What is accounting software?

Accounting software is a computer programme that businesses and accounting professionals use to process financial transactions, store financial data and automate certain bookkeeping and accounting tasks.

Accounting software enables users to complete a wide range of activities including sending invoices, creating accounting reports, running payroll and submitting tax returns to HMRC.

Online software for accounting and bookkeeping

Most modern accounting software exists online, which means that users can access the data from devices connected to the internet. Online accounting software that can be accessed in this way is called cloud accounting software.

Desktop accounting systems

Basic desktop accounting systems that are installed on and accessed from a single computer were once the industry norm. However, most small businesses and accountants with small business clients have now upgraded to cloud-based software.

Spreadsheets vs accounting software

Many businesses still use spreadsheets to manage their accounts. While spreadsheets are a viable tool for some numerical tasks, legislative changes and advances in accounting software technology have highlighted spreadsheets as an unreliable tool for managing business finances and tax compliance.

Tax compliance and Making Tax Digital

In April 2019, HMRC rolled out its Making Tax Digital (MTD) for VAT initiative with the aim of making it “easier for individuals and businesses to get their tax right and keep on top of their affairs”. It first required certain VAT-registered businesses to keep digital records and use MTD-compatible accounting software to submit their VAT returns electronically. The scope of MTD for VAT expanded on 1st April 2022 and all VAT-registered businesses are now required to follow these rules.

Making Tax Digital for Income Tax will be introduced in 2026. It will require self-employed individuals and landlords with annual business or property income above £50,000 to follow the rules for MTD for Income Tax from 6th April 2026. Those with income above £30,000 will need to follow the rules from April 2027.

Find out more on HMRC's website.

Mobile accounting software

As cloud accounting software can be accessed by multiple users from multiple devices, many software companies have created accounting apps for smartphones. Mobile accounting apps enable users to complete simple accounting activities (e.g. scanning expense receipts, creating and sending invoices and reconciling bank transactions) while they’re away from their desktop computer or laptop.

Mobile accounting apps help business owners keep their books up to date and capture all the accounting data they need in order to maintain a healthy cashflow, ensure they claim all the expenses they’re entitled to and stay compliant with HMRC.

Accounting software and Open Banking

While advanced accounting software already enables users to connect their business bank account to receive daily balance and transaction updates, the new era of Open Banking has improved this process. With Open Banking bank feeds, the connection to users’ bank accounts is faster, more reliable and more secure. Accounting software providers that support Open Banking also offer a greater opportunity for innovation in the future. In 2019 FreeAgent secured an industry first by becoming the first accounting software provider to offer Open Banking bank feeds to customers.

Example of accounting software

FreeAgent is an example of a powerful, double-entry accounting system with a range of useful features to help small businesses manage their tax affairs, reduce the burden of administrative tasks and get a clear overview of how their business is performing. FreeAgent’s features include:

  • multi-currency invoicing and expenses
  • time tracking and timesheet reports
  • Self Assessment tax return filing
  • MTD-compliant VAT return filing
  • Corporation Tax forecasting
  • Open Banking bank feeds
  • a dedicated mobile app for Android and iOS
  • HMRC-recognised payroll
  • Tax Timeline of important tax dates and how much you owe
  • a dashboard overview with cashflow and profit and loss data

For accountants, FreeAgent increases efficiency by enabling certain time-consuming tasks to be completed in bulk. The ease of use of accounting software over basic systems, like spreadsheets, also helps clients keep their accounts in order and save time on managing their daily admin. A few of the most popular features for accountants include:

  • bulk payroll with the ability to submit RTI directly to HMRC
  • permission level setting for each client
  • Self Assessment and MTD VAT return filing directly to HMRC
  • IR35 reports with real-time calculations

Disclaimer:The content included in this glossary is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this glossary. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.

Frequently Asked Questions

What’s the best accounting software for my business?

The best accounting software for your business depends on a variety of factors, like how many employees your business has and what sector it operates in. FreeAgent, for example, is a great fit for service-based limited companies and sole traders with 10 or fewer employees.

Most software providers offer an introductory free trial so it’s a good idea to try it out first to see if it’s the right fit. Why not start with a 30-day free trial of FreeAgent?

Do I have to use accounting software to manage my business bookkeeping?

MTD for VAT requires all VAT-registered businesses to use MTD-compatible software to: 

  • store business records digitally
  • send VAT returns to HMRC

While other businesses are not currently required to use accounting software by law, many feel that the benefits of the technology are enough of a reason to make the switch. FreeAgent’s efficiency calculator can show you how much time accounting software could save you on day-to-day admin.

Does accounting software replace the need for an accountant?

Accounting software does not replace the need for an accountant. As good software enables business owners to take care of daily admin tasks, like accurately capturing income and expenses, their accountants are freed up to focus on other areas where they can provide more value.

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