What Is Private Accounting?: Definition & Reasons to Use

Accounting is a necessary part of doing business, but many small businesses don't have the budget to pay for dedicated accounting personnel. The decision of whether to use private accounting or to hire public accounting firms can hinge on a company's size and complexity. It can also boil down to a question of values and priorities, specifically about the quality and importance of your company's accounting records.

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Private accounting is performed by an employee of the business whose books are being completed and evaluated. The public accounting definition covers the domain of an outside contractor who usually does accounting for multiple businesses.

• Proprietary systems. All businesses must comply with generally accepted accounting principles (GAAP) for legal and practical purposes. These include consistency, regularity and good faith. But your business may also have some homegrown systems that make sense internally but would require considerable adjustment from an outside party.
  
  
• Sufficient need. If your business involves a handful of transactions per week, you may be able to easily hand off your accounting routine to a public accountant. This would free up your staff's time for other tasks, such as running your business. However, if your bookkeeping needs are sufficiently complex to keep an in-house accountant busy, you may benefit from hiring a private accountant.
  
  
• Simplicity. Although having simple accounting needs may make it easier to hire a public accountant, this same simplicity can also make it more sensible to have one of your own staff members perform basic accounting tasks, assuming that person is properly trained. If your company is small enough and you understand how to compile basic financial statements, you may choose to save money and do this work yourself.
  
  
• Long-term plans. If you have a small business that you plan to keep small, your bookkeeping may only need to be sophisticated enough to file tax returns, perform simple audits and apply for an occasional bank loan. However, if you project exponential growth and eventual outside investment, it may be more prudent to hire a dedicated private accountant to keep your books immaculate, provide detailed insights and get your financials ready for when it's time to scale up.

• Complexity. Accounting isn't for the faint-hearted, and not everyone has a friendly relationship with numbers. If you're more interested in the craft of your business than its entrepreneurial side, making shoes rather than making financial projections, a public accountant is an ideal solution for a micro business.
  
  
• Scale. If your company just doesn't do enough business to justify hiring a dedicated private accountant, a public accounting option is probably the right choice. Using an accountant who works for multiple businesses will cost less than having an in-house staff person.
  
  
• Perspective. An accountant who handles financial statements for multiple businesses will be able to provide you with a broader perspective than someone who is employed only by your own company. This outside accountant can see your financial situation relative to that of other similar businesses and make useful observations and suggestions.
  
  
• Objectivity. It's difficult to see your own situation clearly, especially when you're deep in the weeds of figuring out how to make ends meet and cover your day-to-day expenses. A public accountant can help you make decisions without the burden of pressures that can cloud your judgment.

Although it may not make sense for your business to use a private accountant, it may still be perfectly reasonable for your company to keep a private bookkeeper on staff. The functions of a bookkeeper and accountant have plenty of common ground, especially because both positions work to organize and understand your business in numerical and financial terms.

Bookkeepers record your company's financial transactions. They do data entry and organize the information so it is useful for managers and accountants. An accountant uses the information that a bookkeeper has assembled and takes it to the next level, completing financial reports and tax forms, and performing audits for accuracy and completeness.

Although it may not make sense for your business to hire a private accountant, you may still have need of a private bookkeeper, one who can take a deep dive into your company's nuances and idiosyncrasies to develop a thorough understanding of how entries should be categorized for maximum relevance. The better your private bookkeeper performs this work, the easier it will be for your public accountant to synthesize and evaluate.

The most urgent and important task of an accountant, whether internal or external, is to compile and organize the entries in your bookkeeping system to present to outside entities such as tax agencies, banks and investors. This process is usually relatively straightforward, although it does require education and experience. It is especially straightforward if your bookkeeper has done a diligent job preparing the information for your accountant's work.

Tax reporting forms follow specific formats, requiring rigorous attention to detail and knowledge of reporting conventions. Your accountant takes responsibility for completing your tax forms legally and accurately. Either a private or a public accountant can perform this task effectively. If your business is small, however, you may not have the resources to hire a dedicated private accountant who can complete your tax forms effectively.

