Excel vs. accounting software: Key differences between the two

For many small businesses, Excel is a tempting choice for bookkeeping.  It’s been around for ages, there are plenty of tutorials and Excel templates online, and it’s easy to find sample Excel accounting formulas. Best of all, you probably already have it. 

When you first start your business, it’s the most accessible bookkeeping spreadsheet available. However, as your business grows, you may realize that you don’t have the time to deal with the manual labor required to maintain Excel. Let’s explore everything you need to know about Excel vs. accounting software, including the primary problems and benefits of each. 

5 notable differences between Excel spreadsheets and accounting software

Business owners looking to manage financial data tend to embrace two primary options: Excel spreadsheets and accounting software. While both options may seem similar on the surface, some key differences set them apart. Here are five notable differences between Excel spreadsheets and accounting software: 

1. Features

Winner: Accounting software 

When choosing between Excel and accounting software, one of the most important considerations is the features each option offers. While you can use both tools for financial management, accounting software exists specifically to meet the needs and requirements of businesses of all sizes.

One key benefit of accounting software is its accounting-specific features, such as:

• Recording income 
• Tracking expenses
• Generating financial reports
• Reconciling bank accounts
• Handling invoices
• Managing inventory

Excel, on the other hand, is a general-purpose tool you can customize to meet your specific accounting needs. However, it may be more time-consuming to set up and may not offer the same level of depth as accounting software in terms of integrated features.

Nonetheless, Excel accounting spreadsheets still offer several accounting-specific features that can be useful for businesses, such as the ability to create pivot tables and graphical reports.

2. Usability

Winner: Accounting software

Ease of use is a crucial factor when choosing between Excel and accounting software. Excel is a general-purpose tool capable of performing complex calculations, but it may require some technical familiarity to use effectively.

Meanwhile, accounting software focuses on user-friendliness and targets both novices and professionals in the accounting field. Accounting software's intuitive interfaces and helpful resources should make financial management seamless.

For instance, accounting software's straightforward dashboards allow users to recognize their financial position in real-time, providing overall visibility and data that can inform business decisions.

Excel is a versatile tool, but using it for accounting purposes can be challenging for some users. Accounting software is user-friendly, with intuitive interfaces and helpful tools that make financial management easier. 

3. Integrations  

Winner: Accounting software

For business owners, integrations can significantly improve productivity and efficiency by streamlining workflows and cutting down on manual data entry errors.

In accounting, integrations are critical to ensuring that all financial records and data are accurate.

Most accounting software systems offer integrations with other business applications, such as:

• Inventory management software
• Payment processors
• Customer relationship management tools
• Tax preparation services

These integrations allow businesses to automate the transfer of information between different systems, reducing the need for manual data entry and eliminating the possibility of human error in the process. On the other hand, Excel doesn’t offer such integrations.

Similar to the fact that Excel accounting requires a lot of manual labor, it also does not integrate well with your other financial apps, like credit cards and bank accounts.

Your credit card and bank companies may allow you to download your statements in a spreadsheet format, but you’ll still have to import and organize all of this data into your existing accounting spreadsheet. Again, this takes a lot of time and exposes you to risk.

4. Pricing

Winner: Excel 

One of the most significant factors when picking accounting software is pricing. Businesses need to find a solution that fits their budget. When comparing accounting software pricing, businesses should look at the upfront costs and the ongoing fees. 

Many software systems charge a one-time fee for installation or setup, while others have a monthly or yearly subscription fee. It's essential to determine which pricing model works best for the business and includes all the necessary features and functions.

Meanwhile, Excel tends to be cheaper than many accounting systems. But the cost of a tool like Excel has nothing to do with the sticker price. It’s all about how much time it requires to manage. Unfortunately, Excel involves a lot of working hours. 

You’ll need to enter every business expense by hand. If you practice double-entry bookkeeping, you’ll need to enter every transaction twice. That’s double the manual data entry. 

This means that everything from expense reports to the chart of accounts requires manual entry. Not only does this take time, but it also increases the risk of error. Just how much does this cost small businesses?

5. Accuracy

Winner: Accounting software 

Accuracy is crucial in accounting. Manual data entry is one of the main culprits of accounting errors. Accounting software removes the need for manual data entry by automating processes such as bank statement reconciliations and invoice tracking. 

