A Guide to Accounting Software Features and Benefits

What are the features of accounting software?

Before committing to an accounting software provider, you must know which tools and features to look for when choosing a system. Nearly all online accounting software uses double-entry accounting to ensure accuracy and have accounts receivable (AR), accounts payable (AP), banking and reporting features. Some also include inventory management, project management, time tracking and payroll tools, though these features are usually in higher-tier plans or available as add-ons that cost extra. 

Below are some core elements of standard accounting software.

AR

Accounting software systems should be able to handle billing, keeping track of what customers owe (AR) and their payments. Here are some of the main AR features to look for:

• Invoice processing: At the very least, your accounting software should be capable of invoicing. When money is owed to you, you need to know from whom, how much and when to expect payment. All accounting systems allow you to print invoices, with most letting you email them, too. Your program should remember basic customer data, such as names, addresses, account numbers and standard terms. Most of today’s software solutions also remember your standard pricing for a wide variety of products and services. 
• Automatic invoicing: This feature ensures revenue is never delayed because you forgot to send out an invoice. In addition, with automated statements and late reminders, the accounting software acts as your collection department, reminding customers to pay their bills. [Check out our review of FreshBooks for an accounting software program capable of automated invoicing.]

Payment processing

Many accounting systems allow a business’s customers to pay their invoices online by clicking a button on the electronic invoice you send them. The advantages for the company 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 highly rated credit card processing companies to have your accounting program handle debit and credit card payments. 

Some systems allow ACH payments to be directly deposited into your checking account and there’s nothing quite like payments pouring in automatically every month without you waiting for checks in the mail or running to the bank. Although there’s often a fee for this as well, it’s usually less expensive than accepting card payments.

AP

Nobody likes paying bills, but keeping track of what you owe is essential for any business. The way your accounting system handles the outflow side of your funds can vary. Here are some of the most useful AP features:

• Purchase orders (POs): Handling purchases and tracking what you owe is one of the main tasks of accounting software, but how it functions can vary, from producing simple POs 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 AP modules can completely automate your payment processes, ensuring you don’t fall behind on your debts.
• IRS tax forms: Having access to a database of the most common tax forms, such as the 1099 and 1096, can save you a lot of time. This is especially true if your accounting software 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.

Payroll

Payroll modules are extremely sophisticated in some accounting platforms, rivaling some of the best payroll services. They can do everything from calculating hours and processing wages to filing payroll tax forms and making 401(k) deductions. Here are some of the top payroll features to look for in accounting software:

• Variable wage schedules: Whether your employees are salaried or paid by the hour, an accounting system that can accurately calculate what you owe them is essential. Problems arise when you have many intermittent workers or part-time staff. Some employees may be paid monthly, others weekly or biweekly. Your software should be able to handle different pay schedules along with different types of compensation, such as commissions, salaries, profit sharing and bonuses and benefits, including health insurance, high-quality retirement plans and perks like paid parking.
• Direct deposit: These days, accounting programs must support direct deposit as most people expect their paychecks to be deposited directly into their bank accounts. Decent accounting software should allow you to set up scheduled direct deposit payments.
• Automatic tax calculations: This function ranges from software that handles only the basic deductions to platforms that provide sophisticated tax tables and can print relevant forms. Find out if the system you’re interested in supports new-hire reporting, expense tracking, W-4s and W-9s. Does it handle monthly federal tax deposits and quarterly federal tax reports, such as 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? These are vital questions to ask the software vendor.
• Expense reimbursements and deductions: If your employees incur tax-deductible expenses, such as travel and entertainment expenses, you’ll want a system that can accommodate these reimbursements and ensure that payments comply with tax deadlines.

Banking

At the very least, your accounting software should have some form of a link to your business checking account and other company bank accounts, enabling you to make direct payments and import real-time data from the bank into the accounting system. Some software programs can go much further.

Account reconciliation

If you have more than one bank account, an accounting solution that can keep track of them all and reconcile your business accounts is essential. Make sure your program includes a general ledger function and checkbook reconciliation. You should also seek the following functions:

• Bank deposit prep: These days, an accounting package that can’t handle the setup of basic electronic deposits is unheard of, but you should check what type of electronic payments it can handle.
• Check handling: If you make a lot of payments by check, then a system that can print and process your checks will save you a lot of time. Look out for other features too, such as check voiding and notification of duplicate check payments.

