to pass a test known as the Uniform Certified Public Accountant exam and must have enough experience as a professional. The specific requirements may differ by the state in the US.

CPAs will be responsible for making sure businesses are following GAAP - generally accepted accounting principles. They handle tasks such as tax preparation, financial planning, and audits, etc.

CPAs usually work in public accounting for different businesses in various industries, the government, as well as in education, and because of their vast expertise, they can potentially see career growth all the way up to high positions like chief financial officer, and sometimes even CEO.  

Management Accountants

Management accountants are usually responsible for giving advice on financial decisions. Management accountants will prepare data for companies to use for forecasting and analyzing returns.

Chartered Accountants (CA)

These are similar to CPAs, with their main focus being taxation, accounting and reporting, applied finance, and management accounting.

Auditors

Auditors are also accountants, but they are responsible for making sure that businesses and individuals are complying to tax laws, regulations, and accounting standards. This is to prevent fraud and improve efficiency.

Forensic Accountants

Forensic accountants carry out complex analyses and interpretations. The analysis provided by financial accounting is so in-depth that it is often used in legal proceedings, and forensic accountants may be called in as experts. For this reason, they are often employed by insurance companies, banks, and government agencies.

Government Accountants

Government accountants are included in all branches of government, from managing city budgets and evaluating public funds to investigating white-collar crimes. Government accountants sometimes work closely with regulatory groups like the IRS to ensure smooth functioning. For government accountants, knowledge of government statutes is also required on top of accounting knowledge. They are often also required to have knowledge of other regulations for public and private sectors.

Investment Accountants

Investment accountants are specifically associated with brokerage and asset management firms and work in maintaining investments for clients. They may also provide financial advice and be involved in the tax reporting for investment accounts.

Project Accountants

Project accountants are often associated with specific projects and are involved in the tracking, reporting, and analysis of results for the project itself. They are also sometimes expected to draft proposals to look at the scope of a project regarding its finances and what profits or losses can be expected.

Tax Examiners

Tax examiners are responsible for reviewing the tax returns filed by businesses or individuals and determining how much is to be collected in tax and doing the collections as well.

Financial Advisors

Financial advisors are often hired to help businesses and individuals make short-term and long-term decisions regarding their money and investments. Sometimes, financial advisors help come up with personalized plans for clients to achieve financial goals.

Educational Differences

Sometimes, accountants and bookkeepers end up having to do the same work, but they have different skills based on their work. Let's look at what credentials are needed for each.

Bookkeepers' Education

Bookkeeping is typically a very straightforward task and doesn't necessitate any formal education. For accurate bookkeeping, the most important skills are attention to detail and knowledge about some basic financial topics. For example, to record a transaction, they should know what to debit and what to credit.

However, beyond this, there is little need for any complex skills. Bookkeepers can work with an associate degree, and some may even start working right after high school, depending on the business.

Accountants' Education

On the other hand, accountants' job involves a lot more technical and complex analysis, which necessitates that they are skilled in the field. For accountants, individuals must hold an accounting degree, though finance degrees are used as a substitute and considered adequate.

Unlike bookkeepers, accountants are also eligible to pursue professional certifications. This includes that of CPA, which we talked about earlier.

Though there are different types of accountants, the basic education requirement for all of them remains the same: a four-year bachelors' degree. After this, additional certification may be required depending on what career path you choose.

Can Bookkeepers Be Called Accountants?

Due to the difference between their required qualifications and the tasks each of these perform, bookkeepers cannot be called accountants. However, bookkeepers can become accountants. Though they are usually tasked with simple documentation or to look over financial data for clients and companies to make sure they're correct, bookkeepers are also able to become accountants.

This will need the CPA exam and, if they don't already have one, a bachelor's degree to fulfill the formal requirements, but bookkeepers usually track a wide range of financial information and may also have the skills needed for accounting due to handling so many financial documents.

Which is Better?

Both bookkeeping and accounting are very important aspects of a company's success.

Though bookkeeping is less technical than accounting, all aspects of accounting depend on good bookkeeping. After all, without the correct and sorted data being entered into the database in a consistent and clean manner, it would be very difficult to analyze or interpret it meaningfully.

Therefore, bookkeeping and accounting are both equally important. However, from a career perspective, there are some extra benefits of pursuing a career in accounting.

Salary Outlook

There is a wide range of salaries for both positions; each depends on the company you work for, the experience you have, and the specific career path you pursue. There are various types of accountants, and each of these will receive compensation in different ways depending on their individual skill sets.

Accounting itself can be quite lucrative, but it depends greatly on the firm you're hired in. For many accountants, the starting salary is actually not that high, unlike investment bankers or attorneys. The largest firms will offer high salaries even to fresh graduates, while medium to small accounting firms will pay a bit less. For accountants who work internally for companies instead of in public accounting, the salary range is again dependent on the company itself.

Accountants may also get other benefits like paid leave, health insurance, etc.

Bookkeepers, on the other hand, usually get paid by the hour instead of annual salaries. On average, in the US, these hourly wages can be around $20 for a new hire.

Career Outlook

The salary ranges for accountants and bookkeepers vary quite a lot, but on average, accountants do make more than bookkeepers. There are also some major differences in the growth opportunities available to each one.

Accountants and those who work in the accounting field, such as auditors, can expect their careers to keep growing for the next several years. In fact, the Bureau of Labor Statistics expects the job growth for accountants to track close to the broader economy, whereas bookkeeping jobs may decline due to automation and technology that reduces the need for human labor resources. Though both the number of accounting and bookkeeping jobs is expected to decline, existing accountants can expect career growth while bookkeepers may find their job in danger.

In the Long-Run

Looking at it long-term, accountants are likely to see more upward mobility and potential for earnings. Of course, the education required to become an accountant is a lot more competitive, costly and difficult than it is for bookkeeping, but the payoff in the future is much higher.

As a career, many workers who are now accountants started off with bookkeeping. As mentioned earlier, bookkeepers can become accountants with the right degree, and bookkeeping provides plenty of experience and exposure to the world of accounting to give an advantage.

Bookkeeping may also be a suitable job for someone who wants a decent job with a good salary if they are not planning on staying long-term. Again, this is why bookkeeping is often a transition job for many accountants.

There is also much less competition in the job hunt as a bookkeeper, and there are fewer barriers to entry than there are to accounting.

The Future of Accounting and Bookkeeping

Having said all that, with new financial software being integrated into many organizations, the line between accounting and bookkeeping is starting to blur. Many tasks that were once considered accounting are now being absorbed into bookkeeping, whereas a lot of bookkeeping software can now generate financial statements. Thus, employees in both positions are required to keep up to date with advancements in technology so they can make use of it for the benefit of both themselves and their clients.

As a whole, however, bookkeeping is slowly becoming obsolete due to the advent of technology and automation. However, for now, this software is making the job for both accountants and bookkeepers much easier and allowing greater efficiency.