Meanwhile, spreadsheet errors can have a waterfall effect. Mess up one input with an incorrect digit or a misplaced comma or decimal point, and your spreadsheet will use that to miscalculate other computations.

For example, a small spreadsheet error cost Canadian power generator TransAlta $24 million in 2003. According to The Register, CEO Steve Snyder said the mistake was “literally a cut-and-paste error in an Excel spreadsheet.”

Pros and cons of using Excel for accounting

Excel is a popular spreadsheet program used by businesses of all sizes for financial analysis, data management, and other tasks. Key advantages of Excel include:

• Flexibility: Excel is a powerful tool for various tasks, from simple data entry to complex financial modeling. Users can customize the program to suit their specific needs, creating custom Excel accounting formulas, macros, and charts. It’s also useful for inventory management. 
• Accessibility: Almost everyone has access to Excel, making it a convenient and universally recognized tool for data analysis. It's easy to share files and collaborate with others, even when working remotely.
• Cost-efficient: Excel is readily available at a low cost or sometimes even for free. It's often a part of the Microsoft Office suite, which many businesses already have installed on their computers.

While it has many advantages, it also has its drawbacks. Let’s explore the cons of using Excel:

• Limited capacity: Excel has limits in terms of capacity. Large amounts of data can slow down the program and cause errors. Furthermore, as the complexity of the analysis increases, the probability of errors occurring also increases.
• Manual entry: Excel requires manual data entry, which can be time-consuming and prone to human error. 
• Accessibility: Excel files can quickly become outdated, making it difficult to keep track of changes and conflicts. This can cause confusion and errors, particularly when multiple users are working on the same file.

While Excel may be appropriate for small businesses or simple financial analysis, more complex businesses may need additional software to accommodate their requirements.

Pros and cons of accounting software

When it comes to balancing the books and managing finances, businesses have a range of software options. Here are the top advantages of accounting software:

• Scalability: Accounting software is often more scalable than manual accounting methods. As businesses grow, accounting software can handle more data, automate more processes, and offer more features. This can be especially useful for fast-growing companies that need to keep up with increasing levels of financial complexity.
• Time-saving: One of the most significant benefits of accounting software is that it can automate many mundane financial tasks, such as processing payroll. This can free up time for business owners or finance professionals to focus on other areas of the business that require attention. From invoicing and billing to inventory management, accounting software can handle many financial processes quickly and accurately.
• Accuracy: Accounting software can help reduce human errors, which can have a massive impact on a business's financial health. By automatingprocesses, accounting software minimizes the risk of manual errors in financial statements, income statements, and balance sheets. It can also make tax returns much more accurate, ensuring businesses avoid costly mistakes and penalties.

On the other hand, like any software, accounting platforms have disadvantages, like:

• Cost: While accounting software is more efficient, it can also be costlier than manual accounting methods. Many software solutions require a monthly or annual subscription fee. Additionally, there may be additional costs for technical support, data migration, and training.
• Usability: While many accounting software solutions are user-friendly, there can still be a learning curve when utilizing them to their fullest potential. For those unfamiliar with the software, adapting to it may become time-consuming and frustrating.
• Security: Accounting software can also be susceptible to security risks like all other software. In response, vendors have attempted to secure these platforms with high-level security features. However, this may not entirely address the issue of cybersecurity, and there is always the risk of data breaches.

While the upfront costs might be more for accounting software, the potential rewards of better financial management, streamlined processes, and accurate reporting can make software a valuable investment for any business.

How to choose between Excel and accounting software

Excel might work when you first start your business or if you only have a few financial transactions a month. However, if you’re doing several hundred transactions and have a bunch of accounts to keep track of, it’s time to consider accounting software. 

As your company grows, things change—you might change your prices, raise financing, roll out a few new products, or hire more people. Before you know it, your spreadsheet can’t keep up with your business finances. This is especially true if you need to create financial statements and track accounts receivable and payables. 

Eventually, you may even consider automated accounting and the advantages of putting parts of your financial management on autopilot. 

Streamline your accounting and save time

If you use Excel as your accounting tool, you likely have some frustrations. However, today’s accounting software makes creating business financials and key accounting tasks like cash flow management easy.