There are two things you should know about my parents: They have both worked in finance, and they both love “Star Trek.” (My mom even wanted to design our basement to look like the bridge of the USS Enterprise—what a nerd.)
I definitely inherited the “Star Trek” gene (Roddenberry, get it?), but I hate math. Luckily, my parents never pressured me to follow in their footsteps. But over the years (and sometimes against my will), I’ve picked up a few handy nuggets of finance knowledge.
One of those nuggets is understanding the difference between bookkeeping and accounting.
But how does the difference between these two vocations translate to the world of software? I’m glad you asked.
Bookkeeping vs. Accounting Software
Accounting software features deal with more high-level, holistic, broad decision-making, management, and analysis.
Bookkeeping software features generally focus more on the smaller facets, such as reports and data management.
To help you visualize the difference, here’s a summary of their features and how they differ, often pretty widely, and where they overlap:
Bookkeeping software not only offers fewer features, it could also be easily integrated with accounting software. In fact, most bookkeeping software comes with third-party integration.
Accounting software is a larger and more comprehensive version of bookkeeping software—like bookkeeping on steroids. So if you don’t need a full blown accounting system yet, but you want more than just simple bookkeeping, having an integrated system could be helpful in the long run, especially as your business grows.
Bookkeeping vs. accounting: A day in the life
Now, let’s take a look at these two different software types in action.
Say we’re in a small or midsize business (SMB). Any business type will do. After all, where there’s money, there must be some process for managing it.
In our hypothetical business, we have Paula, an accountant, and Sam, a bookkeeper.
Let’s call our business “The Enterprise.”
Paula goes to visit Sam, and she asks for the week’s financial report. As bookkeeper, Sam records the company’s day-to-day transactions, including expenses and profits.
By Friday, he’s compiled that data for the past week. The amount of data will differ depending on the structure of your company, and bookkeepers will often report on company data about as well as recording it.
Then Paula can take the reports and turn the data into useful information. A lot of Sam’s job is data entry—at least, at the beginning of his illustrious career.
Sam doesn’t use many of the software features that Paula uses. He might use the company’s customer relationship management (CRM) system to keep track of all the company’s contacts and to pull data about revenue and expenses from interactions with their customers. He’s also use the software’s data storage and tracking features to maintain his records and to help him stay on top of The Enterprise’s daily financial activity.
Then, we have Paula.
Paula takes the week’s financial report back to accounting. She adds the report to the accounting database, where she and her colleagues have gathered all the company’s financial transactions, including purchases, savings, and investments.
Paula and her colleagues in the accounting department spend most of their time consolidating and analyzing the financial data.
Often they will find and predict trends using a forecasting feature in their accounting software. Then Paula will advise the CEO, Jean-Luc Picard, on how to maximize revenue for The Enterprise.
Paula uses accounting software to help make recommendations on many aspects of the company, including budgeting, payroll, cash flow reports, fixed asset management, and accounts payable and receivable.
At the end of the day, Sam records and compiles the data for Paula, who interprets the information. Then she presents her findings to Picard, who will use her advice to make a good financial decision.
How do I know what type of finance software I need?
Again, glad you asked.
You need to understand what your business needs are before you can make this decision.
For example, a basic bookkeeping tool might be enough for your business if:
- You want an organized way of tracking expenses, revenue, investments, and sales
- You need to create basic financial reports
- You need help balancing your books
Accounting software is useful for performing a holistic analysis of your company’s finances. Like an accountant, accounting software helps the company make data-driven decisions based on financial reports.
You might need full-featured accounting software if:
- You need to check your everyday financial activity against previous records
- You need to analyze cash flow reports
- You need help managing your fixed assets
- You need to analyze your company’s overall financial situation
- You need to prepare in-house income reports, tax returns, or balance sheets
In essence, bookkeeping software could be considered a stepping stone to accounting software. As businesses scale, their financial activity increases, and their ability to keep track of it all on their own decreases.
Some smaller businesses can balance the books without any help, but having a dedicated tool never hurts, especially when it’s affordable—or even free!
Unlike the Prime Directive, these rules are guidelines. Every company has its nuances. When you find out what your Enterprise needs, you’ll get a better idea of which is the best tool for you.
Check out Capterra’s finance blog for more tips and tricks to keep your Enterprise on track. Set a course for financial success!
Looking for Accounting software? Check out Capterra's list of the best Accounting software solutions.