What are Bookkeeping and Accounting and why are they Important?
While accountants and bookkeepers share common goals, they support your business at different parts of the financial cycle.
In simple terms, bookkeeping is transactional and administrative. It is concerned with recording a business's financial transactions.
On the other hand, accounting is much more subjective. It provides insights into your business's overall financial health based on the information provided by bookkeeping.
Keep reading to learn more about bookkeeping and accounting and why they both have a role in day-to-day business operations. As you move through the information, you can also learn when each professional is needed, their role in business operations, and how to find the right professional for your business needs.
What Is Bookkeeping? An In-Depth Look
Bookkeeping (as mentioned above) is the process of recording transactions each day in a consistent manner. It is an essential part of gathering the financial information required to run your business and achieve success.
- Producing invoices
- Recording financial transactions
- Preparation of financial statements
- Posting debits and credits
- Maintaining and balancing historical accounts, general ledgers, and subsidiaries
- Handling payroll
Maintaining an accurate general ledger is a crucial component involved with bookkeeping.
Your general ledger is the basic document used by bookkeepers to record the amounts of sales and expenses based on receipts. The process is called posting.
The more sales made, the more often the ledger is posted. You can create ledgers using software, a spreadsheet on your computer, or a simple lined sheet of paper.
The complexity of bookkeeping systems usually depends on the business size and the total number of transactions done monthly, weekly, and daily. Every sale and purchase made by your business must be recorded in your ledger, and some items require you to provide additional documentation. The IRS lets you know what business transactions require you to submit additional documentation via their website.
When thinking about "what is a bookkeeper," an important aspect is their education or credentials.
In most situations, bookkeepers don't have to have any type of formal education. Being successful in this role requires the individual to be knowledgeable about important financial topics and dedicated to high levels of accuracy.
For most businesses, the bookkeeper is overseen by the owner of the business or accountant. This is why bookkeepers can't call themselves accountants.
The Importance of Bookkeeping for Your Business
If you are unsure if bookkeeping is really necessary for your business, keep reading. Here you can learn about the specific benefits offered by professional bookkeeping services here.
Help with Accurate Budgeting
Bookkeeping is an important part of any business because it makes budgeting easier. With your expenses and income organised well, it is easy to review your costs and resources.
Your budget is your business's financial roadmap. When you establish a budget, it's possible to plan for future expenses for your business, which will help with ongoing growth and success. If your books are not updated, it's much harder to develop an accurate budget because you are just guessing everything.
Ensure You're Prepared for Tax Season
While it may be annoying, many businesses must file their taxes at the end of the year. If you ensure proper bookkeeping throughout the year, your financial information will be ready for tax season, and you don't have to worry about the IRS hounding you.
Ensures Organised Records
Do you really want to deal with the last-minute stresses of locating an essential piece of business information? This can lead to errors, missed deadlines, and other issues. Regardless of the size of your business, you really can't afford to make mistakes. Bookkeeping regularly can prevent these issues.
It's imperative to make it a habit to update your books regularly. Don't leave this to the last minute. By doing this, you can remain organised. As time passes, it will make it much easier to find the information you need.
Easier to Recgonise and Meet Business Targets
If you own a business, you want it to grow. However, if you don't keep up with your financial records well, this may keep this from happening at the speed desired. If you don't have accurate data or numbers to analyse.
The main reason this is the case is that you will be guessing at everything. Because of this, you will likely be disappointed that you did not hit your prior targets. When you stay on top of your bookkeeping and update financial records often, it's possible to map out your goals and achieve growth accurately.
Meet Government Regulations
The government is developing new initiatives all the time. Unfortunately, the goal of these is to make things easier for them, not you. One of the most recent is the MTD – Making Tax Digital – an initiative where the government just expects businesses to comply.
With this, your business must do taxes digitally using software and applications. In this situation, you have to do your books and have an app to handle your taxes.
If you use the app provided, the process is actually easier. It can also help you avoid penalties and keep you from having to outsource your bookkeeping needs.
Additional Peace of Mind
If your books are unorganized and tax deadlines are coming up, it can cause a lot of stress and panic. If you own a business, the last thing you want to deal with is bookkeeping tasks that are months behind.
When your books are complete and organised, you don't have to worry about them stressing you out. You can focus on other parts of your business and know that at least this element is taken care of.
Learn the Process
When it comes to bookkeeping, it doesn't matter if you are a veteran or a newbie. Getting hands-on allows you to learn and fill in any knowledge gaps you may have.
Also, when you update your books regularly, you also can learn more about your business's financial situation. Everything you find out is going to help you make better business decisions.
Tips for Hiring a Bookkeeper for Your Business
Now that you know the answer to "what is a bookkeeper," it's time to learn how to find the right one for your business. You have a few options to choose from. You can hire a freelancer, a firm, or a remote bookkeeping service.
This isn't the case for companies with over 30 employees and $1 million in revenue annually. At this point, hiring someone in-house makes the most sense.
This is the most affordable option. It is preferable if you have a limited budget. If you hire a local freelancer, they can come to your business to collect and organize your documents. If you have a paperless office, then you may be able to hire a freelancer online.
One of the biggest drawbacks of working with freelancers is that they usually work on their own schedule. This could leave you in a jam if you need something done quickly and they aren't available.
Working with a Firm
It is usually more expensive to hire a firm, but there is usually always someone there to help you when you need something.
Many modern firms work remotely with clients, so it is a good idea to find a firm that uses the same bookkeeping software as you. This can help ensure seamless service.
