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Overview of Accounting Software
All accounting systems have some basic features. However, the sophistication of these modules can vary from vendor to vendor. Some systems provide just the basics, allowing you to work out what's coming in and what's going out; while others offer features that are more detailed, giving you more control and freedom to handle tasks that you'd otherwise have to perform manually.
- Accounts Receivable
Accounting software systems should be able to handle billing, keeping track of what customers owe (accounts receivable, or A/R), and their payments. Here are some of the main A/R features to look out for:
- Invoice processing
At the very minimum, accounting software needs to be able to handle invoicing. When money is owed, you need to know from whom, how much, and when to expect payment. All systems will allow you to print invoices; most will allow you to send them via email. Your system should be able to remember basic customer data such as names, addresses, account numbers, and standard terms. Most software systems nowadays also remember your standard pricing for a wide variety of products and services.
- Automatic invoicing
This is a useful feature, and ensures that revenue is never delayed because you've forgotten to send out an invoice. In addition, with automated statements and late reminders, the accounting software acts as your collection department, reminding customers of the need to pay their bills.
- Payment processing
Many accounting systems provide a mechanism for customers to pay their bills electronically. The advantages for the vendor are many, including less staff time devoted to processing checks or making bank deposits, greater security for payments, and faster processing times. However, there are costs involved. Expect to pay rates similar to those of credit card processing firms to have your accounting system handle debit and credit card payments. Some systems allow direct deposits into your checking account, and there's nothing quite like payments pouring into your checking account automatically every month without having to wait for checks in the mail or having to deal with running to the bank to make deposits.
- Invoice processing
- Accounts Payable
Nobody likes paying bills, but keeping track of what you owe is essential for any business. However, the way in which your accounting system handles the outflow side of your funds can vary. Here are some of the most useful accounts payable (A/P) features:
- Purchase orders
Handling your purchases and what you owe is one of the main tasks for A/P software, but how it does so can vary from producing simple purchase orders to following quotes all the way through to purchase and payment.
- Vendor credit memos
It's easy for a business to lose track of all those credits vendors often hand out, either as rewards or returns. However, credit memos are as valuable as cash, so a system that can track them helps keep costs down.
- Automatic payment
From scheduling bank payments and direct deposits to printing checks, many A/P modules can completely automate your payment processes, preventing you from getting behind.
- IRS tax forms
Having a database of the most common tax forms, such as the 1099 and 1096, can save you a lot of time, especially if the system can input all the necessary data on the forms for you and file them electronically with the IRS. Electronic payment of taxes and filing of forms can keep you from being penalized for late payments.
- Purchase orders
Payroll modules can be extremely sophisticated in some modern accounting systems, handling all aspects of payroll from calculating hours and processing wages to paying payroll-related taxes and making 401(k) deductions. Here are some of the better features out there:
- Variable wage schedules
Whether employees are salaried or paid by the hour, a system that can accurately calculate what they're owed is essential. Problems arise when you have many intermittent workers or part-time staff. Some employees may be paid monthly, others weekly or biweekly, or as needed. Your software should be able to handle different pay schedules along with different types of compensation (commissions, salaries, profit sharing, bonuses, etc.) and benefits (health insurance, retirement, and even perks like paid parking).
- Direct deposit
This is essential these days, as most people's paychecks are deposited directly into their bank accounts. Decent accounting software should allow you to set up scheduled direct deposit payments.
- Automatic tax calculations
This, too, can vary from being able to cope with only the basic deductions to providing sophisticated tax tables and printing relevant forms. Find out if the system does new-hire reporting, W-4s, and W-9s. Does it handle monthly federal tax deposits and quarterly federal tax reports, such as the Form 941? Does it take care of annual reports and returns, such as the W-2, W-3, Form 940, and 1099? Will it do state tax returns for income taxes and unemployment insurance? Can it handle workers' compensation insurance calculations and payments?
