Topic 2: Introduction to Accounting Software

1. Accounting software definition and function

Accounting software is a computer program that assists bookkeepers and accountants in recording and
reporting a firm's financial transactions. The functionality of accounting software differs from product to
product. Larger firms may choose to implement a customized solution that integrates a vast amount of data
from many different departments. Small firms often choose an off-the-shelf product. Accounting software
describes a type of application software that records and processes accounting transactions within
functional modules such as accounts payable, accounts receivable, journal, general ledger, payroll, and trial
balance.

Accounting software is a computer program that assists accountants in recording and reporting a firm's
financial transactions. Different firms have different accounting software needs. Some may only need
generic, off the shelf accounting software, while others will need customized, complex accounting
software. Accounting software makes accounting calculations easier to perform, understand, and analyze.
Less office space is required with accounting software, as it makes the use of physical data obsolete, which
saves costs in regards to rent. Accounting software makes retrieving old accounting data easier, which is
helpful for internal and external audits.

Understanding Accounting Software

Accounting software is an invaluable resource for modern businesses. Software allows detailed tracking of
financial transactions and near-instantaneous reporting and analysis. Before accounting software, these
tasks had to be performed by hand, using large transaction journals.

Ad hoc reporting was generally impractical due to the labor involved in consolidating the manual entries.
Accounting software automates these tasks, reducing the costs of accounting and allowing better financial
decision-making through timely reporting.

Accounting software also allows for the storing of numerous amounts of data without having to take up
physical space. This results in companies needing less office space because they no longer need large file
rooms to store binders of data. Less office space allows for cost savings.

2. Business processes

All organizations need information in order to make effective decisions. In addition, all organizations have certain
business processes in which they are continuously engaged. A business process is a set of related, coordinated, and
structured activities and tasks that are performed by a person, a computer, or a machine a computer or a machine,
and that help accomplish a specific organizational goal.

To make effective decisions, organizations must decide what decisions they need to make, what information they
need to make the decisions, and how to gather and process the data needed to produce the information. This data
gathering and processing is often tied to the basic business processes in an organization.

Business Processes
Business processes listed in Table 1-2 into groups of related transactions. A transaction is an agreement between two
entities to exchange goods or services or any other event that can be measured in economic terms by an
organization. Examples include selling goods to customers, buying inventory from suppliers, and paying employees.
The process that begins with capturing transaction data and ends with informational output, such as the financial
statements, is called transaction processing.

Many business activities are pairs of events involved in a give-take exchange. Most organizations engage in a small
number of give-get exchanges, but each type of exchange happens many times. These exchanges can be grouped
into five major business processes or transaction cycles:
1) The revenue cycle/process, where goods and services are sold for cash or a future promise to receive cash.
2) The expenditure cycle/process, where companies purchase inventory for resale or raw materials to use in
producing products in exchange for cash or a future promise to pay cash.
3) The production or conversion cycle/process, where raw materials are transformed into finished goods.
4) The human resources/payroll cycle/process, where employees are hired, trained, compensated, evaluated,
promoted, and terminated.
5) The financing cycle/process, where companies sell shares in the company to investors and borrow money, and
where investors are paid dividends and interest is paid on loans.

These cycles process a few related transactions repeatedly. For example, most revenue cycle transactions are either
selling goods or services to customers or collecting cash for those sales. Figure 1-2 shows the main transaction
cycles and the give-get exchange inherent in each cycle.

These basic give-get exchanges are supported by a number of other business activities. Likewise, it may have to
check customer credit before a credit sale is made. Accounts receivable will have to be increased each time a credit
sale is made and decreased each time a customer payment is received. Table 1-3 lists the major activities in each
transaction cycle.

