What Is Accounting Software & Why Your Business Needs It

Accounting software is designed to automate, streamline, and manage various accounting and financial tasks within an organization. It comes in various forms, including cloud-based, desktop-based, and specialized solutions tailored to specific industries or business needs. It helps businesses efficiently keep track of financial transactions, manage accounts payable (A/P) and accounts receivable (A/R), generate financial reports, and facilitate compliance with tax regulations and accounting standards.

Standard Features in Accounting Software
General Ledger (GL)	Tracks all financial transactions, including revenue, expenses, assets, and liabilities, providing a comprehensive overview of the organization’s financial position and automating tedious posting of transactions to ledgers that avoids mistakes
A/P	Manages money owed by the organization to its suppliers and vendors, including invoice processing, payment scheduling, and vendor management; see our recommendations for the best A/P software
A/R	Tracks money owed to the organization by its customers and clients, including invoicing, payment processing, and customer management; check out our top-recommended invoicing software
Bank Reconciliation	Matches transactions recorded in the accounting software with those in the company’s bank statements to ensure accuracy and identify discrepancies; view our guide to the leading bank reconciliation software
Financial Reporting	Generates various financial reports, such as income statements, balance sheets, cash flow statements, and aging reports, to provide insights into the company’s financial performance and health
Payroll Processing	Calculates and manages employee wages, taxes, and benefits, ensuring compliance with payroll regulations and timely payment of salaries; see our recommendations for the best payroll software for small businesses
Inventory Management	Tracks inventory levels, costs, and sales, helping businesses optimize inventory management, forecast demand, and prevent stockouts or overstocking; check out our list of the top inventory management software for small and medium-sized businesses (SMBs)
Budgeting & Forecasting	Facilitates the creation and monitoring of budgets, forecasts, and financial projections to support strategic planning and decision-making; see our roundup of the leading small business budgeting software
Tax Compliance	Helps businesses stay compliant with tax laws and regulations by automating tax calculations, filings, and reporting processes
Audit Trail	Maintains a detailed record of all accounting transactions and activities, providing transparency and accountability as well as supporting auditing and compliance requirements

Types of Accounting Software
Key Benefits of Accounting Software
Pros & Cons of Accounting Software
How Accounting Software Affects a Business
Frequently Asked Questions (FAQs)
Bottom Line

Types of Accounting Software

Accounting software can be distinguished based on various factors, including features, pricing, deployment method, scalability, target market, user interface, integrations, and customer support.

Here are some common ways to differentiate accounting software.

1. Cloud vs Desktop

Cloud and desktop software differ in several key aspects, including deployment, accessibility, maintenance, scalability, and cost:

Cloud-based accounting software, also known as online accounting software, is hosted on remote servers and accessed through a web browser or mobile app:
- Examples of cloud-based software include QuickBooks Online, Xero, and FreshBooks. To learn about other alternatives, check out our guide to the best cloud accounting software.
Desktop software is installed on a computer and runs locally:
- Sage 50 and QuickBooks Desktop software are examples of desktop accounting software.

Cloud-based accounting software offers similar functionalities to desktop software but provides the added benefit of remote access, real-time collaboration, and automatic updates. To discover more differences, read our cloud vs desktop accounting software comparison.

2. Enterprise vs Small Business

The main distinction between enterprise and small business software lies in their target audience, features, scalability, and complexity:

Enterprise resource planning (ERP) software integrates various business functions, including accounting, inventory management, human resources (HR), and customer relationship management (CRM), into a single unified platform. While ERP systems offer comprehensive solutions for large businesses, they can be complex and costly to implement:
- Examples of ERP software include Oracle NetSuite and Microsoft Dynamics 365.
Small business software often doesn’t accommodate all those business functions in one platform. However, it usually includes features necessary for day-to-day operations, including invoicing customers, entering bills, and reconciling bank accounts:
- Examples of small business software are Xero, QuickBooks Online, and FreshBooks.

