What Is Accounting Software? Definition and Features

Accounting software is your digital system for entering transactions, running reports and staying on top of your business’s financial health.
Hillary Crawford
By Hillary Crawford 
Edited by Christine Aebischer

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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.

How can accounting software help your small business?

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:

Minimize manual accounting tasks

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.

Keep your financial data organized

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.

Gain financial insights through reporting

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.

Connect with your accountant

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.

What features should you look for in accounting software?

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. 

Choosing the right accounting software

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.

Accounting software



$30 per month and up.

QuickBooks Online is a scalable solution with granular reporting capabilities and a longstanding reputation in the accounting industry.

$13 per month and up.

Xero stands out for supporting an unlimited number of users. Its simple layout is also easy to navigate.

Free and up.

Zoho offers a wide range of in-house products for inventory, payroll and more that integrate with its accounting software.

$17 per month and up.

FreshBooks is a great solution for freelancers that need to stay in touch with their clients and track time or mileage.


Wave’s simple accounting and invoicing features can be a good fit for very small service-based businesses.

$10 per month and up.

Sage Accounting offers the basics at a low cost and its higher-tier plan supports an unlimited number of users.

$1,410 per year and up.

QuickBooks Enterprise is a locally installed accounting solution with advanced inventory tracking capabilities and industry-specific reporting.

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