Table 1-2 Overview of S&S’s Business Processes, Key Decisions, and Information Needs

Business Process Key Decisions Information Needs

Acquire capital How much Cash flow projections
Find investors or borrow funds Pro forma financial statements
If borrowing, obtaining best terms Loan amortization schedule

Acquire building and equipment Size of building Capacity needs

Amount of equipment Building and equipment prices
Rent or buy Market study
Location Tax tables and depreciation regulations
How to depreciate

Hire and train employees Experience requirements Job descriptions

How to assess integrity and competence of Applicant job history and skills
applicants
How to train employees

Acquire inventory What models to carry Market analyses

How much to purchase Inventory status reports
How to manage inventory (store, control, Vendor performance
etc.)
Which vendors

Advertising and marketing Which media Cost analyses

Content Market coverage

Sell merchandise Markup percentage Pro forma income statement

Offer in-house credit Credit card costs
Which credit cards to accept Customer credit status

Collect payments from customers If offering credit, what terms Customer account status
How to handle cash receipts Accounts receivable aging report
Accounts receivable records

Pay employees Amount to pay Sales (for commissions)

Deductions and withholdings Time worked (hourly employees)
Process payroll in-house or use outside W-4 forms
service Costs of external payroll service

Pay taxes Payroll tax requirements Government regulations

Sales tax requirements Total wage expense
Total sales

Pay vendors Whom to pay Vendor invoices

When to pay Accounts payable records
How much to pay Payment terms

Figure 1-1 Interactions between Company and External and Internal Parties
Figure 1-2 The AIS and Its Subsystems
Transaction Cycle Major Activities in Cycle
Revenue Receive and answer customer inquiries
Take customer orders and enter them into the AIS
Approve credit sales
Check inventory availability
Initiate back orders for goods out of stock
Pick and pack customer orders
Ship goods to customers or perform services
Bill customers for goods shipped or services performed
Update (increase) sales and accounts receivable
Receive customer payments and deposit them in the bank
Update (reduce) accounts receivable
Handle sales returns, discounts, allowances, and bad debts
Prepare management reports
Send appropriate information to the other cycles

Expenditure Request goods and services be purchased

Prepare, approve, and send purchase orders to vendors
Receive goods and services and complete a receiving report
Store goods
Receive vendor invoices
Update (increase) accounts payable
Approve vendor invoices for payment
Pay vendors for goods and services
Update (reduce) accounts payable
Handle purchase returns, discounts, and allowances
Prepare management reports
Send appropriate information to the other cycles

Human Resources/Payroll Recruit, hire, and train new employees

Evaluate employee performance and promote employees
Discharge employees
Update payroll records
Collect and validate time, attendance, and commission data
Prepare and disburse payroll
Calculate and disburse taxes and benefit payments
Prepare employee and management reports
Send appropriate information to the other cycles

Production Design products

Forecast, plan, and schedule production
Request raw materials for production
Manufacture products
Store finished products
Accumulate costs for products manufactured
Prepare management reports
Send appropriate information to the other cycles
Financing Forecast cash needs
Sell stock/securities to investors
Borrow money from lenders
Pay dividends to investors and interest to lenders
Retire debt
Prepare management reports
Send appropriate information to the other cycles

3. Different types of accounting software and functions (Other than Xero)

There are accounting software packages for all companies, from Intuit's Quickbooks for small to midsize businesses
to offerings from Microsoft, SAP, and Oracle for large enterprises. Some of the distinguishing features are
functionalities in expense reporting, FIFO inventory reporting, point-of-sale integration, batch management,
document management, and multi-currency transaction recording.

Also important is where or how the accounting software is deployed: on-premises, hosted as  software-as-a-
service (SaaS), or in the cloud. There are generic accounting software packages that can be used right away for all
types of companies, while other packages require customization for the specific needs of an industry or business. As
with other types of software packages, pricing for accounting software can take the form of a flat-rate (e.g., a
monthly subscription), time-based, per user-based, and tiered-rates depending on the level of service.

Depending on the accounting software chosen, representatives from the software company may visit a customer's
office and demonstrate the accounting software as well as implementing it properly and securely within the firm's
accounting department.

1. FreshBooks
FreshBooks is one of best accounting software for small business that is based on cloud, enabling access to
accounting functions and data from anywhere anytime on any device. FreshBooks’s functionality spans over the
areas of basic accounting, billing and invoicing, payment and expense management, and payroll, allowing small
scale businesses to serve their accounting needs.