3. Specialized vs General

While specialized software is tailored to meet the specific needs of niche industries or professions, general software provides basic features and tools for a broad range of users and applications:

Specialized accounting software often integrates industry-specific features, such as inventory management, fund accounting (for nonprofits), or retail point-of-sale (POS) integrations. Some are designed to cater to specific industries or business needs, such as accounting software for nonprofits, construction companies, retail businesses, or hospitality businesses:
- Examples of specialized accounting software include QuickBooks Premier Contractor Edition, PCLaw, and Realtyzam.
General accounting software is suitable for SMBs that have straightforward accounting processes and don’t require industry-specific functionality. It is designed to meet the basic needs of a wide range of businesses, regardless of their industry or size:
- Examples of general accounting software include QuickBooks Online, Xero, and Zoho Books.

4. Personal Finance vs Small Business

The main distinctions between personal finance software and small business accounting software are the target audience, scope of features, and complexity. In addition, small business accounting software provides double-entry accounting:

Personal finance software, just like its name implies, is primarily targeted toward individual consumers or households for managing personal finances and planning for financial goals. Typically, it includes features such as budgeting tools, expense tracking, bill payment reminders, investment tracking, and retirement planning. It is also generally simpler and more user-friendly, with intuitive interfaces and basic functionality suitable for individuals without accounting expertise:
- Examples of personal finance software include Quicken, YNAB, and Mint.
Small business accounting software offers a broader range of features geared toward small businesses and entrepreneurs for managing business finances, including invoicing, expense tracking, payroll, and generating financial reports. It is more complex and feature-rich, with capabilities for handling multiple aspects of business finances and greater customization options to accommodate various business processes and workflows:
- Examples of small business accounting software include QuickBooks, Zoho Books, and Xero.

For more detailed information about the types of small business accounting software that are currently available based on your business, check out our buyer’s guides:

Key Benefits of Accounting Software

Accounting software offers numerous benefits for businesses of all sizes. Above all, it can improve efficiency, accuracy, and decision-making within businesses—ultimately contributing to their success and growth.

Key Benefits of Accounting Software
Accuracy	Reduces the risk of human error inherent in manual bookkeeping processes Helps ensure accuracy in financial records through automated calculations and data entry
Time-saving	Streamlines many time-consuming tasks with features like automatic data entry, bank reconciliation, and report generation Frees up valuable time for business owners and accountants, allowing them to focus on other aspects of the business
Efficiency	Enables faster processing of financial transactions and reporting, improving overall efficiency in managing financial tasks
Financial Visibility	Enhances access to a picture of the company’s financial health by providing real-time insights into financial data Allows for better decision-making and strategic planning
Cost-effectiveness	Offers long-term cost savings with increased efficiency and reduced errors, often outweighing the upfront expenses
Compliance	Helps businesses stay compliant with features such as tax regulations and financial reporting standards Reduces the risk of costly penalties or fines
Scalability	Can often grow with your business, accommodating increased transaction volumes and adding new features or modules as needed
Accessibility	Allows users to access financial data from anywhere with an internet connection (for cloud-based software) Makes it easier for remote teams to collaborate and for business owners to monitor finances on the go
Integration	Often integrates with other business applications, such as payroll, inventory management, and CRM systems Streamlines workflows and eliminating the need for manual data entry across multiple platforms
Security	Includes robust security features to protect sensitive financial information, such as encryption, user authentication, and regular data backups Reduces the risk of data breaches and unauthorized access

Pros & Cons of Accounting Software


PROS	CONS
Reduces the risk of human error inherent in manual bookkeeping processes	May have a learning curve, particularly for users unfamiliar with software or accounting
Has automated features that save time compared to manual accounting tasks	Usually has an upfront cost associated with purchasing and possibly ongoing subscription fees
Offers quicker processing of transactions and reporting	Comes with potential security concerns, including the risk of data breaches or unauthorized access
Can grow with your business and accommodate increased transaction volumes or adding new features as needed	May have technical issues, such as system crashes, software glitches, or internet connectivity problems, which can disrupt operations

How Accounting Software Affects a Business

Accounting software plays a critical role in managing financial processes, ensuring compliance, supporting decision-making, and driving business growth. Its impact extends across various functions and departments within a business, making it an essential tool for modern organizations.

Invoicing

Using accounting software streamlines the process of issuing invoices and receiving payments by automating tasks, maintaining accurate records, providing customization options, and facilitating communication with customers. Manual handling of these tasks requires more time, effort, and attention to detail, increasing the risk of errors and inefficiencies.

