Accounting software is a digital solution that’s built to help businesses manage the money moving in and out of their organizations, prepare for taxes, and monitor financial KPIs. With this software you will generate and send invoices, capture receipts, and track your business expenses. The software also automates otherwise repetitive and tedious accounting tasks, which minimizes the chances of human error.
Accounting can be a daunting task if you’re a small business owner or freelancer because it may not be your strongest skill. However, you don’t need to be an accounting professional to successfully use accounting software to save time and money. There’s a bit of a learning curve with accounting software, but it’s well worth the effort.
This ultimate guide to accounting software will walk through the basics of accounting, the benefits for your business, and the top accounting software platforms that we recommend. To produce these insights, we spent months researching accounting tools, testing the products firsthand, and interviewing real customers.
If you're still on the fence about getting accounting software for your small business, check out our article that covers why small businesses need accounting software.
Table of Contents
- What is Accounting?
- How Does Accounting Software Work?
- The Benefits of Accounting Software
- How to Evaluate Accounting Software
- Best Accounting Software for Small Businesses
- Key Takeaways
What is Accounting?
Simply put, accounting is the process of keeping track of all the transactions that occur in a business. This includes recording, summarizing, analyzing, and generating reports about financial transactions.
These records help you stay on top of taxes, financial regulations, and overall business expenses. Organized books also give you a solid basis for strategic business moves. The two types of accounting small businesses should know about are financial accounting and cost accounting.
Financial accounting involves generating financial statements of all the transactions in a specified period. A financial statement includes income, cash flow, assets, and liabilities.
External audit firms will audit financial statements of companies yearly as mandated by tax bodies. Similar audits can take place without warning, like when applying for a loan or funding, when a merger occurs, or when a business is flagged for tax evasion. Because of this, it’s important to keep strict records of the money that comes into and flows out of your business.
Cost accounting is a method of determining the price of a product according to how much it costs to make it. This can be applied to the prices of services, too. There can be fixed costs for your business, like utilities, rent, taxes, as well as variables, such as raw materials and labor. You should monitor and estimate these costs to give you proper control over your business budget for informed financial decisions.
How Does Accounting Software Work?
Accounting software works by collecting, categorizing, and analyzing all of a business’s money in and money out. First, you’ll connect your business bank account, credit cards, and other financial systems to your accounting software. This ensures that all financial transactions can be captured by the software.
Additional data can also be manually entered into the system, or captured with a receipt upload tool. All of this data is then processed and displayed in reports like profit and loss statements, cash flow statements, and tax reports. Typically, a bookkeeper or CPA will manage most aspects of accounting software for businesses.
Within the software, you’ll also create and issue invoices, keep track of your vendor and client contact information, accept payments, track and manage inventory, and much more.
Almost every platform comes with a built-in receipt capture feature, where you’ll take photos of anything you buy or sell for your business. When all this data is in one place, you can generate accurate records when tax time comes and assess the financial health of your business at a glance.
The Benefits of Accounting Software
Every type of accounting software comes with numerous useful features for businesses of all sizes. The key benefits of using accounting software include:
Better Control of Your Finances
Accounting software is more than a way of keeping accurate business records. It offers insights that you wouldn't otherwise get using a simple spreadsheet. The user-friendly dashboards on your accounting software show your profits, losses, expenses, and projections in real-time, plus upcoming and past-due payment notifications to save you from tax fines.
Reduce Your Risk of Error
Accounting software allows you to automate processes and generate reports on demand. This means that you can focus on other business functions with the confidence that your books are accurate.
Make Tax Filing Simpler
Maintaining tax compliance is challenging for any business, but accounting software can ease that headache by keeping up-to-date records and calculating sales taxes automatically. Many software tools will also automatically generate any relevant year-end tax forms.
Track Your Expenses
Having a cash flow shortage is never a pleasant experience. With accounting software, you can scan and save cash receipts, track online payments, and manage expenses at every level of your business to maintain a healthy cash flow.
You can also handle some human resource elements using accounting software, such as timesheet tracking, payroll, and employee contract management. While these features often come at an additional cost, it saves a lot of time and effort to have all these features handled within one platform.
