Who uses accounting software?
I'd like to say that anyone in business uses accounting software, but unfortunately, that's not the case. However, everyone in business should use accounting software. That includes the contractor you hired to write a press release, the property management company that you pay your rent to each month, your mortgage holder, your doctor, and your attorney. Everyone who is in business should be using some type of accounting software since it's impossible to measure their company’s financial health without it.
Top Picks for Accounting Software
- AccountEdge Pro
- Zoho Books
- Sage 50cloud Accounting
- QuickBooks Online
- Sage Business Cloud Accounting
Why use accounting software?
Smart business owners use accounting software for a variety of reasons. Some use it because it simplifies the entire record keeping process. Entering a customer into a software application and creating an invoice is much easier than entering that same information into a spreadsheet, and then having to create an invoice in another application. Others use it because they want to know how much money they're making, or in some cases, not making. Still others use it to keep a better handle on their expenses.
How will you know how healthy your business is if you have no idea who owes you money or how much money you've spent in the last six months? How will you convince a bank to give you a credit line if you can't show them that your business is financially healthy? Perhaps most important, how will you keep track of your various tax obligations if you're not adequately tracking sales tax, use tax, employment tax, and employee withholding tax?
Below are some of the benefits of using accounting software.
You'll always know the financial status of your business
Instead of consulting multiple files to see how much you're spending, how much you've been paid, or how much is still owed, you can view all this information from one central dashboard.
This dashboard view from QuickBooks Online (above) gives you the information you need in one convenient location, including paid and outstanding invoices, where you've spent your money, and even the current balances of your bank accounts. So, stop looking at multiple spreadsheets and start using accounting software.
It's a faster way to get paid
We all want to get paid, otherwise there's really no reason to be in business. But one of the ways to get paid faster is to make it easy for your customers to pay you. Accounting software helps with everything from including payment links in invoices, accepting electronic payments through your bank, to accepting credit cards through a merchant account (see image below). Making it easier for them to pay a bill will likely mean that they'll pay you faster, or at the very least, on time.
Taxes, taxes, taxes
If you use accounting software for anything, use it to remain tax compliant. If you sell anything, you will owe taxes. If you pay employees, you will owe taxes. If you live in a large, metropolitan area, or sell in multiple states, you will owe taxes to several different agencies.
As the QuickBooks Online screen (above) asks, how often do you file sales tax? Using the appropriate accounting software will enable you to remain compliant with all tax agencies. You’ll be able to charge your customers the correct tax rate while also running reports that show how much tax is owed to each tax agency. If you have employees, you'll have payroll taxes that need to be paid on time such as federal withholding, state withholding, Social Security and Medicare taxes, and unemployment taxes. Let your accounting software do the heavy lifting and provide you with the tools you need to always be compliant.
Your reports are accurate
Transposition errors, extra decimals, decimals in the wrong place, extra zeros, not enough zeros; these are all things that can happen when you use spreadsheet programs to create reports manually. Professionally prepared reports give your business credibility. When you use accounting software, your reports are prepared using information you've already entered into the system. If that information is accurate, so are your reports (see image below).
Microsoft Excel lovers shouldn't feel too bad. Most accounting software applications allow you to export your reports to Excel, where you can customize them if you wish; the difference being that you're starting with the correct numbers.
What are the different types of accounting software?
There are three types of accounting software applications that are typically used.
- Commercial accounting software: This ranges from simple applications that offer bare-bones features to full-service applications that offer complete accounting functionality. There are also a variety of add-on modules to choose from. Commercial software is usually available as a downloadable application. It used to be installed from a CD-ROM, but most commercial accounting software is now downloaded from the software vendor and installed on a desktop or workstation computer. It can also be delivered via subscription as SaaS (Software as a Service) or from the cloud.
- Enterprise resource planning (ERP) software: This is typically only used by the very largest companies. ERP software is notoriously expensive, and unless you're a billion-dollar company, it’s likely much more than you will ever need.
- Custom accounting software applications: These were popular about twenty years ago, but have mostly disappeared from offices simply because of the scope of features now found in commercial accounting software. Custom packages can also prove to be more trouble than they're worth and typically don't integrate with any other applications.
Key accounting software functionality
Accounting software applications should offer most, if not all, of the following features.
Core accounting features:
- Double entry accounting
- Invoicing (A/R)
- Bill payment (A/P)
- Customer & vendor management
- Management reporting
- Inventory management
- Purchase orders
- Sales / point-of-sale
You may not get every module in every product, but you should get the modules that are necessary for you to run your business.
What to consider when buying accounting software
What features are most important for your business?
Is easy invoice creation important to you? Then you need an application that makes creating an invoice quick and painless. Do you offer a variety of products to your customers? If so, you need a way to manage your inventory properly. What about banking? Do you always forget to record your expenses when you use your credit card? If that's you, then you'll want an application that will import all of your banking transactions, and record them to the proper expense account.
If you have employees, you need a way to pay them, as well as a way to make sure that your tax obligations are taken care of. While most accounting software does many, if not all, of these things, you need to decide what features are a must-have, and look accordingly.
While it's important to purchase the accounting software that will work best for you, budget considerations can also play a role in your final decision. If you're a sole proprietor or freelancer on a very strict budget, you may have to choose from the applications that are within your reach. But don’t panic, many of the best applications available today are under $25 per month.
Your business niche
The type of business you run may play as much of a role in your final decision as cost and features. If you sell hair products online, you will have different needs than a graphic artist that provides a design service. But what if you sell products and services? Simple. Just make sure that the product you purchase is suited to both.
While most people don't think about support when comparing accounting applications, you may want to spend a few minutes looking at the available support options. I guarantee that nothing will be more frustrating that trying to figure out the answer to a problem without a good support structure in place. Knowledgebases are great, but they are no substitute for an actual human being.
Frequently Asked Questions
How much does accounting software cost?
Accounting software is available in a variety of price points. Some applications can run to hundreds of dollars per month, though most entry level accounting software will top off at around $100 per month. There are also some good accounting applications available for free, or less than $10 per month. However, most of those are designed for sole proprietors or freelancers who only need limited features, like invoicing and expense management. Keep in mind that most free or low-cost applications are not equipped to handle payroll or manage inventory.
What's wrong with using a spreadsheet to keep track of my business expenses?
Spreadsheets can be useful, and provide a good way to create custom reports and track simple data. However, spreadsheets have no checks and balances. If your current bank balance is $1,000 and you just wrote a check for $500, you would have a balance of $500 in your account. But what happens if you leave off a zero when you enter that check amount on your spreadsheet? You'll think you have $950 in your account instead of $500 and will likely overdraw the account purchasing things you don't have the funds to pay for.
If you've never transposed numbers, made a typo, or entered an incorrect formula in a spreadsheet program, then maybe you could get by with using spreadsheets for accounting. But for the rest of us mortals, accounting software is the way to go.
How will I know which application to purchase?
When you buy a car, you take it for a test drive. The same goes with buying software. Most software applications include a downloadable free trial, so you can take it for a test drive. By trying out a variety of applications, you'll be able to see which products work best for you.
I don't know anything about accounting. How can I use accounting software?
You're in luck, because the majority of entry level accounting software products were created just for you! Instead of using terms like debits and credits, many accounting applications use everyday terms like bills and payments. If you've ever received a bill, paid a bill, or reconciled your bank statement at the end of the month, you'll be able to use accounting software.
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool owns shares of and recommends Intuit and Microsoft. The Motley Fool owns shares of Xero and has the following options: long January 2021 $85 calls on Microsoft. The Motley Fool has a disclosure policy.