What Is Accounting Software? Definition and Features

Accounting software stores a business’s financial transactions, automates accounting tasks, like recurring invoicing and transaction categorization, and generates reports. You can also use it to track income and expenses and organize your business’s financial information so that you have what you need for tax season. The more data you gather within your accounting software program, the more insights you can glean to strengthen your business.

The best accounting software for small businesses streamlines the process with built-in reports, online bank feeds and invoicing features that help you get paid on time. Capabilities aside, your accounting software also should be easy to navigate and fit your budget.

Here’s a closer look into why businesses use accounting software and the features to consider.

Centralizing your financial data in an accounting software program is preferable to manually entering data into a spreadsheet — not just because it makes your day to day easier. Additional benefits include the following:

Using a spreadsheet to keep track of your business’s financial transactions can get messy and leaves room for human error. Not to mention, it’s tedious. Accounting software minimizes manual data entry by automatically importing bank transactions, so you don’t have to add them. Some software programs will even categorize your transactions based on past activity or bank rules you create.

One of the biggest perks of accounting software is not having to balance debits and credits manually. According to the double-entry accounting system, each transaction results in a debit to one account and a credit to another. This can be confusing if you don’t have a background in bookkeeping. Most accounting software debits and credits accounts automatically, so you don’t have to think about it.

Accounting software usually comes with a built-in chart of accounts for organizing transactions. When you enter a transaction, you group it under a particular account. The five basic account types are assets, liabilities, equity, expenses and revenue. From there, you can create sub-accounts. For example, maybe you have a specific sub-account within the expenses account for equipment costs.

Organizing your accounts allows you to see how different sections of your business are performing and understand exactly where money is coming from and what it’s going toward. It also ensures your reports are as detailed as possible.

As opposed to having to generate financial reports, accounting software includes built-in reports that automatically pull data from the relevant accounts. The balance sheet report, for example, focuses on your equity, assets and liabilities accounts. Other key reports include the cash flow statement, which helps you visualize how cash moves through your business, and the income statement, which displays revenue and expenses.

Some accounting software products allow you to schedule financial reports so that they’re emailed to your inbox regularly. You may also be able to customize reports by filtering for particular periods or even specific departments within your business.

Accounting software makes it easy to work with your accountant or bookkeeper. Typically, you can give them online access to your books so that they can check for accuracy and make any necessary changes. Just make sure you choose accounting software that they’re familiar with.

Before you start comparing accounting software products, make a list of the features that are most important to your business. What processes do you want to streamline? Consider the following factors:

• Accessibility. Most accounting software products today are cloud-based, meaning you can access them from anywhere with an internet connection and easily collaborate with your accountant. If you don’t like the idea of storing your data in the cloud, you can install desktop-based accounting software. However, if you want to access it on multiple computers, you’ll have to buy separate licenses, which can be expensive.   

• Reporting. Consider which reports you want to run and ensure they’re included in your accounting software subscription. Some products, for example, require upgrades to access more specific reports, such as sales per customer.    

• Invoicing. Automatic payment reminders and online payment options encourage your clients to pay you on time. Also, ensure your accounting software comes with invoicing templates that include all the necessary fields for due dates, payment terms, etc.

• Inventory. Businesses that need to keep specific items in stock at any given time, such as retail stores or restaurants, might opt for accounting software with built-in features for inventory tracking such as low stock alerts and barcode scanning capabilities. POS systems can also track inventory, or you might invest in separate inventory management software.  

• Integrations. Your accounting software should be able to exchange information with your other business software products seamlessly. 

Finding the right accounting software for your small business isn’t a “one size fits all” endeavor. It depends on your business size, budget and the features you need most.

If you’re unsure which accounting software product is best for your business, these roundups can help you narrow down your options: