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.
  • 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 on-line service, which requires users to log into the vendor's site to access 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.
  • 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.