Do you need accounting software, or is a spreadsheet enough?

A spreadsheet is enough for your books while it stays accurate and manageable: one person keeps it, the month-end check against your statements balances, and the whole month fits in an evening. You need accounting software when that stops being true: the month won’t balance, the typing eats more than an evening, a second person needs to work in the sheet, or someone keeps asking you for reports between year-ends. The first step can be free, and once you pay for software that imports your bank transactions, the lowest paid bill for one person is Wave (Pro) at $19 a month.

When is a spreadsheet still enough?

All three of these should be true.

• One person keeps it. The sheet has one owner, and nobody else edits it in the same week.
• The month balances, and it fits in an evening. Everything you spend or earn for the business goes through business accounts, and you can type in the month’s transactions from each one and check them against the statements in one sitting. A checking account plus a business card is a common setup and works fine in a sheet; each extra account adds a statement to type and check, so watch the evening, not the count.
• Nobody asks for reports in between. Your accountant, if you have one, is happy with the sheet once a year, and no lender or partner wants a profit and loss mid-year.

What does a working bookkeeping sheet look like?

If you’re keeping your books in a spreadsheet, make it one that holds up. It takes an evening to set up.

One tab for transactions, one row per transaction, with these columns in this order: date, description, money in, money out, category, account (checking or card), receipt (the file name in your receipts folder), and matched (yes once you’ve ticked it against the statement). Nothing else. Keep it in date order and never merge cells.

One tab for categories, a short list you don’t change mid-year: sales, refunds, software, travel, marketing, professional fees, bank fees, and a few that fit your business. Add three that aren’t running costs: equipment, for larger purchases you’ll keep using; owner’s draw, for money you move to yourself; and transfers, for money moving between your own accounts, such as paying the card from checking. Every transaction gets one category, picked from a drop-down so the spelling never drifts.

One tab for the month, a summary that adds each category for each month with a formula: money in and money out, by category. It’s a picture of your cash, not a profit and loss. Keep owner’s draws and transfers out of the running-cost total, since neither is a cost of running the business, and show equipment on its own line. Turning this into profit, and deciding how equipment and your draws are treated, is your accountant’s job, and the clean categories are what make it quick.

The month-end check, once a month, for each account: take the opening balance on the statement, add what came in, take away what went out, and compare the result with the closing balance. On a card, the balance is what you owe, so charges add to it and payments take it down. If they match, mark the month matched. If they don’t, find the difference before you start the next month, because next month it’ll be harder.

What records you have to keep, and for how long, is a tax question, and we don’t answer tax questions; the IRS sets it out on its own recordkeeping page.

What are the signs the sheet has stopped working?

Check these against the last three months.

• The month won’t balance. The month-end check is off, and an evening isn’t enough to find out why.
• The month has outgrown the evening. Typing and checking take longer than one sitting, from more transactions or another account to work through, and you’re catching up two months at a time with receipts piling up unmatched.
• Someone else needs the sheet. A partner or an assistant edits it too, and rows get changed without anyone knowing who did it.
• Someone keeps asking for reports. A lender, a landlord, or your accountant wants a profit and loss or a balance sheet between year-ends, more than once, and you build it by hand each time.
• The formulas have stopped being trusted. A total that doesn’t look right, a row that fell outside a formula’s range, a category spelled two ways.

Any of the first four is enough on its own, because each is one of the tests above failing. Formulas you no longer trust are an early warning: fix them now, and if they keep breaking, move.

Not sure whether you need this software yet? Our Do I Need This Yet? check asks a few practical questions and helps you evaluate your next step.

What’s the first step, and what does it cost?

Often nothing. Four of the six tools in this guide have a free plan, but they do different jobs for someone coming from a spreadsheet.

• QuickBooks Free connects 1 bank account, so the transactions from that account arrive on their own, and it includes basic reports. It’s capped at 2 invoices a month, with receipt capture at 2 per month, so it suits a business that invoices rarely or invoices somewhere else.
• Wave’s Starter plan keeps unlimited records at no cost, but you enter them yourself: Wave lists bank connections on Starter as not included (manual entry). It’s your spreadsheet’s job in proper accounting software, without the import.
• Zoho Books’ free plan has one condition, revenue under $50K for the financial year, and gives you bank reconciliation, a profit and loss, a balance sheet, and 1 accountant with a login. Automatic bank feeds start on Standard, at $20 a month.

Pick by situation:

• One bank account carries most of it, and you invoice elsewhere or rarely: QuickBooks Free. Its one bank connection ends most of the typing. Intuit is also testing a beta edition of QuickBooks Free with different limits; this guide describes the standard plan.
• You want proper books at no cost and don’t mind typing: Wave’s Starter plan. Nothing caps your records.
• Your revenue is under Zoho’s cap and your accountant wants to log in: Zoho Books’ free plan.
• The typing no longer fits an evening: pay for the import. The lowest paid bill for one person is Wave (Pro) at $19 a month, and Wave Pro is the step that imports bank transactions and sorts them for you. Billed yearly, it’s $15.83 a month.

Say you run a two-person app development studio. There’s one business checking account and one company card, and about sixty transactions go through them in a month: client payments, software subscriptions, a co-working desk, the odd flight.

Typing them in takes two evenings, so the sheet fails the evening test. It isn’t the second account that does it; it’s sixty lines a month across the two. QuickBooks Free would import one of the two accounts, which helps only if most of the sixty run through it. Wave Pro at $19 a month imports transactions and sorts them, and Zoho Books Standard at $20 a month connects bank feeds. Either way, a small monthly bill buys back most of two evenings.

What not to pay for yet: inventory, project tracking, payroll, and multiple currencies, until you’ve missed one. Skip yearly billing until you’ve run two or three month-ends in the new tool; where a tool offers a yearly price it’s lower, but it’s a year’s commitment. Accounting software or an invoicing tool covers the owner who only needs to invoice, and when free invoicing is enough compares what ends each free plan.

Your next step

Close last month this week, with a timer running: type in anything missing, then run the month-end check against each statement. If it balanced and took an evening or less, keep the sheet and do the same next month. If it didn’t balance or took longer, start accounting software from the first day of next month, on a free plan if one fits your accounts or on the cheapest plan that imports them, and keep the sheet as the record of what came before.