Home Business Software What Is Software as a Service Accounting – SaaS Accounting Explained
Noah Edis
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No one enjoys balancing the books (let alone doing it manually). I can attest to that as someone who used to record the transactions of a startup on a physical ledger. But for this article, I decided to ask our accounting associate her thoughts on SaaS accounting solutions.

She started with a history lesson. In 2007, she had to manually track income, expenses, and inventory. Tax season, chasing after client payments, and the danger of theft of physical records all added to her daily frustration. But everything changed when she transferred to another company that had accounting software.

Having witnessed firsthand the digital transformation of SaaS accounting, she believes it is a critical need even for startups. Want to discover how to optimize this tool for your benefit? Let’s get started.

What is Software as a Service (SaaS) Accounting?

SaaS accounting is a cloud-based method for managing, recording, and analyzing a business’s financial transactions. Since businesses and SaaS accountants access this type of service via the Internet, the most common payment setup for it is a subscription.

Accounting software’s origins trace back years before the Internet was made public. Here’s a quick recap of how it evolved to what it is today:

  • 1970s: Small businesses saw the advantage of using VisiCalc, the first spreadsheet software, for their accounting needs.
  • 1980s–1990s: Personal computers became an integral part of office setups, with more accounting-specific tools and other suite programs available to the public.
  • The 21st century: Advancements in technology gave rise to SaaS cloud computing capabilities.

For a complete look at how accounting solutions have changed over time, visit our post on the evolution of accounting software.

If your company adheres to the generally accepted accounting principles (GAAP), you should note the changes you’ll have to make in how you account for software costs. Since you’re paying for SaaS monthly, it becomes an operating expense.

Many SaaS accounting solutions are available, making it challenging to look them up individually. We’ll guide you through this landscape later on by recommending some of the best accounting tools we’ve tested as a team.

Accounting for SaaS vs On-Premise Businesses

One key statistic we think you should know is that 70% of business software now uses the SaaS approach. These subscription models differ from on-premise solutions, for which companies generally pay a large one-time fee.

The fixed software becomes a capitalized expense, meaning the company would earn money from it as an asset until it loses its life value. Since SaaS models are paid monthly or annually, businesses account for their costs as small, recurring operational expenses.

The International Financial Reporting Interpretations Committee backs this idea, suggesting that in most cases, SaaS should be classified as a service arrangement rather than leased or intangible assets.

Acknowledging these differences means better decisions, forecasts, and accurate recordings of your transactions. Thus, you’re also improving the compliance and financial trajectory of your business.

Financial Reporting for GAAS vs SaaS Bookkeeping

While the GAAP guides accountants as they perform their main tasks, the generally accepted auditing standards (GAAS) serve as the auditing handbook. Auditors check accounting practices to ensure compliance with regulatory bodies.

There are differences between reporting according to the GAAS and SaaS bookkeeping. As these can be intricate, we’ve listed down some major differences to contrast how you do reports for these two approaches:

GAAS Bookkeeping

  • Costs are typically one-off, capitalized, and amortized over the life of the asset; this means that the cost of your SaaS subscription should fall under operational expenses.
  • Revenue is recognized upon the purchase of the physical or downloadable software.
  • Implementation costs are often spread over the term of the project.
  • Financial reporting follows traditional GAAP standards.

SaaS Bookkeeping

  • Costs are more dynamic, often occurring as recurring monthly or yearly subscription fees.
  • Revenue recognition is spread out over the life of your contract with the provider, aligning closely with ASC 606 standards for SaaS companies.
  • Costs associated with SaaS implementation are usually expensed as they occur unless stipulated otherwise in the contract.
  • Financial reporting typically classifies SaaS arrangements as service contracts per recent IFRIC guidelines.

Whether you opt for on-premise applications or SaaS, you should consider additional costs relating to configuration and customization. These are usually treated as intangible assets under international accounting standards.

Overview of Cloud Accounting Software

We get it. Considering the technical implementation of cloud accounting software is stressful. But there’s good news. In our testing of different SaaS accounting solutions, we discovered how multifaceted its benefits are.

These, from the perspective of an accountant in our testing team, are your ticket to simplified and effective accounting.

Custom Invoicing

This is a standout feature worth mentioning at the start. Cloud-based accounting solutions like Freshbooks let you generate professional-looking invoices in seconds. The best part of it is that you can also easily customize the invoices you create on these platforms.