Applications for bank loans require financial statements that reflect your company's financial situation with accuracy and transparency. Financial statements are also important for internal purposes such as evaluating profitability and reporting to investors. As long as your financial statements are compiled scrupulously and on schedule, they can also be prepared by either an internal or external accountant.

The numbers your accountant assembles for your financial accounting will also be useful for understanding and improving your business to make it smoother and more profitable. Data about margins, fixed costs and variable costs allow you to work on your business model. Figures on cash flow statements help you to plan ahead so you have the capital you need, when you need it.

Managerial accounting encompasses the internal uses of accounting information, from financial planning to cost analyses. In addition to financial accounting reports, which provide low-hanging fruit because you've already gathered this information for external purposes, managerial accountants look at specialized reports that aggregate data about operations, sales and any other aspect of the business where this data will prove useful.

A public accountant will be able to help you understand some management accounting information such as the relationship between your cost of goods sold, or variable costs, and your bottom line. However, a private accountant is likely to have a deeper understanding of these numbers as a result of spending more time around them and being tasked specifically with your own company's financial health rather than the financial health of a broad array of clients.

If you're getting into the accounting field, the decision to work as either a private or public accountant will likely depend on your personal needs, individual training and whatever job happens to be available when you're looking for work. Whichever track you choose, you will need a bachelor's degree in accounting. If you choose to work as a private accountant, you may not need any additional education beyond that degree.

Private accounting makes sense for people who thrive on consistency. You'll be working for the same firm day after day. You'll get to know its finances in depth and you'll revisit much of the same information over time, looking for new insights or old mistakes. You won't have to travel much and you'll probably work with the same coworkers day after day.

As a private accountant, you have better odds of advancing to a managerial position without being licensed as a Certified Public Accountant (CPA). However, your work may be less interesting because it includes less variety and there will likely be fewer opportunities for advancement overall unless you work for a business large enough to hire a team of private accountants.

To work as a public accountant, you will most likely be required to train as a CPA and obtain a CPA's license from your state. Although it may be inconvenient to jump through this extra hoop, the additional credential can also open doors for you. It can make you more employable for a broader range of businesses and also more competitive against job applicants who don't have this certification.

If you like variety and new challenges, public accounting will probably be a more interesting career because it involves working with a range of clients. These different businesses will each have their own strengths and weaknesses, as well as blind spots and demands. You'll develop a broad perspective on business accounting needs and systems because you'll see books from a diverse range of companies. Your work will also likely involve travel to meet with clients in locations other than your hometown.

Because public accounting firms tend to hire a team of accountants, you'll have more opportunity for advancement within your own company, although you'll be vying for managerial spots alongside plenty of other qualified accountants. You can also hang out your own shingle as a public accountant and begin building your own client base. Self-employment has its own set of logistical (and accounting) challenges, but it gives you a greater degree of autonomy than taking a job with an accounting firm.

Not all public accounting firms are created equal. A leading firm with thousands of accountants on staff is unlikely to devote the same level of care and attention to your company's accounting needs as a smaller local outfit whose mission is to serve members of its community. A relatively young accounting firm with limited experience may direct extra care and attention to your company's needs in order to earn your long-term business. Working with such a company can bring you many of the benefits of hiring a private accountant.

The question of finding the right accounting solution for your business doesn't always come down to choosing between private and public accounting. It is also important to weigh the merits of a particular firm you are considering hiring. Ask for referrals, if possible, and pay attention to your gut feelings about whether a particular accounting firm is right for you. Also do your due diligence and come prepared with a list of thoughtful questions expressing your needs and concerns.

If you're hiring a private accountant, look for someone whose experience and expected pay grade is in keeping with your budget. As with public accountants, a lack of experience could be a liability but it could also give you someone willing to devote extra time and care toward doing the job effectively and understanding your company's unique circumstances. Working with a public accountant and learning to ask the right questions can also prepare you for eventually hiring a private accountant down the line.