Accounting vs. Bookkeeping: What’s the Difference?

Team Digits

Published January 31, 2024

TLDR: Accounting vs. bookkeeping

Bookkeeping is all about the day-to-day operations of your finances and making sure that all of your records are accurate and organized.

Accounting focuses on analyzing your financial data, so you know where your startup’s finances are headed and what you can do to make improvements.

In this article, we'll dive deeper into both of these financial functions, exploring what good bookkeeping and accounting look like for startups at different stages. We'll also provide guidance on how to approach these critical financial tasks so you can ensure you’re getting the kind of financial support you need to grow.

What is bookkeeping?

Bookkeeping is the art of keeping your startup's financial ducks in a row. It involves systematically recording, organizing, and tracking all financial transactions within your business (yes, even that personal credit card you keep using for business expenses), providing a clear and accurate picture of your company's financial health.

However, don't just think bookkeeping is simply tallying up what's coming in and going out. A good bookkeeper can do a whole lot more for you than that.

If it involves day-to-day money matters, your bookkeeper is probably the person taking point on it, making sure that every hard-earned dime is accounted for. Plus, they're also responsible for organizing all of your financial records. So, if you've pulled invoices from 2019 and didn't need to spend two hours doing it, then you likely have your bookkeeper to thank for it.

To give you a better idea of everything a bookkeeper does, here’s a relatively short list of the tasks a bookkeeper can do for you (so you don’t have to):

• Record daily financial transactions (sales, purchases, payments)
• Reconcile bank statements with internal financial records
• Manage accounts payable and receivable
• Maintain the general ledger
• Process payroll
• Prepare financial statements
• Track invoices and ensure timely payments
• Manage petty cash
• Assist with tax preparation by organizing financial records

How does good bookkeeping help you?

Organized and accurate finances help your business in innumerable ways. Here are just a few benefits you’ll see if you invest in better bookkeeping:

• Time savings: Bookkeepers handle the financial tasks so you can focus on growing your business, not wrestling with spreadsheets.
• Accurate numbers: Financial records are only helpful if they’re accurate. Getting professional help reduces the risk of mistakes that could come back to haunt you.
• Cash flow clarity: They keep your cash flow numbers up-to-date, so if you or your investors want an update, you can get one with relative ease.
• Easier taxes: Taxes are never simple, but coming armed with accurate records and itemized receipts makes everything a whole lot easier.
• Scalability support: As your startup grows, your bookkeeper adapts your financial systems to keep pace.
• Compliance confidence: They keep you on the right side of financial regulations, helping you sleep better at night knowing you're playing by the rules.
• Cost control: By tracking expenses meticulously, they help you identify areas where you might be overspending, potentially saving you a bundle in the long run.

Signs You need to improve your bookkeeping

Beyond reading an article like this, there are some obvious markers that your startup needs some bookkeeping help. Here are some telltale signs to look out for:

• You can’t find anything: If you're drowning in receipts and invoices, it's time to invest in some help.
• You struggle at tax time: Scrambling to gather financial info every April? Good bookkeeping means you're always prepared and compliant.
• You've outgrown your DIY system: Excel sheets were fine at first, but now they're more headache than help.
• You’re frequently late on payments: Consistently missing due dates often stems from disorganized finances.

Solid bookkeeping isn't just about avoiding problems — it's about setting your startup up for success. If you're nodding along to these points, it might be time to consider bringing in some professional help.

What is accounting?

Accounting is the art of taking the hard numbers of your finances and turning them into the insights, forecasts, and strategies that will help your startup grow.

A good accountant isn’t just good with numbers — they’re good with business. They can look at your financial books and help you tell your story: where you are, where you came from, and where you’re on track to go.

This talent is immeasurably useful for any startup. Here are just a few things a good accountant can do for you:

• Unravel complex financial data to craft comprehensive reports
• Create budgets that help you realize your business goals
• Peer into the financial future with forecasts and risk assessments
• Navigate tax laws to keep you compliant
• Serve as your financial compass, guiding strategic business decisions
• Conduct internal financial health checks to optimize processes

How does good accounting help you?

So, accountants are good with numbers and business, but how does that help your average startup founder? Well, here are a couple of ways your accountant can make a difference in your business today:

• Smarter decision-making: Whether you're considering expansion, new product lines, or cost-cutting measures, your accountant can crunch the numbers and advise you on how to proceed.
• Tax optimization: Accountants stay up-to-date with tax laws and can identify deductions or credits you might have missed so you don’t pay a cent more than you have to come tax time.
• Performance analysis: By setting up and monitoring key performance indicators (KPIs), accountants can help you understand how your business is performing compared to your goals and industry benchmarks.
• Financial planning and forecasting: Accountants can craft realistic financial projections, allowing you to get ahead of the curve by proactively planning for growth and avoiding roadblocks.
• Cost control: Through detailed analysis of your expenses, accountants can identify areas where you might be overspending and suggest ways to safely cut costs.
• Improved cash flow management: Accountants can identify trends in your cash flow and suggest strategies to improve it, ensuring you always have what you need to operate and grow.
• Better investor relations: Accountants can help you prepare financial statements and projections that will impress even the most difficult investors.

Signs you need to improve your accounting

Just like there are warning signs that you need better bookkeeping, there are also clear indicators that your startup could benefit from improved accounting practices. Here are some red flags to watch out for:

• You can't answer financial questions: Struggling to put into words exactly how well your company is doing financially could mean you’re not getting access to good enough numbers or explanations of them.
• You’re unsure of your financial future: If you don’t know what your business’s financial health will look like this next quarter or even further afield, then the forecasting abilities of a CPA could be exactly what you need.
• You're missing out on tax deductions: Overpaying on taxes is never cool. Expert accounting could be the solution.
• You have compliance concerns: Being compliant with all financial reporting requirements and industry regulations is crucial for the growth of any business.

