What is Accounting Software? An Introduction definition

It might sound like an odd question, but it’s one many business owners ask when they’re transitioning into the world of entrepreneurship. In today’s increasingly digital world, entrepreneurs often rely on a multitude of tools to help them manage various aspects of running their business.

There are software solutions for everything from project management to logistics, customer service, and even internal collaboration. Accounting software is one of the core solutions leveraged by business leaders, to help them track profits, maintain cashflow, and deal with taxes.

Today, we’re going to share everything you need to know about accounting software, from the features you’re likely to find in these tools, to the benefits of having the right solution.

What is Accounting Software?

Simply put, accounting software is a digital tool used by business leaders and accounting professionals to complete various accounting and bookkeeping tasks. These systems can store the financial data of a business, track transactions, and sometimes even generate invoices and quotes.

In the past, accounting software tools were often downloadable, “offline” systems, which used algorithms to complete calculations on a user’s behalf. However, in recent years, as many companies have moved into the cloud, and begun leveraging the internet, many accounting tools have become connected to the web. Information is stored in the cloud, and updated almost in real-time, thanks to links to a user’s bank account and other financial resources.

Notably, accounting software solutions can include various different features and functionalities, depending on the service, and the needs of the business. Some smaller options simply automatically enter, store, and analyze data for users. Other, more advanced systems can be custom-built to address the unique needs of certain companies.

Many accounting software systems can also integrate with other tools, such as enterprise resource planning and logistics systems, to provide a more comprehensive view of business operations.

Reliable accounting software should always meet with the legal requirements of the region or country in which a business operates. For instance, companies in the UK need to ensure their accounting solutions are MTD compliant, and can fully facilitate the automatic tracking of professional transactions for tax purposes. In the US, accounting software needs to be flexible enough to address ever-changing regulations in the financial space.

Many of the most common accounting solutions available today are also accessible through the cloud, so users can monitor financial transactions using a mobile app connected to the web.

What are the Common Types of Accounting Software?

As mentioned above, there are different kinds of accounting software available, each designed to address specific financial needs for businesses. Accounting and finance systems are constantly evolving, but they typically fall into four different categories. Notably, there are also comprehensive accounting suites available which can combine the best features of multiple categories. The core accounting software categories are:

Billing and invoicing systems: Billing and invoicing tools complete basic day-to-day financial tasks for companies, such as sending invoices, and calculating accounting reports. They help to document financial activity, and ensure it’s prepared for authorization and validation by a professional bookkeeper or accountant.
Payroll management systems: Companies working with employees often use payroll management systems to maintain control over accounts receivable and payable. These tools can perform a range of tasks, from calculating salaries and removing deductions, to automatically distributing funds to a staff member, producing pay slips and tax forms.
Enterprise resource planning systems: Otherwise known as ERPs, Enterprise resource planning systems combine all of the systems used for inventory management, product planning, distribution, accounting, material purchasing and more in one place. Some solutions can also offer modules for business intelligence and CRM integrations.
Time and expense management systems: These tools help to accelerate billing cycles and allow companies to improve relevant expenses on the move. They’re often highly customizable and configurable to suit the needs of different business leaders. Plus, they can usually produce detailed graphical reports on how time and resources are used.

The Features of Accounting Software

The exact capabilities of any accounting software will vary depending on the technology in question. Depending on the main features and objectives of these tools, they can help to optimize businesses and streamline operations. Some of the core capabilities include:

Accounting: The main component of any accounting software solution is the ability to track and calculate accounts. Accounting systems include solutions for general ledgers, fixed assets, bank reconciliation, accounts receivable and payable, and more.
Billing and invoicing: While there are software solutions specially designed for billing and invoicing, many broader accounting tools offer these features too. Billing and invoicing systems allow users to track purchases, send invoices automatically, and make sure payments are made according to schedules.
Budgeting and forecasting: Budgeting and forecasting tools are also frequently bundled into accounting systems. They calculate and interpret financial performance for a specific period, and help organizations to set feasible targets for growth.
Fixed asset management: With fixed asset management tools, companies can effectively manage financial data more accurately. These modules often include features like auditing history, depreciation calculation, cost records, and resource allocation tools.
Payroll management: Many full accounting suites often include their own payroll features. With these tools, users can calculate and process payments to employees, print checks, and prepare tax and legal documents without errors.
Project accounting: Project accounting software is usually included in systems which are designed for specific verticals or industries. These tools are typically used by construction operators and software developers. They can help with estimating and handling overheads and costs related to materials, labor, and equipment.
Fund accounting: These features are typically designed for non-profit organizations and government agencies, and can track donation expenses, grant management, and other regulatory financial concepts. They also offer a unique suite of financial reports.
Inventory management: While inventory management tools can be accessed separately by businesses, they can also come bundled into accounting software. They help companies to control the movement and availability of their products.
Reporting tools: Many accounting tools come with solutions for creating customized reports for balance sheets, and financial health. Tools like Netsuite, Freshbooks and Xero all come with their own dedicated reporting section.

Many accounting solutions can also come with add-ons and integrations, which help companies to better track important details. For instance, solutions can include data entry tools which allow business leaders to track credit card purchases made by employees.