- Expense reimbursements and deductions
For those businesses in which employees incur tax-deductible expenses such as mileage, travel and entertainment expenses, etc., you'll want a system that can accommodate these reimbursements and ensure that payments are made in compliance with tax deadlines.
- Variable wage schedules
At the very least, accounting software should have some form of link to your bank account, enabling you to make direct payments and letting you import data from the bank into the accounting system. Some software can go much further:
- Reconcile accounts
If you have more than one bank account, software that can keep track of them all and reconcile them is essential. Make sure your program includes a general ledger function and checkbook reconciliation.
- Prepare bank deposits
These days, an accounting package that can't handle the setup of basic electronic deposits is unheard of, but check on what type of electronic payments it can handle.
- Check handling
If you make a lot or payments by checks, then a system that can print and process your checks will save you a lot of time, but look out for other features, too, such as check voiding and duplicate-check-payment notification.
- Reconcile accounts
Besides the array of different features that are available in accounting software, the quality and quantity of reports the system can generate differs widely, too. Some systems offer a vast range of reporting options, with almost unlimited categories and reporting options. Others just offer the basic reports: money in and money out. Here are some of the better options:
- Standard reports
One expects the accounting system to generate the customary reports used in business, including the income statement (profit and loss), the balance sheet (assets and liabilities), statement of cash flows, accounts receivable, accounts payable, and payroll summary.
- Customizable reports
A system that enables customizable reporting options allows you to pretty much create and compile any report of your choosing. For example, look for systems that let you easily add or remove columns in standard reports, resize column width, or remember a custom report so that it can be duplicated in the future.
- Graph summaries
Sometimes reports composed of long lists of numbers can be difficult to interpret, so having the ability to translate this data into pictorial form, such as pie charts, bar charts, and other graphs, can help you make sense of where your money is going. Look for color graphing capabilities and the ability to display previous years on the same graph for easy comparison.
- Cost predictions
Reports are all well and good for helping you identify trends, but a system that can interpret data, make statistical analyses, and produce forecasts can help you make financial decisions based on facts, not guesswork. Look for systems that include budgeting, estimating, and other costing functions.
- Subsidiary reporting
If you have multiple businesses, a system that can amalgamate certain financial aspects can help you get a better perspective on your entire portfolio, rather than having to estimate from individual reports.
These days, accounting software can handle processes well beyond the scope of financial management, providing a single platform to control nearly all aspects of your business. Be sure to look out for the following advanced features if you think they'll assist you in the running of your organization:
- Standard reports
For online retailers and those businesses that frequently send goods out by couriers, an accounting platform that can handle shipping processes will save you from having to invest in a separate shipment software program.
- Print shipping labels
This can save a lot of time and streamline the shipping process by producing labels along with orders or invoices.
- Estimate shipping costs
Some systems can be set up to understand differences in weight and distance and can enable accurate shipping costs to be estimated, which ensures that you're including such costs in your billings and pricing.
- Track shipments
Having a link to a courier's tracking system ensures that you can monitor what has been shipped and estimate delivery times more accurately, providing better service to your customers.
- Drop shipments
If you need to send a product to a customer directly from a supplier or manufacturer, this can sometimes play havoc with your billing unless you have an accounting platform that can handle drop shipments.
- Print shipping labels
An accounting system with stock and inventory controls can really streamline your business, helping you identify what's in stock, what needs reordering, and where your purchasing budget is being spent.
- Track inventory
Following the lifecycle of an item from purchasing to stocking to sales-all the way to shipping-is a great asset for keeping track of inventory levels.
- Set inventory levels
Ensure that you don't over- or under-order certain products by using automatic ordering to guarantee stock within a specified range. This avoids the hassle of not having items in stock when you need them or a glut of products that just won't move.
- Specify stock locations
For large distribution hubs, having stock locations included on orders avoids the need for an additional warehouse management system, which helps streamline business functions.