Freshbooks’ invoice customization platform
Add your logos, color themes, and more with Freshbooks

While these solutions let you automate recurring invoices, you can also opt to send automatic follow-ups to clients who’ve missed their due dates. Just imagine how much time you save as you eliminate unnecessary email exchanges.

Cloud-based tools can also simplify currency conversions for international clients. This functionality eliminates potential confusion and makes it easier to conduct business globally.

With custom invoicing, cloud accounting software transforms how businesses handle billings, making it an indispensable tool in any modern company’s financial toolkit.

Management of Expenses and Payables

It’s common for cloud-based accounting platforms to show you a concise overview of what you owe and what you suspend on, making these accounting areas a less mundane task.

Zoho Books’ recurring expense option
Add recurring expense automation for future use using Zoho Books

With solutions like Zoho Books, your recurring expenses and payables can also be automated. Simply set up the workflows via the software, and you can say goodbye to missed payments and hello to better relationships with your suppliers.

But the best thing about testing expense management with these tools is that they let us scan receipts. We’ve seen them turn pictures into detailed versions, including the taxes, merchants, and totals. Talk about expense tracking on the go.

Meanwhile, everything is accounted for in a detailed record of each payment you make, which means you get an accurate audit trail. With this much visibility and control, you can ensure smoother operations and better cash flow management.

Real-Time Financial Reports

Because it records each transaction, whether an expense or invoice, a software solution must have reporting capabilities, right? We’re glad to tell you that reporting is the most critical must-have for any tool.

Whether it’s for a year-to-date or financial year report, you can get a snapshot of your financial position with just a single click. Thus, you eliminate the need for manual data entry and calculations.

Freshbooks Profit and Loss report
Get an income statement for any accounting period with just a single click

There are many types of reports you can generate with solutions like Freshbooks, including:

  • Profit land loss statements
  • Expenses
  • Balance sheets
  • Forecasts

Advanced reporting means you can establish a more data-driven approach to each business decision.

SaaS solutions even foster collaboration, as you can set different member access levels for your team. This lets them access important information on the go and ensures everyone’s on the same page.

Secure Storage

While cloud databases are safer from physical threats, they can still be vulnerable. That’s why SaaS accounting tools today have to adhere to strict industry standards.

The cloud-based accounting solutions we’ve tested (and will recommend) comply with the General Data Protection Regulation (GDPR), one of the most stringent regulations for data privacy and security.

These tools help you record financial transactions and even vital information like bank details. That’s why cloud developers use high-grade encryption, backup systems, and even multi-factor authentication.

Integration Capabilities

Using your SaaS accountant tool, you’ll need to transfer and collect data from other platforms, including banks and other apps.

Cloud-based accounting services for self-employment can integrate with your apps of choice, so you won’t have to switch tabs, windows, or devices that much.

Accounting software typically integrates with the following tools:

  • Customer Relationship Management (CRM) tools: Need to keep tabs on customer interactions and payments? With your CRM software connected to your accounting platform, you can do both. This also lets you research the correlation between customer relationships and payments.
  • Payroll systems: Although HR and finance are two completely different departments, collaboration increases the chance of business success in the modern workplace. This integration streamlines the management of wages and taxes.
  • E-commerce platforms: Selling products requires managing your inventory and transaction processes. Integration lets you obtain accurate financial data faster.
  • Project management tools: A project has costs, which you must communicate to your clients. Accounting SaaS makes this easier by integrating with Project Management software.

Many of the business solutions we’ve tested can perform several or even all of these functions. By connecting these tools, you simplify and centralize every business process into a few command stations, decreasing the need for switching apps even further.

Tax Season Preparation

As our accounting associate led the testing, she said some of her ex-colleagues work up to 80 hours a week during tax season. Tax-time stress is a real issue. This season is more manageable with SaaS solutions, as they store and organize data systematically.

These tools also reduce the time you spend on collating information for tax filing by automating the computation of different taxes like payroll and sales.

Freshbooks Sales Tax Summary function
View sales tax information in a few clicks with Freshbooks
Disclaimer: While some tools promise that they’re also updated with the latest tax rules, part of your responsibility as a business or accountant is to do the same thing. This is to avoid any legal ramifications due to compliance issues.

