Every business organizing financial information will need an accounting system. Whether it’s manual or automated, single entry or double entry, the goal of any such system is to make expense tracking, budgeting, income tracking, and other activities as simple as possible.
Accounting is one of those necessities that many small business owners feel they don’t know enough about. A survey by Wasp Barcode found that less than half (40%) of small business owners consider themselves as “extremely knowledgeable” or “very knowledgeable” when it comes to accounting.
Regardless of your accounting knowledge, you are still required to report financial data, and failure to comply can attract serious repercussions.
Suffice to say that financial reporting is important, and accounting systems help you keep your balance sheet tight.
Which accounting software you need will depend on what you want to get out of your system. Think of the accounting system as a place to get a birds-eye view of all your financial information. Each system has different offerings around how that data is collected and what exactly is tracked.
Let’s look at them more closely below.
Single entry vs. double-entry accounting systems
There are two main types of accounting systems:
1. Single entry
2. Double entry
A single entry system is where each transaction is recorded as a line item in a business ledger. It’s a popular small business accounting system because it’s very simple.
Single entry accounting systems have a low barrier to entry. You don’t need any formal training to adopt it. You don’t need complicated accounting software, either. And it’s still really useful to give an overview of your financial state.
With no more than an excel spreadsheet, your single-entry accounting system is ready for manual entry. The key data points to track are:
- Sales tax
- Payment method
This level of simplicity naturally means there is limited functionality. A single entry system is not detailed enough for proper financial reporting. It doesn’t have enough data to complete financial analysis and thus doesn’t help you plan resources for the future.
While a single entry system is better than no system, it’s not recognized by tax authorities for reporting purposes. It’s really just a tool to help you keep track of your finances. Anything beyond that needs more comprehensive tools and a bookkeeper or accountant.
Small businesses that may want to consider the single entry system are those that don’t process a lot of transactions each day. This would include sole proprietors that don’t need extensive bookkeeping, such as business consultants or freelancers, who focus more on optimizing invoicing and billing.
The double entry system records each transaction as both a debit and credit in separate accounts. This system keeps the books balanced and is a much more detailed process than the single entry system.
Double-entry accounting systems develop complete records, which can then be used to create proper financial statements. You can analyze your financial reports and plan for the future. Plus, these can be used with tax authorities.
Because of the dual data entry, errors in the balance sheet are easier to detect and rectify. The outcome is a detailed, accurate picture of your company’s finances, including your:
- Profit & loss statements
- General ledger
- Chart of accounts
- Sales tax summary
- Invoice summary
- Payment summary
- Expense reports
The more comprehensive a system, the greater the investment. Compared to the single entry system, double-entry systems cost more, they’re more complex and require additional time to input data. There will be a learning curve to adopt this kind of system, and you need accounting software if you want this level of data capture.
Considering it’s a more costly, time-consuming accounting system, double-entry is best suited to businesses with higher volumes of transactions or significant cash flow. Those that deal with inventory management, invoicing, and accounts receivable and payable are going to want the accounting features of a double-entry system.
Cash vs. accrual accounting methods
The single vs. double system above refers to how the data is captured (single line, or both debit and credit). The accounting method, comparatively, is about when you capture the data. (e.g., cash or accrual.)
Cash accounting tracks when the money trades hands. Under the cash accounting method, you would record the income at the time it is paid. You would also record the expenses at the moment you pay the money.
Accrual accounting tracks when the transaction occurs, which doesn’t always line up with the day the money trades hands. Accrual accounting, for example, would record the transaction when a bill is sent out, or an invoice comes in. Accrual accounting mirrors the dates on your received and payable invoices.
Best practice accounting method
When you drill down into the difference between these two, all that really changes are the dates. The accrual dates will be before the money reaches or leaves your bank accounts, while the cash method will mirror your bank statements. Both would match a bank reconciliation statement.
Cash accounting is fine for small businesses, but the accrual accounting method is really the best practice. Businesses that exceed 5 million USD in sales are legally required to follow accrual accounting. It makes sense to just start with accrual accounting if that’s what you’ll be expected to do when your business booms. Plus, accrual accounting is believed to offer the most accurate view of a company’s finances.
Identifying the best accounting software for small businesses
Now that you understand the systems and methods, it’s time to look at the software that helps you capture your financial data.
The “right” option depends on several factors, including your industry, your accounting needs, and the volume of financial activities that need to be tracked by your accounting tool. There are a few ways to break down the prospects. The first is to identify what you need from your accounting solution. The main three are:
1. Managerial accounting
2. Inventory accounting
3. Industry-specific accounting.
The most common accounting solution that small businesses need is managerial accounting. This kind of accounting process is double-entry and lets managers grasp their financial information to aid better decision-making about current operations and future plans.
This kind of management software will record costs incurred by the business through transactions and operations. It also provides tools and data to analyze this information. With these insights, managers are able to reduce costs, improve efficiency, and better plan for resources.
Most online accounting software is going to cover managerial accounting solutions. The higher end of this would be an enterprise resource planning (ERP) system, and the lower end would be a cloud accounting tool.