Following are the steps required for issuing an invoice and receiving payment and how they differ between accounting software and manual accounting methods.

	Accounting Software	Manual Accounting
Issuing an Invoice	Create invoice by selecting customer, items sold or services provided, and so on Email the invoice directly from the accounting software or print and mail it, if desired Once the invoice is sent, the accounting system records automatically: Revenue generated Amount owed by customer	Prepare an invoice document manually using word processing software, spreadsheet templates, or accounting forms Write or type customer information, invoice number, invoice date, and so on Print and mail the invoice to the customer, deliver it in person, or email it Add to a list of outstanding invoices prepared using a spreadsheet or similar program Record journal entry manually to recognize revenue and total effect on A/R Carry details from journal entry to A/R subsidiary ledger to track amount owed by this customer
Receiving Payment	Physically receive cash, checks, or other forms of payment from the customer When the customer submits payment, open the unpaid invoice in the accounting software and apply payment The accounting software will automatically: Reduce amount owed by customer Record receipt of cash Optionally, generate a receipt within the accounting software and send it to the customer as confirmation of payment	Indicate on the list of outstanding invoices that this invoice has been paid Record manually: Receipt of cash Reduction of A/R in total Post reduction in A/R to subsidiary ledger to reduce amount owed by this customer Optionally, prepare a receipt document and provide it to the customer

Accounting Software

Manual Accounting

Issuing an Invoice

Create invoice by selecting customer, items sold or services provided, and so on
Email the invoice directly from the accounting software or print and mail it, if desired
Once the invoice is sent, the accounting system records automatically:

Revenue generated
Amount owed by customer

Prepare an invoice document manually using word processing software, spreadsheet templates, or accounting forms
Write or type customer information, invoice number, invoice date, and so on
Print and mail the invoice to the customer, deliver it in person, or email it
Add to a list of outstanding invoices prepared using a spreadsheet or similar program

Record journal entry manually to recognize revenue and total effect on A/R

Carry details from journal entry to A/R subsidiary ledger to track amount owed by this customer

Receiving Payment

Physically receive cash, checks, or other forms of payment from the customer
When the customer submits payment, open the unpaid invoice in the accounting software and apply payment
The accounting software will automatically:
1. Reduce amount owed by customer
2. Record receipt of cash
Optionally, generate a receipt within the accounting software and send it to the customer as confirmation of payment

Indicate on the list of outstanding invoices that this invoice has been paid
Record manually:

- Receipt of cash
- Reduction of A/R in total

Post reduction in A/R to subsidiary ledger to reduce amount owed by this customer
Optionally, prepare a receipt document and provide it to the customer

A/P

Accounting software centralizes bill management by capturing, storing, and organizing bill data in a digital format. Essentially, it allows you to track and pay bills while the software is also doing the accounting. It provides a searchable database of vendor bills, allowing users to easily retrieve and reference information as needed. This improves visibility and control over A/P activities, enabling efficient tracking and monitoring of payment obligations.

Many accounting software solutions also offer customizable approval workflows for managing bill approval processes. These workflows route invoices to designated approvers based on predefined criteria, such as bill amount or vendor category.

Accounting software facilitates electronic payment processing by integrating with bank accounts, payment gateways, and online payment platforms. It often supports various payment methods, including automated clearing house (ACH) transfers and credit card payments. These features are unavailable with manual accounting, which also doesn’t support vendor management. Accounting software maintains vendor records and tracks vendor information, providing insights into vendor performance, payment histories, and outstanding balances, enabling businesses to manage vendor relationships effectively and negotiate favorable terms.

Financial Statements

Accounting software automatically compiles financial statements by aggregating and summarizing the financial transactions recorded within the system. It collects and organizes financial data from various sources, including transactions entered manually, imported bank feeds, and integrated systems such as invoicing and payroll.

The software categorizes transactions into relevant accounts, such as revenue, expenses, assets, liabilities, and equity, based on a predefined chart of accounts. It provides tools for generating financial statements, allowing users to customize the presentation format, layout, and content based on their preferences and reporting requirements.

