It’s widely recognized that effective financial management is vital for every successful business. As one of the key components of a business’s financial health, deciding between accounting vs. bookkeeping is a crucial decision.
Roughly 70% of small businesses don’t have an accountant or bookkeeper, and 60% admit they aren’t knowledgeable about accounting. This might not be a shocker, but the risks become clear, considering that nearly 82% of small businesses fail due to financial mismanagement.
The question, then, is, can your business afford to tiptoe this potentially disastrous edge?
The absolute answer is no, but where should you start? Well, understanding the differences between accounting and bookkeeping is the first step you can take today to cement a thriving financial future for your business. So, let’s get to it, then.
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Bookkeeping and Accounting: Quick Overview
While it might seem as if bookkeeping and accounting cover the same type of financial transactions, statements, processes, and analysis, this couldn’t be further from the truth. Knowing that both are essential to keeping your finances in order is a good foundation, but what do they involve?
What Is Bookkeeping?
Simply put, bookkeeping is recording daily transactions and financial data consistently and accurately. It is also key to gathering the essential financial information needed to run a successful business.
Bookkeepers typically have an administrative, detail-oriented role. They emphasize collecting financial records and data, which includes quality control steps such as bank reconciliation and monthly reports.
Bookkeeping tasks include:
- Recording financial transactions
- Posting debits and credits
- Setting up invoices
- Reconciling bank accounts
- Managing bank feeds
- Payroll processing
- Maintaining and balancing general ledgers
What Is Accounting?
On the other hand, accounting is a high-level process that takes the financial data compiled by bookkeepers (or business owners) to create strategic financial models. Whereas bookkeeping is mainly transactional, accounting is far more subjective.
Accountants use the same information as bookkeepers, but their main focus is interpreting and analyzing financial records. They deliver a complete overview of a business’s finances while consulting on possible problems and successes.
Accounting tasks include:
- Checking and adjusting financial records
- Interpreting data collected during the bookkeeping process
- Compiling reports, performing audits, and preparing reports, income statements, and balance sheets
- Presenting information needed for financial forecasting, showing business trends, and highlighting areas of growth
- Advising the business owner regarding any business decisions and strategic planning
- Tax submissions, tax consulting, and reducing the business’ tax liability
READ MORE: 8 Best Finance and Accounting Outsourcing Companies
The Key Differences Between Accounting and Bookkeeping Services
While accounting and bookkeeping are similar, various nuanced differences exist in how they integrate into your business. It’s these unique characteristics that you should be aware of, and here’s a side-by-side comparison:
| Feature | Bookkeeping | Accounting |
|---|---|---|
| Purpose | Records daily transactions | Analyzes financial data for decision-making |
| Complexity | Routine data entry | Strategic financial planning |
| Who Performs It? | Bookkeepers | Accountants/Certified Public Accountants |
| Financial Reports | Basic reports | Full financial statement preparation |
| Tax Preparation | Prepares records | Files tax returns and plans deductions |
| Software Used | QuickBooks, Xero | NetSuite, Sage, SAP |
Purpose: Recording vs. Analyzing
If we examine the purpose of both, there is a clear distinction. Bookkeeping, at its core, is about accurately recording financial transactions. In contrast, the financial accounting process is more about analyzing those transactions, ultimately providing business insights.
- A bookkeeper ensures that every single sale, purchase, and expense is logged correctly.
- An accountant reviews those records and assists business owners with understanding their financial position.
For example, a bookkeeper records a company’s monthly revenue and expenses, whereas an accountant uses that data to determine whether the business is profitable.
Complexity: Data Entry vs. Financial Strategy
When it comes to complexity, bookkeeping is predominantly administrative, involving tasks such as collecting, organizing, and managing financial data. On the other hand, accounting requires financial expertise and strategic thinking.
- Bookkeepers keep track of transactions, ensuring they’re accurate and categorized.
- Accountants dissect financial information, identifying trends, potential for business growth, budgeting, and tax planning.
In short, bookkeeping involves maintaining a financial diary, and accounting involves analyzing that diary to improve economic outcomes.
Who Does It? Bookkeepers vs. Accountants/CPAs
While this might seem like an easy question to answer, once again, there are key considerations to keep in mind.
- Bookkeepers, generally, do not need a formal education, though many have professional training in software and recordkeeping.
- Accountants, especially Certified Public Accountants (CPAs), must meet formal education requirements, including a bachelor’s degree. They must also pass licensing exams and stay updated on tax laws and financial regulations.