Bookkeeper or accountant: Which do you need right now?

Businesses benefit from both bookkeeping and accounting, but your specific needs will depend on your startup's size, complexity, and growth stage. Let's break it down:

When you might need a bookkeeper:

Your early-stage startup may be able to get by with bookkeeping alone. With modest sales, simple tax returns, and low headcount, a bookkeeper can fill your needs and set up your financial records correctly from the start.

You could even try to handle the books yourself, but you will likely grow past this fairly quickly.

If you find yourself struggling to maintain organized financial records or need basic financial reports, a bookkeeper or bookkeeping software can handle these tasks efficiently, freeing you up to focus on growing your business.

When you might need an accountant

Accountants become particularly valuable when your business begins to really take off.

They can help manage the increasing financial complexity that comes with scaling, provide in-depth insights into your financial data, and help you secure the funding you need to reach your potential.

Plus, they can help you navigate regulations when it comes to taxes or major business decisions, like expansion, diversification, or even selling your business.

In essence, an accountant helps you see the bigger financial picture and plan strategically for your startup's future.

When you might need both

Many successful startups find that as they scale, they benefit from having both bookkeeping and accounting.

In this scenario, the bookkeeper handles the day-to-day transactions and record-keeping, while the accountant provides higher-level financial strategy and analysis. This combination ensures all your financial bases are covered, from the tiniest details to the big-picture planning.

Having both can be particularly useful when you're preparing for an audit. The bookkeeper ensures your records are accurate and up-to-date, while the accountant can guide you through the audit process. Similarly, when implementing new financial systems, a bookkeeper can manage the day-to-day use, while an accountant ensures they meet your broader financial needs.

Remember, the choice isn't always either/or. Many startups begin with a bookkeeper and add accounting services as they grow. Others might start with periodic consultations with an accountant and bring on a bookkeeper as their daily transactions increase. The key is to assess your current needs, anticipate future growth, and choose the financial support that will help your startup thrive.

What to look for when picking bookkeeping and accounting services

As you navigate the world of bookkeeping and accounting services for your startup, it's crucial to look beyond traditional options. Finance has changed a lot, even just in the last five years, and the services you choose should take advantage of that.

Here are some key features to look for when it comes time to pick where you get your bookkeeping and accounting support from:

1. AI-powered automation

Instead of relying on a human to spend hours manually categorizing transactions or reconciling accounts, AI can do this in seconds with greater accuracy.

With Digits, you can even pay your company’s bills with AI. Simply drag and drop your invoices, and AI will do the rest.

By leveraging AI and using software that integrates with your bank accounts and credit cards, you can make sure your books are always accurate and up-to-date with your latest financial information. This not only saves time but also reduces the risk of human error, ensuring that your financial data is always reliable and ready for analysis.

2. Real-time data and dashboards

No one has time to wait weeks for financial reports — especially not in a fast-paced startup world. Look for services that offer real-time or near-real-time financial data and reporting. By getting your data fast, you'll be able to make more informed decisions and respond to market changes quickly.

Plus, there’s no reason why financial data needs to be so difficult to understand. Look for a platform like Digits that can automatically create intuitive and customizable dashboards that help you understand your company’s financial situation all in one place.

3. Integrated platforms

Consider services that offer an integrated platform for both bookkeeping and accounting needs. Having all your financial data in one place, from transaction-level details to high-level reports, can significantly streamline your financial management processes.

An integrated platform eliminates the need to switch between multiple software tools or reconcile data from different sources. This not only saves time but also reduces the risk of discrepancies between different financial systems. Look for solutions that can handle everything from daily bookkeeping tasks to complex financial reporting, all within a single, user-friendly interface.

4. Proactive insights and advisory

Modern financial services should do more than just crunch numbers. Seek out options that offer proactive insights and advisory services.

For instance, AI-powered analysis can help identify trends, spot potential issues, and suggest opportunities for improvement before they become apparent. On the other hand, a good accountant should reach out to make sure you understand how the latest economic news might affect your cash flow.

These insights can be invaluable for startups, helping you understand your cash flow patterns, identify areas of unnecessary spending, and spot growth opportunities.

5. Enhanced security measures

With financial data being increasingly digital, robust security is non-negotiable. Ensure that any service you consider employs bank-grade security measures, including encryption, secure data storage, and regular security audits.

The loss or leak of your financial data would be devastating. Look for services that use multi-factor authentication and encrypted data transmission so you know your data is getting the high level of protection it deserves.

6. Expert human support from actual CPAs

While AI and automation are powerful, they’re still not a complete replacement for good old-fashioned human ingenuity and expertise. Look for services that combine cutting-edge technology with access to experienced CPAs who can provide nuanced advice and support when you need it.

These accounting experts can help you navigate complex financial situations, provide strategic advice, and ensure that you're making the most of your financial data. They should be readily available to answer your questions and provide guidance, serving as a valuable extension of your team.

By prioritizing these features in your search for bookkeeping and accounting services, you'll be well-positioned to find a solution that not only meets your current needs but also supports your startup's growth and success in the long term.

Say hello to the future of bookkeeping and accounting

Imagine a world where your financial data is always up-to-date, where you can get real-time answers to your financial questions, and where proactive insights help you stay ahead of the curve.

This is the future we’re ushering in at Digits.

Our modern approach to bookkeeping and accounting marries the best of both financial worlds: cutting-edge AI automation for accuracy and efficiency coupled with expert human insight for strategic guidance.

If you’ve been let down by subpar or outdated bookkeeping and accounting services, it’s time to try something new and purpose-built for the fast-paced startup industry.

Book a demo with us today and take your first step toward financial clarity and control with Digits.