The terms CPA, or Certified Public Accountant, and accountant are often used interchangeably, but in reality, there are significant differences between them.
But the bigger question is, which one do you need for your business? Surprisingly, you probably need both of them.
For many small businesses, an accountant is sufficient for managing day-to-day financial activity. However, a CPA can be an important resource for other aspects of your business, which can include in-depth financial statement analysis and internal and external auditing, as well as tax planning and tax preparation.
The expertise of a CPA can also be helpful in the early stages of your business by providing advice and guidance on everything from initial business structure to asset purchase and depreciation methodology.
What are the responsibilities of a CPA?
The American Institute of Certified Public Accountants (AICPA) has stated that a CPA is not legally a fiduciary, but by following the AICPA Professional Code of Conduct, a CPA is expected to treat clients with objectivity, integrity, and truthfulness while remaining free of conflicts of interest. When you’re trusting your livelihood to someone else, those qualities are pretty important.
There are a few more things that CPAs typically do that are different from the tasks that accountants typically perform.
Prepare audited financial statements for review
With the widespread use of accounting software, you don’t need a CPA to run financial statements. However, while you may run the reports, do you understand what they’re telling you? That is the job of a CPA.
This is particularly important when you need to have audited financial statements prepared or reports filed with the Securities and Exchange Commission (SEC), which is a requirement for all publicly held companies. For new businesses, a CPA can be a valuable resource in explaining financial statements and what they mean for your business — both now and in the future.
Almost anyone can prepare their taxes. However, many small business owners find themselves in a bind when they try to prepare business taxes for the first time. A CPA is the best person to use when it comes to preparing taxes since they have familiarity with complex tax laws that accountants generally lack.
Legal representation before the IRS
Along with their extensive knowledge of tax laws and what you can and cannot legally deduct, a CPA can represent you in front of the IRS in the event of an audit. While an accountant can prepare your business tax return, only a CPA can defend that return should the IRS or your state tax authorities have questions or concerns.
Don’t underestimate how important this may be if you are ever audited by the IRS or your state tax authority.
Most audits are performed by CPAs, although accountants can sometimes perform in-house audits. However, external audits or auditing of public companies are always handled by a CPA.
What are the responsibilities of an accountant?
Bookkeeping and accounting are two other terms that tend to be used interchangeably, but they are also not the same. Bookkeepers are responsible for recording financial transactions into an accounting software application or a manual accounting ledger. Accountants often perform some of the same tasks as a bookkeeper, but their expertise is usually more advanced than Accounting 101.
Tasks that accountants are typically responsible for include the following.
Recording financial transactions
An accountant is usually responsible for organizing and recording financial transactions. This can include:
- Accounts payable
- Accounts receivable
- Depreciation entry
- Journal entries
Depending on the company, accountants may also supervise bookkeepers or accounting clerks and handle payroll.
Accountants are responsible for reconciling bank accounts at month-end, as well as general ledger accounts. For example, if your ending utility expense account in the general ledger is higher or lower than expected, it’s the accountant’s job to figure out why.
Analyzing financial statements
Experienced accountants can break down and analyze financial statements, including examining cash flow, calculating accounting ratios, and making expense recommendations.
Accountants are also tasked with examining business expenses and reviewing employee travel expenditures, and they may also be responsible for staff payroll, including processing and ensuring that all reports and tax remittances are made by the deadline.
Accountants are usually responsible for creating departmental and organizational budgets. Because staff accountants are familiar with company operations, preparing a budget is a natural extension of their experience and expertise.
CPA or Accountant: What’s the difference?
Just what are the differences between an accountant and a CPA? In some cases, the differences are insignificant, while in other cases, those differences are of vital importance to your business.
Accountants typically have a bachelor’s degree in accounting, finance, or a related field. CPAs also hold a bachelor’s degree, but many states require CPAs to also have an advanced degree before they can sit for the CPA exam. In addition, CPAs are required to fulfill continuing education credits of up to 40 hours annually.
You may be wondering if you can just hire a tax accountant instead of a CPA to do your taxes. In fact, most tax accountants are CPAs. But while accountants are qualified to prepare tax returns for your business, they don’t have the level of knowledge that CPAs have regarding tax codes. CPAs can also represent you before the IRS should you be audited, something that accountants cannot do.
CPAs must be licensed in their state to practice, while accountants do not require a license. And because CPAs are licensed, they are required to adhere to more stringent standards than an accountant.
Code of Conduct
All CPAs in the U.S. are required to abide by a set of principles established by the AICPA. These principles include:
- The Public Interest
- Objectivity and Independence
- Due Care
- Scope and Nature of Services
While accountants should follow many of these same principles, they are not required to do so.
Should I use an accountant or CPA for my business?
Ideally, you should use both. An accountant can be an everyday asset by entering financial transactions, preparing adjusting journal entries, and managing accounting tasks such as depreciation and amortization, bank reconciliations, and basic financial statement analysis.
But just because you have an awesome staff accountant is no reason why you shouldn’t use a CPA as well.
When a CPA makes sense
There are times when deciding between a CPA and an accountant can be tough. At other times, the decision is simple, such as under the following circumstances.
- If your tax return is complicated: If your taxes are complex, go with the tax expert.
- If you're starting out: A CPA can assist with the big picture and also provide guidance on business structure.
- If you’re being audited: A CPA can assist with the audit process. They can also represent you in front of the IRS.
- If you’re a public corporation: Only a CPA can create audited financial statements that are required by law.
When an accountant makes sense
As valuable as a CPA can be for certain situations, there are also times when an accountant is the better choice.
- For routine transactions: Accountants can easily organize and record financial transactions.
- If you need management accounting: An accountant is the better choice for internal cost analysis. They can also make recommendations for increasing revenue or cutting expenses.
- To create a budget: The best people to create a budget are staff accountants who have access to department and company performance metrics.
- To analyze financial statements: Both CPAs and accountants can analyze financial statements. However, for routine analysis and reconciliation, an accountant is the best option.
You won’t always need a CPA
Is a CPA better than an accountant? That depends on the circumstances. Both CPAs and accountants are valuable assets to any business, and, in a perfect world, your small business would take advantage of the expertise of both by using an accountant to manage day-to-day financial activities and calling on a CPA for auditing, taxes, and general business consulting.
So, while you won’t always need a CPA, understanding that there are times when you will need one is important for all small business owners.