What are advanced accounting software features?

Online accounting software can handle processes well beyond the scope of financial management, providing a single platform to control nearly all aspects of your business. Look out for the following advanced features if you think they’ll assist you in running your organization.

Shipping

For online retailers and businesses that frequently send goods by couriers or clients, an accounting platform that can handle shipping processes will save you the investment of a separate shipment software program. Here are some of the features you may want:

• Shipping label printing: This function can save you a lot of time and streamline the shipping process by producing labels along with orders or invoices.
• Shipping cost estimation: Some systems can be set up to understand differences in weight and distance to provide accurate shipping cost estimates. This ensures that you include such costs in your billings and pricing.
• Shipment tracking: 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, it can wreak havoc with your billing unless your accounting platform can handle drop shipments.

Inventory management

An accounting system with stock and inventory management controls can really streamline your business, helping you identify what you have in stock, what you need to reorder and where you’re spending your purchasing budget. If you have a retail business, you’ll likely want to seek the following features:

• Inventory tracking: Being able to follow the lifecycle of an item — from purchasing to stocking to sales, all the way to shipping — is a great asset to help you track inventory levels.
• Set inventory levels: You can ensure you don’t overorder or underorder certain products by using automatic ordering to guarantee stock within a specified range. This saves you the hassle of not having items in stock when you need them or a glut of products that just won’t move.
• Specified 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.
• Item images: The inclusion of item images 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.

What reporting options does accounting software offer?

Besides the above features commonly found in accounting software, the quality and quantity of reports each system can generate differ widely. Some systems offer a vast range of reporting options with virtually unlimited categories to help you create more than just essential financial statements. Others just offer the basic reports: money in and money out. Here are the reporting options to look for.

Standard reports

Your accounting system should be able to generate the customary reports used in business, including income statements (profit and loss), balance sheets (assets and liabilities), statements of cash flow, AR, AP and payroll summary. [Related article: What Are Assets in Accounting and Business?]

Customizable reports

An accounting solution that enables customizable reporting allows you to create and compile any report of your choosing. Look for a system that lets you easily add or remove columns in standard reports, resize column widths and remember custom reports so that it can duplicate them in the future.

Graph summaries

Long lists of numbers can be difficult to interpret, so software that can translate data into pictorial forms, such as pie and bar charts, can help you make sense of where your money is going. Look for color-coding 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 platform 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 cost functions.

Subsidiary reporting

If you have multiple businesses, a system that amalgamates certain financial aspects can give you a better perspective of your entire portfolio than making your estimate from individual reports.

How does accounting software monitor time and job management?

Most organizations 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 if you’re seeking native time and attendance functionality:

• 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 accurate payroll. To ensure accurate timekeeping, this is usually done with a time clock. These time clocks can be compatible with electronic swipe cards, barcodes or PINs, although the most advanced solutions use biometric authentication. Some systems allow users to clock in from a web browser or an app instead of a physical time clock.
• Job tracking: Businesses in service-based industries often need to track how long jobs take to make sure they charge the right amount. This type of time tracking can help you make adjustments in future prices and identify trends in the costs of different jobs.
• Job status: If your accounting software shows you which jobs are being worked on and which are inactive, you can keep track of what needs doing and when.
• Estimates: For some service businesses, providing an estimate is essential to procuring the job — and maybe to getting paid. A system that can store estimates and turn them into orders and invoices in just a few clicks promotes efficiency.

Alternatively, you can choose an accounting solution that integrates with one of the best time and attendance services.

Why should businesses use accounting software?

Using accounting software can save your company time and prevent errors.

“The main benefit of using modern accounting software is efficiency,” said Fabien Dawidowicz, the former chief financial officer of Spendesk. “Instead of copying and pasting data from spreadsheet to spreadsheet, you have all your transaction information in one place. You can easily see what’s been spent or what’s come into the business and you always know where to find this information.”

Rather than manually inputting data and transactions, you can use the bank feed feature to connect the software to your business bank and credit card accounts. With this in place, you have a daily update of your transactions. Most accounting applications have a dashboard that gives you a real-time look at your most important metrics.

