It’s not uncommon to hear the terms bookkeeper and accountant used interchangeably – they both work with financial data, and they’re both in charge of making sure a business’s numbers are squared away. But is there a difference between the two titles? And how does a CFO fit into the picture?
This week’s blog post aims to demystify these terms so you can use them with confidence and understand which is best for your business.
Bookkeeping is a blanket term for collecting, organizing, and recording financial data for any group that takes in a profit. There is no training required to do bookkeeping, and anyone who can do basic math can call themselves a bookkeeper if they’re the one in charge of recording financial data. Many times, a bookkeeper’s work is overseen by an accountant whose job it is to analyze the data in a more complex way (more on this in the Accountant section). There are two types of bookkeeping: single-entry and double-entry.
Single-entry bookkeeping works best for small businesses with uncomplicated financials because it records only one entry for each transaction. Similar to keeping a checkbook or ledger for your personal finances, each entry gets recorded as a positive or negative transaction with no extra data involved. For this reason, single-entry bookkeeping is not a viable option for large companies because it is not possible to account for any cash flow beyond simple money-in vs. money-out (e.g. accounts payable, accounts receivable, inventory).
Double-entry bookkeeping, as the name suggests, records each entry as two points of data, a debit and a credit. For example, for every payment made towards paying down a debt, the transaction would be recorded as to reflect both the payment itself (debit) and a reduction in the amount owed to the creditor (credit). This type of bookkeeping makes it easy to check for fraud or errors, and this data can easily be used to create balance sheets, P&Ls, and financial statements.
In short, bookkeeping is the bare minimum of financial record-keeping. Without accurate books, a company would never know when it was doing well or facing a deficit, and neither would its investors.
Overwhelmed by the thought of doing your own bookkeeping and ready to outsource? Set up a free discovery call with our CEO, Tyler Jefcoat.
Unlike a bookkeeper, an accountant has formal training in accounting and works with a specialized set of skills. Accountants use these skills to not only track financial data for a company but also to analyze that information in a way that can tell the past, present, and future of a company through its financials.
Trained accountants can use a company’s books to assess investment needs, create yearly and quarterly budgets, deliver financial statements, and reconcile multiple types of spending accounts into a clear financial picture.
The two types of accounting, cash basis and accrual, each track incoming and outgoing revenue, but Seller Accountant strongly favors one over the other. Based on the descriptions below, can you guess which?
Cash basis accounting records transactions as money flows into and out of an account in real time. For example, when making an inventory purchase, the ledger reflects the amount paid when the inventory hits the warehouse and is ready to be sold.
Accrual accounting is done with impending data, meaning that transactions are recorded as soon as they are made without regards to when the money is actually transferred from one account to another. In the same inventory example, accrual accounting will record a purchase on the date it is made even though the inventory won’t arrive in a warehouse for several weeks.
If you guessed that Seller Accountant requires accrual accounting from all of its clients, you’re correct. Accrual accounting gives a more accurate picture of current financials because it prevents spending money where there is none to spend. Cash basis accounting is like writing a check at the grocery store and then using your debit card at a nice restaurant. By the time the original check is cashed, it bounces because you spent the money on dinner before the grocery bill was pulled from your account. Accrual accounting anticipates this cash transfer and shows you an up-to-date account of how much you actually have available to spend on that steak and bottle of wine.
If you’re interested in finally understanding where all of your money is going, Seller Accountant’s DIY accounting course aims to teach you how to do your own accrual accounting in less than one hour a week. Find more information about this course here.
So you understand the difference between bookkeeping and accounting, you’ve got an accurate financial picture of your business thanks to your immaculate books, and you may even have hired someone to do your accounting for you. Now what?
Now it’s time to think like a CFO. While an accountant’s job is to prepare financial statements that make it easier to understand what your business needs from a cash flow standpoint, a CFO’s job is to call the shots on those big financial decisions.
If you inherited a company that was already in a bad financial position (or somehow got there all on your own), it’s the CFO’s job to get the business out of the hole it’s dug itself into. You can think of a CFO as someone in charge of the past, present, and future financial state of a business. In looking at historical data, a CFO is responsible for compiling reports for shareholders, employees, and management.
A CFO is also responsible for making high-stakes financial decisions based on current data and for forecasting a company’s future. The CFO assesses risk in investments, balances debt and equity, and attempts to predict which products or services will ultimately prove successful for the company’s finances.
Understanding your cash flow situation is crucial to making profitable business decisions in any market. If you’re looking to leverage your financial knowledge into seven- or eight-figure earnings, or even just feel more secure in your financial decisions, Seller Accountant’s CFO course can help. You can read more about this course here.
This is a basic outline of how accounting, bookkeeping, and CFO services can each influence your business’s fiscal position. For more in-depth information about how to set yourself up for financial success, check out the Seller Accountant blog and consider making a discovery call today.