Accounting software is a computer system that accountants use to store and analyze the financial data of a company. Accounting software is used to store a business’s income and expense transactions. For example, accounting software will take note of the date, amount, and product name if a shoe store sells two pairs of shoes to a customer.
Accounting software is unique from a simple Excel file because it allows accountants to generate financial statements such as income statements and cash flow statements. These reports are very important to the management and the balance sheet and the cash flow statement are often looked at when deciding on business strategies. It is important for these financial statements to be generated precisely by a computer program because a miscalculation could result in huge consequences. For example, a miscalculation in the balance sheet could result in the company not having enough funds to make payroll at the end of the month.
In addition, accounting software is different from an Excel file as it restricts users from doing certain things. A basic example is that all assets need to balance out with liabilities and equity. Every income and expense category is linked to its respective asset and liability category. Also, accounting software has useful features such as multi-currency conversion and reconciliation to ensure that all data recorded is up-to-date and accurate.
Historically, Multinational Corporations (MNCs) adopted accounting software before small businesses. This is because MNCs had larger budgets and could afford to hire a team of software developers to build a custom-built accounting system specifically for their business. For example, many constructions and retail MNCs needed accounting software with an inventory management functionality but service companies like law firms didn’t.
Additionally, it used to be very expensive to set up and maintain an accounting system. Before cloud computing, companies had to purchase an IBM mainframe and hire a full-time software engineer to maintain the server and accounting software. Today, a software engineer can deploy his application to AWS and pay a much smaller downpayment and a monthly fee to keep his accounting software application running.
This will make an accounting graduate gasp – but accounting used to be done by actual bookkeepers before accounting software. The bookkeeper would use a physical journal to record every single financial transaction of the company. The bookkeeper would then need to add up everything and make sure that the credits matched the debits. A lot of time was spent going through every transaction to find a mistake whenever the entries didn’t balance.
Accountants also had to add up all the debits and credits for each income, expense, asset, liability, and inquiry category in order to generate the financial statements. This required a lot of work and checking since these statements were audited and needed to be submitted to authorities which meant that there was no room for human error.
Fast forward to 2022, accounting software no longer has to be built from scratch and customized to each business individually. There are now a number of ERP and small business accounting software companies including Xero and Quickbooks.
These off-the-shelf accounting software companies have a SaaS (Software As A Service) model where they charge businesses a monthly fee to use their accounting software. No expensive hardware or full-time software engineer is required. Anyone can set up a Xero account for less than a hundred dollars a month and start doing your accounting immediately.
And there are all sorts of integrations for your business as well. For example, most accounting software like Xero and Quickbooks have integrations with banks. This means that your bookkeeper no longer has to spend hours on manual data entry. Your accounting software will be automatically updated when your corporate bank account receives or makes a payment. All your bookkeeper will have to do is categorize transitions and upload receipts and invoices.
Training your accounting team to use Xero or any small business accounting software is easy too! Aside from forums that provide free Q&As, documentation, and step-by-step guides, you have Xero accounting courses with trainers that will guide you through every feature.
Small business accounting software isn’t just for small businesses. Many larger businesses such as Raspberry Pi use Xero too. Many small business accounting software has inventory management extensions that retail businesses can use to keep track of their stock without having to pay for another service.
If you’re a small business owner who doesn’t need a full-time accountant doing your bookkeeping, you can hire a Xero accounting firm instead. This will save you time from finding and training an in-house accountant while getting the expertise and experience from an experienced accounting firm.