Bookkeepers manage day-to-day transactions, whereas accountants (particularly CPAs) offer comprehensive financial analysis and compliance assistance.
Financial Reports: Basic Reports vs. Full Statements
This is one area where both bookkeepers and accountants fulfill the same role by creating reports. The vital difference comes into play when considering their level of depth.
- Bookkeepers set up basic reports, including profit & loss statements, expense receipts, and cash flow reports.
- Accountants prepare detailed financial reports, such as balance sheets and income statements, which can be used to secure funding or file taxes.
A bookkeeper may present a report outlining the funds received and spent last month, while an accountant would analyze that data to evaluate the company’s overall financial health.
Tax Preparation: Organizing vs. Filing
The distinction between accounting and bookkeeping becomes very clear when it comes to tax preparation and general tax season practices.
- Bookkeepers keep records organized for tax filing, but they do not prepare or file any tax returns.
- Accountants, mostly CPAs, handle all tax filings, deductions, credits, and IRS compliance.
Without systematic bookkeeping, accountants struggle to file taxes accurately, and without proper accounting knowledge, businesses risk either overpaying or underpaying their taxes.
Software Used: Bookkeeping vs. Accounting Platforms
Bookkeeping and accounting professionals rely on financial software and tools, but, once again, these differ.
- Bookkeeping software generally includes platforms like QuickBooks, Xero, and FreshBooks to record transactions.
- Accounting software solutions include NetSuite, Sage, and SAP for financial analysis, key financial topics, tax planning, and compliance.
Businesses usually start with bookkeeping software and only later integrate accounting platforms as they scale and grow. Alternatively, outsourced bookkeeping and accounting services often handle both.
When Should You Hire a Bookkeeper or an Accountant?
At some point in time, your financial management will inevitably become too complex to handle alone. But should you hire a bookkeeper or an accountant? Or both? Let’s have a look at when to bring in each professional.
Hire a Bookkeeper When:
Your business begins to handle a significant number of transactions, and you need someone to maintain accurate financial records. Here’s a nifty checklist to help you decide:
- Are you spending too much time recording income and expenses?
- Do you have multiple missed payments or unpaid invoices?
- Is tax season a chaotic time for you due to disorganized records?
- Are you unsure of how much money is coming in vs. going out?
- Is your accountant handling basic tasks like categorizing transactions?
The bottom line: A bookkeeper will help keep your financial records accurate, up-to-date, and organized, ensuring that you always know where your company’s financial health stands.
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Hire an Accountant When:
When your business requires financial strategy, tax expertise, or compliance support, and you’re in need of someone to oversee your financial performance. If any of the below sounds familiar, you should hire an accountant.
- You consistently need help with tax preparation and compliance.
- Your business is expanding, seeking funding, or investing, and you need financial forecasting.
- You are unsure of the steps when applying for business loans or investor funding.
- You’re looking for effective, legal ways to minimize taxes.
- You’re facing an audit or legal financial issue.
The bottom line: Managerial accounting is about financial decision-making, and an accountant will help you with expert insights, tax knowledge, and strategic planning.
Choosing Between In-House or Outsourced Bookkeeping and Accounting
When managing your finances, you have two main options: hire an in-house team or use outsourced services. Each option has pros and cons, and the best choice depends on your business size, budget, and financial complexity.
Let’s break it down.
In-House Bookkeeping & Accounting: Pros and Cons
When you hire an in-house bookkeeper or accountant, you add someone new to your payroll to handle various financial tasks directly within your company.
Pros:
- Full-time availability – You’ll have immediate access to financial statements and support.
- Industry-specific knowledge – In-house accountants can be trained to specialize in your business needs.
- Direct Communication – You’ll have faster collaboration with all internal teams.
Cons:
- High costs – Salaries, benefits, training, and office space will increase expenses.
- Limited expertise – A single person could lack the full range of financial skills you need.
- Scalability issues – As your business grows, you must hire additional staff.
Potential Costs:
- Bookkeeper Salary: $45,000–$60,000 per year
- Accountant Salary: $70,000–$100,000 per year
Outsourced Bookkeeping & Accounting: Pros and Cons
Outsourcing means hiring an external provider to remotely handle your bookkeeping and accounting needs.
Pros:
- Cost savings – You pay only for the services you need.
- Access to top talent – Get financial experts with specialized knowledge.