It also compiles data from ledger accounts, performs calculations (such as totals, subtotals, and ratios), and formats the information into standardized financial statement templates. Standard financial statements include the balance sheet, income statement, statement of cash flows, and A/R or A/P aging reports.

Complex Calculations

Accounting software is designed to handle complex calculations like cost of goods sold (COGS) and depreciation efficiently and accurately. More advanced software allows users to customize depreciation methods, useful lives, and other parameters to reflect the specific requirements of their business and comply with accounting standards.

It also automates repetitive tasks related to COGS and depreciation, reducing manual effort and minimizing the risk of errors associated with manual calculations. Also, by integrating with other modules or systems—such as inventory management, fixed assets, and purchasing—it streamlines data sharing and ensures consistency in calculations across different functions.

Closing Periods

Accounting software is equipped to handle closing periods efficiently, ensuring that businesses can accurately finalize financial records for specific reporting periods, such as months, quarters, or fiscal years. It facilitates the periodic closing process by allowing businesses to define closing periods and establish procedures for closing financial records and rolls forward or closes accounts for the next period automatically with no closing entries required.

Auto-import of Bank & Credit Card Accounts

Accounting software often includes features for auto-importing transactions from bank and credit card accounts, streamlining the process of reconciling financial data and reducing manual data entry. It integrates with financial institutions, allowing users to link their bank and credit card accounts directly to the software.

Users provide authorization for the software to access their bank and credit card information securely, typically through application programming interfaces (APIs) or secure data connections. Once the accounts are linked, the software will automatically import transaction data to the accounting software.

Transaction data includes details such as dates, descriptions, amounts, and account codes, which are imported directly into the appropriate ledger accounts within the software. Accounting software will also match imported transactions with corresponding entries in the company’s accounting records, such as invoices, bills, or manual entries. Users review and reconcile imported transactions with their accounting records to ensure accuracy and completeness.

Bank Reconciliation

Equipped with features to handle bank reconciliation efficiently, accounting software ensures that a company’s financial records align with its bank statements. The reconciliation module within accounting software highlights matched transactions, indicating they have been reconciled and are in agreement between the bank statement and the accounting records.

This helps users identify discrepancies by showing unmatched transactions, such as missing deposits or withdrawals, duplicates, or errors, which are flagged for further review. Users can manually reconcile unmatched transactions by matching them with corresponding entries or investigating discrepancies.

Frequently Asked Questions (FAQs)

How does accounting software work?

Accounting software works by centralizing financial data and automating key accounting processes. Users input financial transactions into the system, which then processes the data, updates relevant accounts, and generates reports. Typically, the software includes features, such as GL, A/P and A/R, payroll processing, and financial reporting.

What are the different types of accounting software?

Accounting software comes in various types, including desktop-based, cloud-based, ERP, specialized, such as construction, nonprofit, and retail, or small business and personal finance software.

What is an example of accounting software?

A few examples of accounting software include QuickBooks, Xero, FreshBooks, Sage 50, Zoho Books, and Wave. Each offers unique features and functionalities to meet the diverse needs of businesses across various industries and sizes. Our guide to the best small business accounting software provides more samples and information.

What are the alternatives to accounting software?

Alternative options include manual bookkeeping, which we don’t recommend, in which businesses opt to perform bookkeeping tasks manually using spreadsheets, ledgers, and paper records. They can also decide to outsource their accounting functions to a virtual accounting firm or hire an in-house bookkeeper. Some businesses may opt for a hybrid approach, combining elements of manual bookkeeping, outsourced accounting services, and accounting software to meet their specific needs.

Is Excel an accounting software?

No, Excel is a spreadsheet program developed by Microsoft, and it is widely used for data organization, analysis, and visualization. However, while it lacks many features found in dedicated accounting software, it can still be a useful tool for small businesses or individuals needing to perform basic accounting tasks and financial management. Read our article on how to use Excel for accounting for guidance.

Bottom Line

Accounting software typically includes a range of features and functionalities tailored to meet the needs of businesses of all sizes, from small startups to large enterprises. Businesses should choose the accounting software that best fits their requirements, budget, and preferences, helping them streamline their accounting processes, improve accuracy, and make more informed financial decisions.