Accountants: More Than Just Bookkeepers
For many people, the job titles of accountant and bookkeeper are interchangeable. After all, doesn’t a bookkeeper maintain the accounts of a business by tracking accounts receivable, accounts payable, rent expense, payroll, etc.? The answer is yes, a bookkeeper does perform all of these accounting functions. So why does an accountant get paid so much more than a bookkeeper? Aren’t they one in the same?
To answer this question, we can first think back to geometry. To say that a bookkeeper is equivalent to an accountant is like saying a square is equivalent to a quadrilateral. Both are shapes with four sides. But a square is a specific type of quadrilateral with all four sides equal in length and four right angles. A quadrilateral, on the other hand, is more encompassing.
A rectangle, a square and a trapezoid all are quadrilaterals. All have four sides, but it is the length of those sides and the angles between them that differentiate these shapes. The same holds true for accounting. Bookkeeping is a very specific part of accounting which looks at the tracking of money being spent and earned. We all do bookkeeping by (hopefully) balancing our checkbooks. But accounting, like a quadrilateral, is much more encompassing.
Accountants use a technique called matching, which goes way beyond standard bookkeeping. Beyond basic bookkeeping, accountants must make decisions regarding the “how, when and why” of documenting a businesses finances. Matching is a principle used to allocate debits and credits to certain accounting periods and reconcile across types of financial statements. Although there are strict laws governing accounting, there is a certain amount of flexibility that allows accountants to have some control over the outcomes of their financial statements.
As a more specific example, let’s compare straight-line and double-declining balance depreciation. To oversimplify, in straight-line depreciation the cost of the equipment is divided by the number of years of its “useful life” (less the salvage cost, or final “worth,” of the equipment once it has reached the end of its useful life). This gives a depreciation amount that is the same year one as it is year ten. It is a very neat and reliable method to use, as there is no variation in the fixed amount.
With the double-declining balance method, however, the amount of the depreciation is much more the first year than it is the tenth year. Think of the interest on your mortgage. During the early years, the majority of your mortgage payment is interest, compared to the final years when almost the entire amount paid goes to principle.
We all know that the tax advantage of a mortgage is that you can deduct the interest paid. Your tax deduction, much like the tax deduction using double-declining balance depreciation, is more the first year than the tenth year, since you pay more interest early on. Using the same principle and accountant can elect to have a greater deduction for depreciation, or a greater offset to the revenues generated, by choosing the double-declining balance method. This is not as neat, but it allows for more cash to be reinvested in the company during the first few years, when it may be more needed.
As you can see, accountants have a lot more responsibility for the financial success of a business, both on paper and in the eyes of potential investors, than do bookkeepers. Although bookkeepers do perform some basic accounting functions, please do not confuse them with accountants.
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In: Accounting · Tagged with: accountant, Accounting, bookkeeper, finance, tax
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