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The Difference Between Accounting and Bookkeeping

When it comes to running a small business, there are a lot of different moving parts. And one area that is often misunderstood is the difference between accounting and bookkeeping. To put it simply, bookkeeping is a way of recording all the financial transactions of your business, whereas accounting is the process of interpreting, classifying, and summarizing those transactions to give you an overview of your financial health.

What is Bookkeeping?

As we mentioned, bookkeeping involves recording all the financial transactions of your business. This includes everything from income and expenses to assets and liabilities. All this information is then stored in what’s called a general ledger. Think of the general ledger as the brain of your bookkeeping system; it contains all the raw data that will eventually be used to produce your financial statements.

To make sure all this information is properly recorded, most small businesses will use accounting software like QuickBooks or FreshBooks. These programs make it easy to track everything in one place and can automate many of the more tedious bookkeeping tasks (like billing and invoicing). They also allow you to connect your bank accounts and credit cards so that transactions are imported automatically—which can save you a ton of time come tax season.

The Bookkeeping Process

Bookkeeping is the process of tracking all of the financial transactions made by a business. This includes things like sales, purchases, payments, and receipts. Bookkeepers use this information to generate financial statements like balance sheets and income statements, which provide an overview of a company's financial health.

Why is Bookkeeping Important for Small Businesses?

As a small business owner, you need to have a good handle on your finances in order to make informed decisions about where to allocate your resources. Bookkeeping gives you a clear picture of your financial health so that you can make smart decisions about how to grow your business. Additionally, good bookkeeping practices can help you avoid costly mistakes, such as overspending or not collecting payments from customers in a timely manner.

What Does a Bookkeeper Do?

A bookkeeper is responsible for recording all financial transactions, categorizing them into accounting ledgers or journals, and preparing reports to summarize this information. In short, bookkeepers keep track of all the money coming in and going out of your small business. This may include recording sales revenue, tracking inventory levels, managing accounts payable and receivable, preparing tax documents, and more.

How do I Choose the Right Bookkeeper for My Small Business?

When choosing a bookkeeper for your small business, you want someone who is organized, detail-oriented, and has experience with bookkeeping and accounting principles. You should also consider whether you want to hire an in-house bookkeeper or use an outsourcing service. There are pros and cons to both options – it really depends on your specific needs and preferences.
Whichever route you choose, be sure to do your research and ask lots of questions so that you can find the right fit for your small business.

What is Accounting?

While bookkeeping focuses on recording financial transactions, accounting takes things one step further by interpretation, classification, and summarization. In other words, accounting is all about making sense of the numbers and using them to inform business decisions. For example, let’s say you want to open a second location for your small business. An accountant would analyze your current financial situation—including things like revenue, expenses, assets, and liabilities—to help you determine whether or not expanding is feasible.

Another important role accountants play is helping business owners comply with tax laws. Come tax season, they’ll use the information captured in your general ledger to prepare your tax returns. They might also offer advice on how to minimize your tax liability moving forward.

As a small business owner, you need to wear many hats. One of the most important—but often overlooked—hats is that of accountant. Having a solid understanding of accounting is crucial to the success of your business, as it allows you to make informed financial decisions and keep track of your company's progress. But what exactly is accounting, and what do you need to know about it? Read on to find out.

At its core, accounting is the process of tracking a company's financial transactions and reporting the results. This includes recording income and expenses, preparing financial statements, and calculating taxes. Essentially, accounting provides small businesses with the information they need to make sound financial decisions.

However, accounting is more than just crunching numbers; it also involves interpretation and analysis. For example, when reviewing your company's financial statements, you might notice that you're spending a lot on office supplies. This could be cause for concern—perhaps you're overspending in this area or could be cutting costs by shopping around for better deals. Regardless, this is an issue that needs to be addressed. By being able to interpret your company's financial data, you can identify potential problems early on and take corrective action before they become serious issues.

Types of Accounting Methods

There are two main types of accounting methods: cash-basis accounting and accrual-basis accounting.

Cash-basis accounting records transactions only when cash changes hands. In other words, income is only recorded when it is received, and expenses are only recorded when they are paid. This method is simpler and easier to understand than accrual-basis accounting; however, it does not provide an accurate picture of a company's financial health because it does not take into account money that has been earned but not yet collected (accounts receivable) or money that has been spent but not yet paid (accounts payable).

Accrual-basis accounting records transactions when they occur, regardless of when cash changes hands. In other words, income is recorded when it is earned (not when it is received), and expenses are recorded when they are incurred (not when they are paid). This method provides a more accurate picture of a company's financial health; however, it can be more complicated to understand and keep track of.

As a small business owner, you need to have a solid understanding of accounting in order to make informed financial decisions for your business. Accounting involves tracking a company's financial transactions and reporting the results; however, it goes beyond simply crunching numbers. It also involves interpretation and analysis in order to identify potential problems early on so that corrective action can be taken before they become serious issues.

As you can see, there is a big difference between accounting and bookkeeping—but both are essential for keeping your small business running smoothly. If you don’t have the time or energy to tackle these tasks yourself, we recommend working with a professional accountant or bookkeeper who can take care of everything for you (and help you save money come tax season).

author avatar
AG Freideman
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