Remote Bookkeeping Solutions
Online bookkeeping solutions typically use cloud-based software to connect you with an experienced team of bookkeepers. These individuals handle your books for you. The service is similar to a firm but usually more affordable.
What Is Accounting? An In-Depth Look
Accounting is a higher-level process that uses the financial data gathered by bookkeepers or business owners and then produces financial models.
Accounting is more subjective than what you do in bookkeeping, which is mainly transactional.
Some of the aspects of accounting include:
- Preparing the adjusting entries
- Helping the business owner understand the impact of different financial decisions
- Handling income tax returns
- Analysing operation costs
- Reviewing the company's financial statements
One of the most important parts of the accounting process is to analyse the financial reports, which help you make a business decision. This results in a better understanding of how profitable your business is and provides you with information about the business's cash flow.
Accounting will turn the information located on the general ledger into insights that provide the "bigger picture" of the business and what path your company is progressing down.
Business owners often work with accountants to help with tax filing, forecasting, analysing the business's financial position, and strategic tax planning.
If you want to be an accountant, you must have a bachelor's degree in accounting (in most cases). If you don't have a degree in accounting, having a finance degree may be a suitable alternative.
Accountants can also acquire other professional certifications, unlike bookkeepers. For example, with adequate experience and proper education, accountants can work to become a CPA or Certified Public Accountant title. To earn the title of CPA, the accountant has to pass the Uniform Certified Public Accountant exam and have experience working as a professional accountant.
The Importance of Accounting for Your Business
Accounting plays a huge role in running your business. It helps track expenditures and income, make sure you are compliant, and provide the government, management, and investors with quantitative financial information that is then used to help guide business decisions.
Some of the top reasons it is imperative to invest in accounting for your business include:
Help Evaluate Business Performance
Your business's financial records reflect the operation results and the financial position of your small business. Put simply, they help you to understand the financial state of your business.
Having clean, accurate, and updated records will help you keep track of gross margin, your expenses, and debt. Still, it allows you to compare your existing data with prior periods so you can allocate your budget properly.
Ensures Statutory Compliance
Regulations and laws vary from one state to another, but with proper accounting processes and systems, you can feel confident your business will maintain statutory compliance.
Accounting ensures liabilities like pension funds, income tax, VAT, and sales tax (to name a few), are handled as needed.
Create Budget for Future Projections
Future projections and budgeting can make or break your business. Your financial records will play a huge role when it comes to this.
Business projections and trends are based on your historical financial data. They are needed to help ensure your business remains profitable. The financial data is most reliable and accurate when provided with a strong, structured accounting process.
Helps with Filing Financial Statements
Businesses must file their financial statements as required by law. The listed entities must file them with the stock exchanges and for indirect and direct tax filing purposes. It should be clear that your accounting practices play a huge role in these situations.
Tips for Hiring an Accountant for Your Business
Hiring an accountant isn't cheap. If you have a small business, it may be tempting to avoid using the services of this professional altogether.
While this may be tempting, having access to an accountant will be beneficial in the long run.
You must find the right accountant for your business. The best one is one who understands your business and industry. They should also have experience working with businesses like yours.
You can ask around to contacts in your industry to find out if anyone can refer you to someone who is qualified. After you have a few leads, you should meet up with a few, ask them questions, and learn more about their firm. Some of the things to consider are listed here.
Do They Understand Your Business?
It's important to find an accountant with prior experience dealing with people in your industry. They can help you with common deductions and tax breaks that apply to your situation and business.
When talking to an accountant about taxes or the IRS, there's the possibility that they may begin using all types of technical language. Try to find an accountant who communicates these high-level topics in a manner that is accessible and that helps you learn more about your industry and business.
Strength and Size of Their Team
Ensure that the accountant you choose to hire has a large enough team to handle what you need them to do. Hiring a one-person firm may not have the resources your growing business needs.
How Often Will You Need Their Services?
It's important to consider how often you will need the services of the accountant that you hire. For example, do you just need yearly tax help or more intensive financial planning? Are you going to be meeting regularly or quarterly? Will you only need their help during tax season? Be sure to ask them what their availability is to ensure they will be available when needed.
The Cost of Hiring an Accountant
Some accountants will charge by the hour, and others work on a retainer fee paid monthly. The cost of services can vary quite a bit from one accountant to another. It all depends on the level and type of service provided by the CPA.
Be sure to discuss costs at your initial meeting. This will give you an idea of how often you will meet with the accountant, which is also going to impact the cost.
When to Hire a Bookkeeper or Accountant
It can be challenging to determine when you should hire a bookkeeper or accounting professional. You may even wonder if you need one at all.
While some small businesses only use accountants as consultants, you have more than a few options regarding handling different bookkeeping tasks.
For example, you may want to handle bookkeeping tasks in-house. You can discuss what software to use with your accountant and then provide them with the information as needed. Be sure to consider carefully what makes the most sense for your business's needs. When you hire these professionals, it means you will have time to focus on core operations rather than bookkeeping and accounting tasks.
Accountant vs. Bookkeeper: Now You Know the Difference
As you can see from the information here, both bookkeepers and accountants have important roles in all businesses. Understanding what these professionals do provides you with an understanding of who you should hire and why.
Take some time to understand the roles of each professional, which will help you figure out what best suits your needs. Being informed and thinking about your business is going to help you along the way.
Do not underestimate the benefits that are offered by hiring the right professionals for your business. Doing so will help ensure your business grows, thrives, and succeeds now and in the future.
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