A reader recently e-mailed me this question: "I'm starting a small business and will need some help with the financial side of things. What's the difference between a bookkeeper, an accountant and a certified public accountant (CPA), and which professional is right for my business?"
To get the right answer, I went to someone with a little experience in the financial field. Linda Hunt, president of SumSolutions , a financial and management consulting firm in Trumbull, Connecticut, says that there are actually four types of accounting professionals.
First, there are bookkeepers who record your daily business transactions but don't prepare or file your tax returns. According to Hunt, bookkeepers come in two varieties. A "basic" bookkeeper is basically a clerk who can handle your accounts receivable and payable records, and perhaps take care of your payroll each week. A "full charge" bookkeeper, on the other hand, can handle a wider variety of more complex transactions. "Since most small businesses look for someone who can handle all their financial transactions, they should always look for a full charge bookkeeper," advises Hunt.
Then there are accountants and CPAs. Contrary to popular belief (and to what a lot of CPAs will tell you), Hunt says there's really no difference between the services that accountants and CPAs provide. "A CPA has met the requirements of state law and has a license or certificate from the state, says Hunt. "When you're an accountant, you study the same things but you don't take the state exam." Both accountants and CPAs can help you prepare your tax returns and organize your books and records, Hunt explains, but only CPAs can file your tax return as a "paid preparer" or audit your financial statements.
Lastly, Hunt points out that there's a fourth accounting professional: the "enrolled agent" who falls somewhere between an accountant and a CPA. Often a former IRS employee, an enrolled agent is "not an accountant or lawyer, but someone who understands the federal and state tax laws, has sat for an exam, and can file your tax return as a paid preparer," according to Hunt. In Hunt's view, enrolled agents are usually more knowledgeable than accountants because they're held to a higher standard of education and performance, but are not as knowledgeable as CPAs or tax lawyers.
So which one do you choose? Hunt believes it's best to have both a bookkeeper and either an accountant, enrolled agent or CPA. "An accountant or CPA knows what the tax deductions are, what's legal and illegal, and your bookkeeper isn't trained to do that," explains Hunt, "but accountants and CPAs usually charge a lot of money to record your business transactions. A bookkeeper is usually a lot less expensive."