Types of accounting software
/Accounting software is used to collect information about and report on the financial viability of a business. This software is critical to the proper administration of an organization. Before deciding upon which software package to use, it is important to understand the different types of accounting software, and under what circumstances each one should be used. The following list itemizes the general classifications of accounting software.
Spreadsheets
Quite a small business can be run just using an electronic spreadsheet for its accounting software. The spreadsheet software is inexpensive and the system can be configured in any way at all. However, spreadsheets are prone to error, since information may be entered in the wrong place, incorrectly, or not entered at all, resulting in inaccurate financial statements. Consequently, spreadsheets are typically only used by organizations that have very low transaction volumes.
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Accounting Information Systems
Commercially-Available Software
Commercial off-the-shelf (COTS) software is the predominant accounting software used throughout the world. It is moderately configurable to the needs of a business, contains multiple layers of error detection to prevent the entry of incorrect information, and produces standard reports that can usually be configured to the needs of the user. There are COTS packages that are specific to certain industries, with extra features to address the needs of their target markets. COTS software may require the services of consultants to install, and can require a lengthy installation process, as well as on-site staff to maintain the software. A variation on this concept is accounting software that is available as an online service, which requires users to log into the vendor's site to access the software. The latter approach requires the payment of a per-user fee each month, rather than an up-front purchase of the software.
Enterprise Resource Planning Software (ERP)
ERP software integrates information from all parts of a business into a single database. This approach eliminates the problems associated with having independent department-specific software that does not share information. However, it is also painfully expensive and may require more than a year to install. This software is usually only needed by the largest and most complex organizations.
Cloud Accounting Software
This software is the same as commercially-available software, but it is stored in an offsite data center that is controlled by the software vendor. You can access the software through an Internet connection. This software-as-a-service approach is funded by monthly subscription billings, usually based on the number of users. There are several advantages to using cloud accounting software, including not having to maintain it locally on a server, having the vendor automatically provide all software updates, and being able to access the system from anywhere, as long as there is an Internet connection. The main downside is the Internet connection - if it is severed, then you cannot access the system at all.
Custom Accounting Software
This software is custom developed for an organization. This approach is usually only taken when an entity's needs are so specific that they cannot be met by a COTS or ERP package. However, this approach is rarely taken, since custom software tends to be buggy and requires more maintenance than commercially-available packages.