Restaurants, retailers, and all businesses with inventory to manage will likely want accounting software with inventory tracking capabilities. These accounting tools will often come with all the same features as the managerial type of solution, with added features, like RFID and real-time barcode tracking to simplify inventory tracking.
The obvious benefit of inventory tracking built into your accounting solution is that you can monitor and reorder stock along with your financial activities. This can help you with tasks like demand forecasting, placing stock orders, and more.
Businesses with accounting requirements specific to their industry may want accounting software for that industry or are at least customizable to cover their unique needs.
Industry-specific accounting software is not that common, but some of the larger SaaS providers will have customization options. For this kind of strict accounting, it’s highly advised you work with an industry-specialized accounting professional or CPA.
Highly customized or industry-specific software ensures your needs are covered. You can enjoy the peace of mind that you’re meeting your legal tax management requirements, and your system is set up to minimize errors.
Considerations of small business accounting software
Not all of the following features will be required for every company, but they need to be considered and understood to help you determine which solution will meet your business needs.
Enterprise resource planning (ERP)
An ERP system is the créme de la créme of business software which most small companies will not need. However, if you’re a business that deals with supply chain, manufacturing, procurement, project management, finance, and accounting, an ERP solution -— such as Oracle’s Netsuite — may be right for your business.
These enterprise-level solutions are also highly customizable, so they could be suited to businesses looking for industry-specific add-ons.
Any modern accounting software really should be a cloud solution. Cloud accounting software lets you manage your finances from anywhere. You could send purchase orders on the go, review financial reports while you’re waiting for a meeting, and your staff can complete time tracking while out of the office.
Most cloud accounting solutions will have a mobile app that is compatible with both Android and iOS.
Automation is a must for small business accounting software. Whether it’s as simple as payment processing or as comprehensive as automated inventory tracking, you definitely want a solution that will automate tedious tasks.
Every business deals with invoicing. And not all accounting software offers the same invoicing features. If invoicing is your primary method for requesting payments, you want to look at solutions that don’t have limits on the number of invoices you can send out. Failing to check for this can end up costing you, having to increase your software plan to cover your invoicing needs.
Only businesses with inventory will need inventory management features, but it’s important to realize that not every software solution will include this. If inventory is a part of your business, look out for accounting software that has barcode tracking and RFID to help you quickly track and manage your stock.
Bookkeeping is really one of the core features you will want from your accounting software and one that all systems will offer, to a degree. If you work with a bookkeeper to manage your books, you will want to check that your accounting software allows for collaborators (e.g., user permissions for your accountant and/or bookkeeper to easily access your financial records and reports). Some systems limit the number of accounts you can create, so identify your needs before you sign up.
If you’re operating online or accepting payments in more than one currency, you will need to look for multi-currency features on your prospective accounting platform. Most will not have this as a basic feature, but plenty will offer multi-currency solutions as an add-on or in higher plans.
Top 5 small business accounting software providers
Covering a range of needs, these are the best accounting software providers for small businesses:
QuickBooks Online (QBO) is a very popular choice thanks to its high level of flexibility and scalability. It offers a range of add-on services so that you can customize it to fit your needs, and it’s easy to share information with your accountant. It’s the software your accountant is likely using themself.
QBO offers hundreds of third-party app integrations through record keeping and comprehensive reporting features, as well as inventory management (with the Plus and Advanced plans).
The cons for QuickBooks are that it can end up expensive, particularly with add-on features like time tracking and payroll. Depending on your needs, these additions could end up too much compared to other platforms.
Xero is one of the most popular accounting solutions for small businesses. It offers features like full reporting, inventory management, and automated bill and receipt capture at every subscription level.
Xero also offers unlimited users on all pricing plans. It’s a great solution for growing businesses needing a flexible solution that grows with them.
We all know Zoho CRM, but worth considering in the accounting world is Zoho Books. This affordable accounting solution — it’s free for businesses with less than $50,000 in annual revenue — boasts high-power automation solutions.
Zoho Books offers accounts receivable and payable automation, automated invoice creation and reminders, and the ability to set up auto-charges and recurring payments. It also produces automatic reports. The downside? The free version is limited to just one user.
Sage 50cloud is a sophisticated accounting platform that has excellent customizability to suit businesses with unique needs. As a standard, Sage offers in-depth contact and item records, inventory management tools, Microsoft 365 integration, and great customer support options.
Disadvantages include the fact that it’s Windows-only, the interface is not so user-friendly, it’s fairly expensive, and there is no dedicated time tracking feature. But its customizations make it a strong contender for businesses that need this.
FreshBooks is a solid option for freelancers and independent contractors. It’s got incredible customizable invoicing features and strong customer service. However, it’s not as strong for other business types when compared to the accounting software listed above.
FreshBooks is not very flexible or scalable, so it’s really only a solid option for independent contractors and freelancers.
Completing your financial solutions
Already using a good accounting tool? Be sure to integrate it with your payment processor. Connecting the two solutions makes data entry and payment reconciliation easier, so you can spend less time on administrative work and more time running your business.
The good news? Stax integrates with leading accounting software like QuickBooks and Xero so you can keep your financial processes tight. Learn more.