The confusion around bookkeeping vs. accounting usually starts as a business begins to grow. Most companies start with bookkeeping, and for a period of time, that is sufficient.
As the business grows, however, the questions become more complex. ‘Which product lines are actually profitable?’ or ‘why do my margins go up and down month after month?’
At that point, the issue is not whether bookkeeping is being done properly. The issue is that Generally Accepted Accounting Principals “GAAP” are not being applied to the transactions input by the bookkeeper.
Bookkeeping vs. Accounting: What’s the Real Difference?
Bookkeeping and accounting are not closely related, they serve different purposes inside an organization.
What Bookkeeping Does
Bookkeeping is data entry. It focuses on recording financial into an accounting system, usually a focus in generating invoices, and paying vendors, but no consideration for Generally Accepted Accounting Principals. Bookkeeping is the simple activity of inputting data about buying and selling and almost always on a cash basis.
Typical bookkeeping responsibilities:
- Recording daily transactions
- Processing accounts payable and receivable
- Reconciling bank and credit card accounts
Strong bookkeeping records total sales and total espenses. In addition, bookkeeping does not take into consideration accruals, and such are presented on a cash basis. This means there are actual timing differences in the business operation that are not being considered. Therefore in most cases, cash basis financial statements do not accurately portray the margins and profitability of a business.
What bookkeeping does not do is evaluate whether margins are accurate, whether costs are properly allocated, or whether the structure of the reporting supports decision-making.
What Accounting Does
Accounting builds on the bookkeeping foundation and turns recorded data into structured financial information based on U.S. Generally Accepted Accounting Principals “US GAAP”. Every successful private company that is well maintained, and 100% of the publicly traded companies keep their books and records per US GAAP because that is the correct way to keep your books and records.
Typical accounting responsibilities:
- Producing accurate financial statements
- Ensuring reporting aligns with Generally Accepted Accounting Principals “GAAP”
- Reviewing revenue recognition and expense classification
- Correctly calculating gross margins and cost allocation
- Evaluating inventory and work-in-progress (read more on WIP Accounting)
- Proper use of accruals
- Building budgets and forecasts
- Maintaining 13-week cash flow projections
Accounting is “principal” based. A set of rules on how to record revenue, expenses assets and liabilities that allows two companies to be compared, apples to apples. It evaluates whether the numbers reflect economic reality and whether the reporting supports operational decisions. The Generally Accepted Accounting Principals are applied to all historical transactions.
In simple terms, bookkeeping is data entry. Accounting takes that data entry and by applying accepted principals, the business can generate accurate financial statements that portray the actual results of an operation.
Can You Do Your Own Bookkeeping and Accounting?
In the beginning: Sure. If you are a Certified Public Accountant “CPA” and you own your own business, you will know that latest accounting principals and you can maintain your own books and records. If you have a very small company, lets say below $1 million in revenue and you sell sandwiches via a point of sale cash register, and purchase your inventory on a cash basis, then you are probably OK with bookkeeping. Beyond that, you need to consider having your books are records on a US GAAP basis “professional accounting”.
As you grow: No. Here are a few reasons why most owners eventually hand over the keys:
- Even if you are a CPA and know the accounting principles to apply, you should be focused on running your business and future strategy.
- If you are not a CPA, you can hire a CPA, in most companies your first hire is a Bookkeeper because you do not have a need to keep books and records on an accrual basis or per U.S. GAAP. But as you grow and pass $1 mm in revenue and more, you want to understand your true margins, get a loan from the bank, or have discussions with investors, you will be required to present your financial statements accurately and per U.S. GAAP.
- Until you hit scaling milestones like hiring employees, managing inventory, or applying for a bank loan.
Why Most Businesses Outgrow Their Books
It’s no surprise that what works at $2 million in revenue rarely works at $15 million.
Business growth introduces additional layers of complexity: more customers, more vendors, more employees, maybe more locations, and in some cases manufacturing processes or long-term construction contracts. Each new layer that gets added on means more accounting needs.
Oftentimes companies continue operating with the same bookkeeping structure they established from the beginning. Transactions and reports are done correctly, but the underlying financial structure does not evolve.
Signs You’ve Outgrown Basic Bookkeeping
- Revenue approaching or exceeding $1 million
- You want to know your true margins
- Gross margin fluctuations (without clear explanation)
- Confusion around inventory valuation or costing
- Confusion regarding percentage-of-completion accounting
- Increasing reporting requests from commercial bankers
- Decisions being made primarily on instinct, rather than financial analysis
When to Move Beyond Bookkeeping and Invest in Accounting Solutions
If your businesses is showing any of the above signs, it may be time to upgrade from bookkeeping to accounting. It’s important to note that upgrading does not mean replacing bookkeeping. It means adding structured accounting oversight around it.
For actively growing companies, these structured accounting solutions typically include:
- A dedicated senior accountant and controller, these must have accounting degrees. The Controller should be a CPA.
- Formal monthly close procedures
- U.S. GAAP- produced financial statements
- Margin and cost analysis by product, job, project, or division
- Inventory or work-in-progress oversight
- Budgeting and rolling forecasts
- 13 week cash flow visibility
- Regular financial review meetings with ownership
Don’t be overwhelmed. Building this capability internally often requires multiple hires and ongoing supervision. However, a dedicated external accounting team can deliver the same things. Learn more about our outsourced accounting solutions.
Upgrade Your Accounting Structure with Strategic CFO
Strategic CFO provides dedicated Controller and CFO services and accounting solutions for growth stage companies that need disciplined reporting, oversight, and forward-looking visibility without building a full internal department. Unsure whether your business has outgrown basic bookkeeping or accounting? Speak with one of our accounting consultants today!
Schedule a consultation and we will give you a direct assessment of your current financial structure.
