People typically use the words “bookkeeping” and “accounting” interchangeably. In everyday conversation, where the finer points of the record keeping lexicon are avoided for the health and sanity of everyone involved, this is probably for the best.
Even so, there are distinct differences in the roles assigned to bookkeepers vs those assigned to accountants. As an entrepreneur or aspiring business owner, understanding the subtleties between these two terms can improve your ability to make the best use of your accounting and bookkeeping resources.
Where These Words Come From
The need for accounting dates to when ancient Mesopotamian merchants were suddenly faced with the new task of tracking the sale of goods through trading towns in present-day Iran. The very first accountants used clay cylinders and stone tablets to track everything.
Since then, accounting has been a mainstay of human society. Detailed books on bookkeeping date back to the 1300’s Italy, and describe the importance of the double entry system, where every transaction is recorded as both a debit and credit. This is the type of bookkeeping we still use today.
Accountants at the time recorded transactions in various books - the cash book, sales book, and the ledger book, for example, leading to the introduction of the term “bookkeeper”.
In today’s common usage, both bookkeeping and accounting describe the activity of recording your business’ financial transactions. The distinction lies in what responsibilities fall to the bookkeeper vs those duties reserved for the accountant.
What a Bookkeeper Does
If you need someone to help keep track of all your finances, you need a bookkeeper or an accountant who offers bookkeeping services. Modern bookkeepers are experts in accounting softwares, many of which are cloud-based. They will help you create processes to collect data about your business, such as implementing inventory or time tracking software.
Bookkeepers also compile reports such as the profit and loss statement and balance sheet, which provide a comprehensive overview of the financial performance of a business.
Bookkeepers are sometimes charged with sending invoices to clients and collecting payments, paying bills, and managing payroll.
What an Accountant Does
Today, we generally recognize accountants as people who have received a professional designation to practice public accounting, such as the Certified Public Accountant designation. Experienced professionals with a degree in accounting are sometimes also called accountants.
Accountants are typically tasked with preparing and filing taxes for businesses and business owners. Some accountants focus exclusively on tax preparation, as it is relatively more lucrative than bookkeeping. Accountants occasionally offer all-in-one services, both preparing the books and filing taxes for clients.
Accountants are sometimes also hired to perform an independent audit of a company’s financial records. This is especially popular among companies with a large number of shareholders, where financial transparency is enforced through the use of outside accountants.
And What Does a CFO Do?
Companies hire a CFO to interpret all of the data their bookkeepers and accountants generate. CFO’s oversee all of the accounting processes at a business, and their role is divided into two parts: backwards looking and forwards looking.
The backwards-looking component of a CFO’s role is to tell the story of how the company has done in the past. This also encompasses making sure that the right systems are in place to track the right data.
CFO’s do more than just prepare a profit and loss statement for each year in a company’s history. A CFO will look to tie important business decisions to specific points in time. They will be able to quantify the impact certain business decisions had, and provide company management with an accurate interpretation of a company’s financial performance.
The forward-looking component of the CFO role is to answer the question “what will happen if we do X”, where X is any one of the crazy things entrepreneurs want to try. That’s the fun in owning a business, right?
This part of the job entails creating detailed financial forecasts and models that attempt to predict the likely outcome of a given policy or process change.
What a Small Business Owner Needs
No matter if you’re hiring a bookkeeper, accountant, or CFO, there two easy rules to make sure that you find the right person for the job.
Look for relevant experience and education
Ask for references!