Pros
• Includes invoicing automation
• Cloud-based
• Offers a dashboard and reporting
Cons
• Not able to authorize external access
• Limited features for big business

2. Sage
Sage Accounting Software is one of the most well-known, and widely used accounting software programs for
Windows 10/8.1/8/7 on the market. The system adapts itself to different business goals and unique requirements.
This cloud-based application excels in managing your bookkeeping needs. SME’s can manage their books and relay
their data to the cloud as needed. Larger organizations utilize the cloud mobility to enjoy a range of scalability with
Sage Live and Sage X3 so they can stay in line with customer demand. One of the drawbacks is that there is a
learning curve for using Sage. If you’re not particularly tech savvy, or don’t have the time to learn to use new
software, there are simpler options on the market that might be more suitable for you. It’s also worth mentioning that
the lack of mobile features is one disadvantage that Sage has compared to other options on the market.

Pros
• Quick and simple installation
• Reliable and fast data transactions
• Definable user rights
• Data encryption
• Data back-up functionality

Cons
• Lack of customer service options
• Slow running on some functions
• Double entry required on certain functions

3. Tally
Much more than simple accounting software Tally ERP 9 is a complete business management software solution
which also covers taxation, inventory, payroll and more business functions. Tally is perfect for businesses of all
sizes to take control of their accounting and improve their business resources.

The simple, user-friendly interface allows for robust management of income, expenditure and cash flow with a range
of accounting-minded key features including multiple company management capabilities, account payables
management, unlimited cost and profit centers, credit management, budget and controls view, and many more
accounting functions.

The program’s banking functionality makes automation and fast-banking a workable reality for businesses.

Pros
• Quick and simple installation
• Reliable and fast data transactions
• Definable user rights
• Data encryption
• Data back-up functionality
Cons
• Lack of customer service options
• Slow running on some functions
• Double entry required on certain functions

4. SAP
SAP aims to simplify global accounting operations through fast, accurate, and automated processes and it largely
achieves its goals.

The SAP ERP Financial Management software (running on Windows platforms) offers a range of accounting
applications for general ledger, project accounting, managing budgets, financial reporting and multi-currency
transactions. This effective software allows full control over many accounting functions including financial tracking,
reporting, compliance, and collaboration processes.

Pros
• Includes a wide range of functions and options
• Easy to expand the program for company requirements
• Synchronizes with Microsoft programs like Word and Excel
• User-friendly
• Simple data-sharing

Cons
• Slow and complicated set-up
• Often needs third-party additions to get full experience
• Many steps needed to complete each transaction

5. QuickBooks
QuickBooks is one of the fastest accounting software packages for small business on the market, allowing users to
instantly access client information at the click of a button. Through the simple user interface, businesses can scan
receipts and invoices promptly to ensure accuracy. The core features of the software are in line with other
accounting software packages on the market, offering a comprehensive management of accounts payable,
receivable, invoicing and real-time fixed asset management. Unfortunately, QuickBooks doesn’t support bank
reconciliation, tax management, or expense tracking. This means that new users will benefit from the software but
more established organizations may find it has limited functionality.

Pros
• Works across multiple devices
• Offers backup in cloud
• Data security
Cons
• Does not integrate with third party software
• Doesn’t support payroll management

6. Microsoft Dynamics Accounting Software

Dynamics 365 is one of Microsoft’s lesser-known accounting software offerings, and it packs quite a punch. The
mission statement of Dynamics is to automate where possible, enabling users to streamline bookkeeping and supply
chain management with minimal time investment. The sheer variety of features will work for small start-ups all the
way up to larger organizations. The basics, are all there, with accounts payable and accounts receivable functions
readily accessible and an onboard cash management system that helps to manage invoicing and payroll.

Pros
• Unifies the capabilities of CRM and ERP
• Built for big business
• Offers solutions for different industries

Cons
• More expensive than others
• Real-time customer service not available