Honorable Mentions

During our testing, we also encountered a few additional gems that you’ll love. These honorable mentions also have the potential to streamline your accounting process and thus deserve your attention:

  • Automation capabilities: Aside from automation for expenses, payables, and invoices, cloud accounting solutions like Freshbooks automate other processes, such as bill receipt data capture, bank imports, and client emails.
  • Receive payments online or via credit card: Want to improve customer experience? Streamline cash flow by enabling online and credit card payments via accounting SaaS.
  • Bank reconciliation: Accounting software can scan the bank accounts you connect, match the transactions with your accounting records, and alert you of any discrepancies. It’s a game-changer for accuracy.
  • E-signatures: Solutions like Freshbooks let you generate proposals based on the estimates you make via the platform.
  • Timesheets: Need to charge clients on an hourly basis? Track your time directly on the accounting software to make the process easier for you and your employees.
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So, as you combine these ancillary functions with the main accounting processes, you’ll eventually see how an accounting SaaS becomes a central point for all your finance management needs.

Is Free Accounting Viable for Cloud Computing Accounting?

The truth is that solutions like Zoho Books and Wave offer free cloud computing accounting. These free versions even let you handle basic accounting functions, such as recurring invoices, payments, and reports.

During testing, our associate said these freemium features may only realistically serve fresh startups or freelance accountants. This is due to the many limitations a free subscription usually comes with.

By solely relying on free versions, you’re potentially missing out on the following:

  • Custom reporting
  • Multi-currency contacts
  • Custom roles
  • Automation capabilities like workflow rules
  • Inventory management

These features often serve as the backbone of the accounting system as your business scales up. As it grows, financial management becomes even more complex.

So, instead of using free versions for extended periods, you should instead use them—or other solutions with free trials—to explore the products in-depth. Doing so adds more to your experience with the software and helps you decide whether it’s a perfect fit for your needs.

Remember, your monthly or annual subscription to a SaaS accounting platform is still a big investment to make. Find a plan and service that grows with you and your financial management needs.

Comparison of Top Cloud Accounting Software in 2024

We’re always on the lookout for the best solutions to aid businesses, and we’re proud to say we don’t do it solo. We bring in professionals and specialists and scour the internet for real user reviews. That’s how we’re always confident in helping you make decisions more easily with a compilation of the best tools we’ve tested:

Best Small Business Accounting Software Top Choice For Starting Price Standout Features
Freshbooks Invoicing and billing $5.70/month a. Expense and time trackers
b. In-App Estimates and Proposals
c. Automated payment reminders
Oracle NetSuite All-in-one business management Custom pricing a. Account permission levels
b. Customizable dashboards
c. Supports over 190 currencies
Zoho Books Self-employed accountants Free a. User-friendliness
b. Report creation accessible via the dashboard
c. Inventory management

While Freshbooks stands out with its robust features, Zoho remains a compelling alternative, especially for those who feel they need more than Freshbooks’ free trial.

Each of these solutions has unique advantages that fit specific needs. If you want a more in-depth comparison, check out our other post about the best accounting software solutions.

There, you’ll even see how these three compare with other comprehensive accounting tools out there.

Can SaaS Accounting Be Simplified?

While every business has unique needs, we can still confidently say that accountants can simplify their jobs with SaaS. But there’s no one-size-fits-all answer as to how much they can streamline. This is because the complexities of their finances also come into play.

In our case and testing of cloud accounting services, we’ve witnessed how they can improve the decision-making process of businesses. This is possible as these tools automate various accounting operations, prepare reports for you, and integrate with other business software.

Also, as you transition from on-premise to SaaS, don’t forget the changes you have to make to how you record and account for software expenses.

The insights we’ve provided here will give you a comprehensive look at accounting SaaS, but in the end, it all boils down to your practical experience.

We recommend checking out Freshbooks’ free trial. Our team has rated this tool as one of the best solutions due to its user-friendliness and the many accounting procedures it can help you with.

Remember, simplifying SaaS accounting isn’t about downplaying the complexity – it’s about harnessing that complexity for your company’s benefit. Take that step with Freshbooks today to experience a new realm of accounting management.

FAQs

What is SaaS in accounting?

Is software as a service capitalized?

What is the difference between GAAP and SaaS accounting?

Is Freshbooks a SaaS product?

Is QuickBooks a SaaS product?

References

  1. Cloud computing for business (Business Queensland)
  2. 10 Common Generally Accepted Accounting Principles (GAAP) (Indeed)
  3. What is GDPR, the EU’s new data protection law? (GDPR.EU)
  4. The stress of tax season is real. Here’s how to cope | CNN (National Library of Medicine)

Noah Edis

Noah Edis

Noah Edis is a technical content specialist and systems engineer with a wealth of experience in modern software. When he's not working, you can find him playing competitive dodgeball or programming.

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