Imagine you have a 20 dollar bill, and that money is earned by providing a service and as a result, the business has the freedom to spend it, invest it or save it. Regardless of what happens to that 20 dollars next, these transactions have started bookkeeping and accounting processes.
But a lot of people are still confused when it comes to bookkeeping vs accounting. They want to know:
- What are the differences?
- Why do I need them?
- How much do they cost?
At LYFE Accounting, we’ve helped companies with their bookkeeping and accounting processes. We’ve helped companies with preparing their financial statements. And we’ve helped companies save a lot of money with tax preparations.
So if you’re in a business, then understanding your financials are really important. So important that according to Investopedia, one of the most common reasons small businesses fail is due to a lack of capital or funding.
And from my personal experience, most small business owners understand their expenses.
They know they have rent to pay. They have to pay their employees. They have to pay their lenders…
Where most people fail is not understanding their revenue. Thus, they end up investing a lot of profits into poor performing products and services, which ultimately leads to business failure.
But, we can help eliminate some of those risks by proper financial processes.
So today, I’m going to give you three simple points that you should know about bookkeeping vs accounting.
Alright let’s go ahead and get started with point number one.
Bookkeeping vs Accounting: What’s the Difference?
I. Defining Accounting and Bookkeeping
Technically, the definition of bookkeeping is the activity or occupation of keeping records for financial affairs of a business. In other words, bookkeeping is about recording data and transactions.
Let’s think about the 20 dollar bill from earlier. A good bookkeeper would be able to tell you all the transactions that led up to that 20 dollars. And all the transactions that followed it afterwards.
In contrast, the full definition of accounting is the action or process of keeping financial accounts. In other words, accounting helps you summarize all your transactions into reports.
Going back to our 20 dollars, a good accountant would be able to locate your transactions, summarize and make some honest conclusions about how you’re spending your money.
In short, bookkeeping can provide you with a very micro view of your financials, while accounting can provide you with a macro view of your financials.
II. Why Do You Need Bookkeeping or Accounting?
By now, it’s probably easy to see that bookkeeping and accounting work together. You can’t produce financial reports without data, and without a report, your data is pointless.
But that’s just scratching the surface.
Here’s an example: Imagine you own a bakery and you sell three types of cookies. You have sugar cookies, chocolate chips and oatmeal raisins. Every month, you pay your expenses and you realize you’re profitable. After a minute feeling of success, you decide you want to grow even more, so you add on a fourth cookie- a macadamia nut cookie.
Yet in the following month, the profits go down. So you decide to add another cookie. This time a snickerdoodle. And yet it’ll cost you a bit more but you’re sure that people are gonna love them. Yet again, the following month, your profits turned negative. And suddenly, you’re scared about your future.
After getting some help from an accountant, you found that your chocolate chip cookies were actually driving 50% of your profits. And the reason your profits went down was because you cut back on chocolate chip cookies to introduce your new cookie product.
As you can see from a little bit of insight, you can make key business decisions.
In addition, a bookkeeper’s task can help you out with many other tasks such as:
- Employee payroll
- Bill pay
Whereas an accountant can help you out with tasks that include:
- Tax preparation
- Loan applications
- Letter generation
- Overall setup
These are all the tasks you won’t have to worry about as a small business owner, thus giving you more time and more understanding within your business.
III. How Much Should You Spend?
The main drivers of price when it comes to bookkeepers and accountants are their level of knowledge and skills.
A good bookkeeper generally requires no schooling or experience. They only must possess the skills or cognitive ability to follow their tasks. For this reason, an independent bookkeeper may charge anywhere in between $10 to $20 per hour based on their experience.
However, an accountant generally requires some level of education and experience. Usually, they possess a Bachelor’s Degree and have worked in some kind of entry level accounting position. Most independent accountants can demand a price in between $50 to $200 per hour based on their experience.
For example, a CPA or Certified Public Accountant must pass a very rigorous exam that proves their competency in accounting. For this reason, an independent CPA can demand a higher hourly rate- usually between $200 to $250 per hour.
The key is to identify what your weaknesses are and what your needs are.
For example, if you’re looking to save some time on mundane tasks, a bookkeeper may be a good fit.
However, if you need some help understanding your financials on a deep level and preparing a tax return, then an accountant may be a better fit for you.
But if you’re just starting out or you don’t have any business yet, then you probably don’t need either.
When it comes to bookkeeping vs accounting, there’s no one-size fits all. In our opinion, it really boils down to your personal skills set, your interest and where your business is today.
And if you need help with bookkeeping, accounting, with your business taxes, or need a reliable financial advisor to guide you- then you can count on us for that. Simply click this link to get started!