- Include item images
This is also advantageous for distributors, as it allows all individuals involved in the process to identify products visually and ensure that the correct items are being shipped.
- Track inventory
- Time and Job Management
Most organizations have some need to monitor attendance and time spent on specific tasks. Time and attendance modules can be very helpful additions to accounting systems. Look for these capabilities:
- Time tracking
If you pay staff by the hour, or require employees to punch in at a certain time, keeping track of attendance and hours is essential for ensuring accurate payroll.
- Time tickets
Individual time tickets, whether paper punch cards or, more likely, electronic swipe cards, ensure accurate timekeeping.
- Job tracking
For service industries, there's often a need to track how long jobs take to make sure you're charging the right amount. This type of time tracking can help you make adjustments in future prices and identify trends in the cost of different jobs.
- Job status
Knowing which jobs are being worked on and which are inactive ensures that you can keep track of the amount of work you have and what needs doing and when.
- Create estimates
For some service industries, providing an estimate is essential to procuring the job-and might be essential to getting paid. A system that can store and then turn estimates into orders and invoices promotes efficiency.
- Time tracking
The cost of accounting software varies greatly, so it's important to find a system that's within your budget. However, it's not as simple as identifying the price of the software package, as there are other considerations to think about, such as what else you get for your money.
Some accounting software systems offer comprehensive technical support, so there's always someone you can contact by phone or email when you run into problems. In contrast, some accounting packages offer very little in the way of support, so once you've paid for the software, you're on your own.
The hardware required to run your accounting software system is going to affect costs, too. Servers, storage, and the number of PCs you're going to need licenses for all have to be taken into account. Of course, these days, a convenient solution is to use a cloud-based accounting service, where all software and data is stored on the Internet. This means that you don't have to worry about storage and backup. However, cloud-based systems also have their drawbacks.
Because modern accounting software platforms handle all sorts of data, such as employee payroll information and customer credit card details, security has to be taken seriously. One of the biggest problems with cloud-based systems is that you're handing all this information over to a third party. The perception is that the data is less secure than on a standalone system stored on your company's own servers. But the facts might surprise you. The reality is that cloud-based accounting systems are often more secure than the software that runs on a company's own computers, servers, or intranet. Cloud hosting usually includes redundant backups and co-located servers to ensure that no data can ever be accidentally lost or destroyed. In addition, they offer access control systems that can force users to change passwords, can limit user access to sensitive data, and can track every action so that no information can be altered without leaving a trail. This makes it easier to audit systems and correct errors.
For very small businesses, such as sole proprietors, it might be the case that you don't need to purchase accounting software. If you just require a basic system to keep track of money coming in and out, spreadsheet programs such as those packaged with Microsoft Office or Google Docs can take care of the basics for you. But if you want the security of having the software calculate your payroll and taxes, or the convenience of paying taxes and other bills electronically, you'll appreciate the new breed of low-cost accounting solutions. Excellent packages start as low as $9 per month.
Use this checklist to track what different vendors offer and what they charge.
Glossary of Terms
- Accounts Payable (A/P): Amount you owe for services or products purchased from vendors. A/P is a liability on the company's books.
- Accounts Receivable (A/R): Amount a business is owed from customers for goods or services sold. A/R is an asset on a company's books.
- Cloud: Cloud computing is the hosting of software on the Internet. You use the software by accessing it online. Cloud computing, also called "software-as-a-service," or SaaS, saves companies money by eliminating the need to purchase software and servers, and ensures more reliable software upgrades and usually better security.
- Contractor: Somebody working for a company who is not a direct employee.
- Drop shipment: When goods are sent directly to a customer from a third party, such as a manufacturer or wholesaler, rather than the retailer who sold the goods.
- Internal Revenue Service (IRS): A division of the U.S. Treasury Department that administers the collection of taxes.
- Payroll: The money a business pays to its employees for work performed.
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