The software can create a variety of reports, such as AP reporting and financial statements, including profit and loss statements and balance sheets, which are necessary for requesting funding from an investor. You can also compare transaction activity or statements from prior months and years to your current ones, which can help you analyze your business’s growth, sales trends and other key metrics that you need to make informed business decisions as you prepare for the future.

You can use accounting software to categorize expenses and schedule and pay bills, whether you pay online, by check, by credit card or with cash. This will help you keep track of those transactions and manage your cash flow. You can also use the software to record the payments you receive in cash or by check and create and send invoices and past due notifications. Accounting software also automates many tedious and repetitive accounting tasks, which increases the accuracy of your data and keeps your bookkeeping efficient. If you use cloud-based accounting software, you can do your accounting anywhere there’s an internet signal to connect to.

“Using an accounting package will help organize your records and ‘force’ you into a systematic structure,” Ken Stalcup, senior director with Houlihan Valuation Advisors, told us. “That will put the company’s finances into a system that can report the financial results and help when it comes to tax time.”

What are the benefits of accounting software?

Accounting software isn’t just a necessary evil. It provides a lot of valuable features that can help run your business more smoothly. From automating invoices to keeping on top of cash flow, here’s a look at the main ways your business can benefit from accounting software:

• Maintain control of your finances: Managing your personal finances on the fly is one thing, but you need something more formal when running a business. Pen and paper and spreadsheets may be okay, but they won’t give you the insights accounting software can. Accounting programs organize and store your financial data in one location and they enable you to get a full view of your business’s financial performance in real time.
• Automate invoices: To keep cash flowing and your business growing, you must bill clients on time. The longer you wait, the harder it may be to collect. Many of the best accounting software platforms let you automate invoicing. You can create recurring invoices, send follow-up reminders and accept digital payments directly from the invoices. You can also track your unpaid invoices and offer discounts for early payments.
• Track expenses: Cash is king for small businesses. A common accounting mistake is failing to track business costs accurately and the last thing you want is to face a cash flow shortage because expenses are out of whack. Accounting software can help you prevent that scenario by automating expense tracking. With the software, you can scan and record receipts, as well as track mileage and expenses incurred on behalf of clients.
• Reconcile bank statements: A core feature of accounting software is the ability to connect with your bank accounts. With it, you can access your bank statements directly from your accounting software. You can also match and reconcile bank transactions automatically. [Learn how accounting software can help with your AP process.]

• Stay in good standing with the IRS: Filing taxes is complicated enough, but for small businesses, it can be even more difficult to maintain compliance. Accounting software makes it easier. Many of the best accounting software programs automatically calculate sales tax and prepare tax forms for you.
• Obtain reporting and analysis: As you run your company, your accounting software collects a lot of data through integrations with your point-of-sale program, customer relationship management system and other business applications. That gives you deep insight into your business. Most accounting solutions offer reporting functions, enabling you to easily analyze that data and track performance.
• Manage inventory: Whether you run a retail store or operate only online, you need to keep tabs on your inventory with retail accounting. You don’t want to run out of a hot-selling product or purchase one that’s languished on the shelves. Accounting software can help with that, even automating the ordering process. With accounting software, you can track products sold, set reordering thresholds and run reports on which items are doing well and which aren’t.
• Easily collaborate with your accountant: When you use accounting software, your financials are organized in one central digital location. Receipts are scanned in, tax forms filed and inventory tracked. That makes it much easier for your accountant to do their job. Many accounting software vendors will even let your accountant have access to the program for free. A digital accounting solution also frees up the time it would take to manually gather the documents and information your accountant needs.
• Have around-the-clock access: Modern accounting software lives in the cloud, which means the platforms can be accessed anywhere you have an internet connection. That means you can check up on sales, accept payments and run reports whenever and wherever you are.

The power of accounting software

Ditching spreadsheets and messy records is just the beginning. Cloud-based accounting software organizes your financial data and provides a clear view of your cash flow. It also automates tedious tasks like invoicing and expense tracking, freeing you up to focus on growth. Collaboration with your accountant becomes effortless. Overall, accounting software — when stocked with the right features — saves you time, reduces errors and equips your business for financial success.

Mike Berner and Simone Johnson contributed to this article. Source interviews were conducted for a previous version of this article.