When it comes to managing finances, small businesses have a few different options available to them.
One popular option is accounting software, which can automate many of the financial tasks that would otherwise need to be completed manually. But how does this software actually work?
Let’s take a look under the hood of accounting software to find out.
What is an Accounting Software
Accounting software is designed to help businesses keep track of their finances. It does this by tracking income and expenses, recording financial transactions, and generating reports.
Transactions are typically entered into the system by way of invoices, receipts, and other financial documents. Once entered, these transactions are categorised according to their type (e.g. income, expenses, etc.) and then stored in the software’s database.The data stored in the accounting software’s database can then be used to generate a variety of reports.
Most accounting software programs are based on double-entry bookkeeping. This means that for every transaction, there are two entries: one that records the income or expense, and one that records the offsetting entry. For example, when you record a sale in your accounting software, you’ll also need to record the corresponding entry for the customer’s payment.
Double-entry bookkeeping is the most accurate way to keep track of financial transactions, but it can be complicated for businesses that don’t have experience with it. That’s why many accounting software programs include features that make it easier to use, such as templates for common transactions and the ability to import data from other software programs.
In addition to tracking financial transactions, accounting software can also help businesses manage their taxes. Accounting software can be used to prepare and file tax returns, calculate estimated taxes, and track tax payments.
Main Functions of an Accounting Software
Generally speaking, accounting software is designed to track and manage three key areas of a business’ finances: income, expenses, and assets.
The software will typically have modules for each of these areas, which can be customised according to the specific needs of the business.
Income tracking involves recording and categorising all of the money that comes into the business. This might include sales revenue, interest income, and other forms of income. The software will typically have built-in templates for common income sources, which makes it easy to track everything in one place.
Expense tracking is similar to income tracking, but focuses on recording and categorising all of the money that goes out of the business. This might include the cost of goods sold, operating expenses, and other forms of expenditure.
As with income tracking, the software will usually have built-in templates for common expenses, which makes it easy to track everything in one place.
Asset tracking is the process of tracking and categorising all of the physical assets that a business owns. This might include equipment, inventory, real estate, and other valuable items.
The software will typically have a module for asset tracking, which can be customised according to the specific needs of the business.
Once all of this financial information has been entered into the software, it can then be used to generate reports. These reports can give businesses a clear overview of their financial situation, and can be used to make informed decisions about where to allocate their resources.
Accounting software can be an extremely valuable tool for small businesses, as it can help to automate many of the financial tasks that would otherwise need to be completed manually.
If you’re considering using accounting software for your business, it’s worth taking some time to understand how it works. This will help you to make the most of its features and ensure that you get the most from your investment.