- Technology-driven efficiency – Many outsourced firms use the latest accounting software for automation and accuracy.
Cons:
- Less direct control – Outsourced professionals work remotely, limiting in-person interactions.
- Potential security concerns – Requires trust in data privacy and secure financial systems.
- Choosing the wrong provider – Outsourcing companies vary in expertise, so vetting is essential.
Potential Costs:
- Bookkeeping services: $500–$5,000 per month
- Accounting services: $1,000–$10,000 per month
Did You Know?
57% of companies outsource at least part of their financial operations to cut costs and improve efficiency.
READ MORE: 8 Signs You Need to Outsource or Hire a Freelance CFO
How to Transition from DIY to Professional Financial Management
Many entrepreneurs start bookkeeping solo using spreadsheets or essential software. DIY management can become overwhelming as businesses grow, leading to errors, compliance issues, and lost opportunities.
Transitioning to professional bookkeeping or in-house or outsourced accounting saves time, minimizes costly mistakes, and enhances financial insights.
5 Steps to a Smooth Transition
Here’s how to make the switch smoothly.
1. Assess Your Current Financial Situation
Before handing over your financial management, take a step back and evaluate:
- Are your financial records organized?
- Are you struggling with tax compliance?
- Do you spend too much time on financial admin?
2. Decide Whether to Hire In-House or Outsource
You have two options for professional financial management:
- Hiring an in-house bookkeeper or accountant – Works well for larger businesses with complex finances but comes with high costs.
- Outsourcing to a bookkeeping and accounting service – A cost-effective option that gives you access to expert financial professionals without hiring full-time staff.
3. Choose the Right Bookkeeping or Accounting Partner
Not all financial service providers are the same. If you decide to outsource, look for:
- Industry experience – Choose a provider with expertise in your sector.
- Scalability – Ensure they can adjust services as your business grows.
- Compliance expertise – Verify they understand tax regulations in your country.
- Technology integration – They should use secure, up-to-date bookkeeping and accounting software.
4. Implement a Smooth Handover Process
After you’ve decided on a chosen professional service, the transition should always be as structured as possible to avoid disruptions. Here are some steps you can take:
- Organize your financial records – Gather all your invoices, bank statements, and expense records.
- Access financial records – If you already use software, securely share your login details.
- Define clear roles – Establish what your bookkeeper will handle vs what your accountant will manage.
- Schedule regular check-ins – Even when outsourcing, keep informed with monthly or quarterly reports.
5. Focus on Strategic Growth with Professional Financial Insights
After the transition, keep an eye on specific metrics, and you should start to see benefits, which will include:
- More time to focus on business growth – You’ll have more time to concentrate on other areas of your company.
- Fewer costly errors – With accurate records, you’ll prevent tax mistakes and financial mismanagement.
- Better financial insights – Professional reports make planning for expansion easier, reducing unnecessary expenses and improving cash flow.
FAQs About Accounting vs. Bookkeeping
We’ve already discussed the pros and cons of using an accountant or a bookkeeper, but here are the answers to the most commonly asked questions.
1. Do I Need Both a Bookkeeper and an Accountant for My Business?
This depends on your business’s unique needs and the complexity of your financial situation. A bookkeeper is far cheaper than an accountant, but they offer limited services. An accountant costs more, and you might still need to handle basic tasks yourself.
2. Can a Bookkeeper File Taxes for My Business?
No, bookkeepers traditionally do not file taxes. However, they play vital roles in tax preparation and collecting necessary information.
3. What Are the Benefits of Outsourcing Accounting vs. Bookkeeping?
Outsourcing your accounting or bookkeeping saves money, improves accuracy, and provides access to top-tier financial expertise without in-house hiring costs. Here’s why it’s brilliant.
- Significant cost savings
- Access to top financial experts
- Improved accuracy and compliance
- More time to focus on business growth
- Access to advanced technology and automation
- Easy scalability and flexibility
Final Thoughts
Effective financial management goes beyond record-keeping. It leverages financial insights to inform strategic business decisions. Bookkeeping guarantees accuracy, while accounting enables planning, strategy development, and growth.
When handling your finances feels daunting, outsourcing bookkeeping and accounting can significantly transform the situation. This approach provides expert knowledge, enhances efficiency, and saves costs.
Why struggle with financial management when you can have experts handle it? 1840 & Company connects businesses with top-tier bookkeepers and accountants tailored to your needs.