Integration options can even allow companies to align their accounting tools with their payment processing systems or inventory tracking tools.

Advertisment ⓘ

Some tools can automatically create financial statements and submit them to the correct tax groups. There are even double-entry tax solutions like QuickBooks Online and Intuit which allow companies and accountants to work together in real-time.

What are the Benefits of Accounting Software?

For most companies, the biggest benefit of accounting software, is the ability to track cash flow information effectively and accurately. The right tools will show business leaders where they can cut costs, and how they can preserve a high level of profit. They’re also ideal for automating bookkeeping tasks and processes related to tax management. Key benefits of accounting software include:

Simplicity: The right accounting tools will help companies to control their finances and track important metrics related to business growth. In many cases, business owners can use these systems with no training at all, to ensure they complete essential accounting operations and comply with legal and regulatory standards in their organization.
Cost savings: Many accounting systems can automate administrative procedures and calculations which help businesses to understand their revenue framework. They can reduce the costs associated with printing documentation, and provide insights into areas where companies might be able to minimize expenses.
Financial transparency: A good accounting system can often eliminate many costly and complex human errors. They calculate sums automatically, to reduce the strain on employees, and ensure that a company’s documentation is precise for tax purposes.
Time saving: Accounting applications can minimize the number of time-consuming processes companies would need to complete if they were managing their accounts manually. They can streamline everything from calculating sales tax to creating reports. Some solutions even go beyond basic accounting functions to help with things like employee time tracking.
Forecasting: A core advantage of accounting software is that it can help companies to predict future company sales and patterns. Accounting software can show companies where to invest more, where to cut expenses, and how to preserve or improve their financial status. It helps organizations to allocate resources effectively.
Productivity: With a range of automated tools and solutions, accounting software can reduce the amount of work employees and business leaders need to do to maintain financial documents. These systems can collect, organize, and analyze data on a company’s behalf, and provide guidance that strengthens business results.
Compliance: Most accounting systems are designed to ensure companies can remain compliant with the regulations of their industry and country. The right solutions will ensure you can manage your taxes and payroll tasks effectively. They also store all of the important details a company needs to maintain a transparent workflow.
Security: One of the most important assets of any business is its financial information. It needs to be protected and prevented from falling into the wrong hands. Accounting software helps to keep information secure, and ensures companies are less likely to lose track of hard physical documents or copies of data.

What Should Companies Look for in Accounting Software?

Accounting software comes in a range of different shapes and sizes, designed to suit different business needs. The exact capabilities you should be looking for in your accounting software will depend on your business goals and expectations. However, there are a few key features many organizations will benefit from, such as:

Integrated invoicing: Accounting systems should generally include some basic invoicing and billing functionality. This prevents business owners from having to purchase additional software, and transfer data between both tools.
Customization: Because the specific financial needs of businesses can vary, there’s no one-size-fits-all solution for accounting. This is why it’s often important to look for options to customize the technology to suit a brand’s specific business model or workflow.
Ease of use: Accounting procedures and calculations can be complex. Accounting software is designed to make the process of financial management easier for businesses. As such, it’s worth looking for technology that’s simple and straightforward.
Security: Accounting software is responsible for storing and managing some of the most sensitive data collected by a business. Because of this, it’s essential for any company investing in this technology to ensure the right security measures are in place.
Connectivity: Not only should a good accounting solution connect to bank accounts and other financial tools, but it should be able to integrate with the technologies an organization is already using. Some solutions even come with API access to help businesses link all of their technology in a single pane of glass.
Support: Many accounting software platforms offer access to fantastic customer service and support. This ensures business leaders can easily access the guidance they need if something goes wrong with their technology.

It’s also worth thinking about the price of the accounting software you’re thinking of buying. Different solutions from Xero, Sage, Zoho (Zoho Books), QuickBooks, and other market leaders all have different pricing structures available.

Often, the more features you need, the more you’ll need to spend. However, the rise of SaaS solutions means many small business owners can still access a wide range of tools within their small business accounting software, without having to spend a fortune.

The Future of Accounting Software

Accounting software has come a long way over the years. As companies continue to evolve, and their financial processes grow more complex, they need more than just tools capable of tracking accounts payable and receivable. Even small businesses are beginning to invest in accounting tools with access to innovative solutions for automation, AI, and advanced analytics.

Although it’s difficult to know for certain what the accounting landscape will look like in the future, it seems likely that certain trends will take over. For instance, cloud accounting tools which offer direct access to accounting processes to users from any device with an internet connection are growing more popular. The best accounting software with cloud-based functionality can also allow companies to connect with their own accountants over the web for tax purposes.

Accounting processes are likely to grow more streamlined, with the help of AI systems and tools that can track online accounting reports in real-time, spot trends in purchase orders, and even offer companies access to guidance on how to improve their cash flow.

Even today, a modern accounting platform can help business leaders in retail and ecommerce to track the financial health of their company at a glance, using Android or iOS apps. The right cloud accounting software can even make it easier to hire and manage freelancers and contractors, with payroll management software.