How to Evaluate Accounting Software
With plenty of accounting software solutions on the market today, small business owners and freelancers may feel overwhelmed by options. Consider the key features, pricing, and usability of the software for yourself and your team to make the best choice.
Ask yourself the following questions:
|Would a basic software suit you best?||You may need something with extra features that goes beyond basic invoicing and expense tracking.|
|Do you need to track and manage inventory?||Certain software tools, like Wave and FreshBooks, don’t allow you to track inventory, and are therefore best for service-based businesses. If you need to track and manage inventory, choose a tool like Zoho Books or QuickBooks Online.|
|What features do you need from your accounting software?||You might consider an accounting software that includes payroll, project management, and employee time tracking, which might cost extra.|
|How much money do you have to spend on accounting software?||There are products that range from entirely free to at least $150 per month. This is just for basic features, and likely does not include services, payroll, or time tracking.|
|How many users will need to access the software?||Most solutions have strict user limits on their plans, so make sure to note how many users each plan allows for. Otherwise, you may be stuck paying for additional users each month.|
|Which reports do you need from the accounting software?||Sales reports, balance sheets, cash flow analyses, and income statements are some examples of accounting reports that are useful for your business.|
Best Accounting Software for Small Businesses
We personally researched and tested the most popular accounting platforms for freelancers and small businesses. Below are our top choices for you to consider.
1. QuickBooks Online
QuickBooks Online is the best overall accounting software for small businesses. It has all the features you could need, including invoicing, payroll, time tracking, tax and accounting services, and more. Though it can get expensive, it’s the undisputed leader in this category.
To learn more about QuickBooks Online, read our full review.
QuickBooks online is the most popular accounting tool for small businesses. It includes all features a small business needs to keep track of its financials, and most accountants are very familiar with using the tool. QuickBooks Online has over 70 financial reports, integrations with many third-party tools, and a powerful payroll add-on.
Xero is ideal for either service-based or product-based businesses that want exceptional power for an affordable price. Xero does not offer accounting or tax services, but otherwise has a full list of features, more than 800 pre-built integrations with third-party software tools, and one of the most advanced reporting sections that you’ll find.
Xero is an accounting software that's used by more than 2 million customers worldwide. It includes all essential accounting features like reporting, invoicing, inventory management, and tax form generation. It's a great option for most small and medium businesses in any industry.
Wave is a freemium accounting tool that gives customers invoicing, receipt capture, and expense tracking entirely free of charge. You can also add payroll or Wave’s business bank account for a monthly cost. Wave is exceptionally easy to use and is a fantastic value, which is why we recommend it to freelancers and small, service-based businesses.
Wave is an accounting tool for invoicing, expense tracking, and payroll functionality. Wave is the best freemium tool on the market, and we recommend it for those who want accounting features for free.
FreshBooks is another option that’s geared towards freelancers. It’s the easiest-to-use tool that we tested, and though it’s more basic in terms of functionality, it’s still a reliable choice for those who need affordable software that you can learn to use in just minutes.
FreshBooks is the most user-friendly accounting software for beginners and freelancers. With features like invoicing, receipt capture, and expense tracking, it's a great first accounting tool to use when you're starting your business.
5. Zoho Books
Zoho Books is best for larger product-based businesses or those who reside outside of the United States. Zoho Books has built different versions of the accounting software for different countries, making it easy to adapt to different tax rules and currencies. While it’s one of the least user-friendly tools that you could use, it’s worth the investment to get the advanced functionality.
Zoho Books is an accounting software designed for small and medium businesses. Its standout features are its invoicing templates and vast number of financial reports. We recommend Zoho Books for those who need inventory management features.
Successful small business accounting combines good bookkeeping habits, the right accounting software, and consulting with a professional accountant when the need arises. Accounting software automates processes and saves time on payroll, invoice processing, and document capture.
These simplified processes free up time to dedicate to other business tasks. This will set you up for the best chances of financial success as your business grows. Remember, a financially healthy business thrives on good bookkeeping.
If you want some more tips and tricks, check out our article about the best accounting blogs. The resources there are created by accountants and bookkeeping professionals.