Can You Use Excel as Free Accounting Software – Let’s Find Out

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Excel is a flexible and customizable spreadsheet-based platform for various business tasks, such as calculating revenue/profits, creating financial models, and generating financial statements. However, using Microsoft Excel as free accounting software can involve a lot of constant learning and designing.

The best alternative is to use  free Excel templates and certain advanced Excel functions that can together help you build your own accounting system on the platform.

In this article, we’ll provide a step-by-step guide on using Microsoft Excel as an accounting platform. We’ll also share some free templates you can use for a quick head start and some other alternatives to Excel accounting. Read on.

Can You Do Your Own Accounting In Excel?

Accounting in Excel essentially means building your own accounting software on the platform. Since you’re the ‘developer’ in this case, you must know the ins and outs of accounting. You also need a good grip on Excel so that you can troubleshoot any issues you might face.

This can become difficult if you’re a mid-sized business with hundreds of entries every week. A small glitch, like an incorrect formula input in your Excel template, can leave you high and dry. Unlike ready-made accounting software, you won’t even have the backing of a customer support team to resolve technical issues.

Pros and Cons of Using Excel for Accounting

Let’s weigh the pros and cons of using Excel as an accounting software.

Pros

Here are some advantages of using Excel for accounting.

More Economical

Excel can be a lifesaver if you’re on a budget and looking for a free accounting solution. You can get lifetime access to Excel at just $159.99.

Or, you can purchase the entire Microsoft package, which includes Excel, Word, PowerPoint, Outlook, and OneDrive, for $6.99/month.

And since you’ll probably be using this suite of apps for several other business purposes, you’ll probably have to get a Microsoft package anyway.

Customizable

Unlike ready-made accounting solutions that have a ‘one-solution-fits-all’ approach, you can customize an Excel sheet the way you like. You can change colors, use different formulas, and build different charts with the parameters you prefer.

Cons

Now let’s look at some cons of Excel accounting.

Lack of Automations

Excel is more manual than other dedicated accounting solutions with fewer automation functions. You have to build your own automations with macros, which are also prone to errors.

Plus, there is a lot of stuff you can’t automate perfectly, so you have to do it manually every time. For example, if you have 2-3 bank accounts, it can be difficult to build an accurate cash flow statement in Excel.

Learning Curve and Time-intensive

Building the entire system from scratch can be a time-consuming exercise. You’ll need to read a lot of tutorials and help articles to design a system that fits your business needs.

Ready-made accounting solutions, on the other hand, can be used right from the word go. You can record all your transactions, and the software will automatically generate reports, reconcile books, and record journal entries.

Potential Errors

Excel accounting systems are more prone to errors and glitches – you may mess up inputs of a complex formula, which can make your entire sheet incorrect. And since there are no customer support options available (like accounting software), you’ll have to solve all the glitches yourself.

In case a problem persists, you might need to carry out the whole function all over again. This can eat up a lot of your time, which you otherwise should invest in the core functions of your business.

The Best Free Excel Accounting Templates

Excel offers some ready-made templates that help you manage your books of accounts – balance sheet, profit and loss, and loan amortization. Here are a few bookkeeping templates to help you get started with Excel accounting:

Inherent Excel Templates

Microsoft offers certain templates for managing your accounts on Excel. You can find them on Microsoft’s Create platform. Here are some of the best templates you can use:

The Statement of Accounts template

This template can be used to record transactions with a particular account in one place. For instance, you can maintain all transactions with your Supplier X in one statement of account.

However, you’ll have to create several statements for all the accounts you have and then link them to form an income statement and balance sheet.

On the flip side, all of this can be done automatically with an accounting platform like Freshbooks or Xero.

Loan Amortization Template

We found the loan amortization Excel template pretty handy. Since businesses need to make loan amortization statements only once or twice for a single loan, the template does the job for you.

There’s no need for regular updates – you can fill in the details once and keep referring to the statement throughout the life of the loan.

Balance Sheet

Excel also offers a simple template for business Balance sheets. You can record the values of all your assets and liabilities and fill in the balance sheet.

However, unlike online accounting platforms, the transactions do not automatically flow in these reports – you have to add the values manually.

As you can see, most of these templates are single-page and too basic even for solopreneurs. That’s why we’ve found and listed below some free third-party Excel templates to improve your bookkeeping on the platform.

Transactions and Income Statement

This is a holistic template that lets you record every transaction and view your income statement. It consists of three sheets: Settings, Transactions, and Reports.

Settings

The Settings worksheet consists of two major pieces of information – business details and a chart of accounts. Under the business details, you need to enter three main pieces of information: the name of your business, the report name, and the date range.

The date range specifies the period within which the transactions take place. This is typically set as one financial year, say, 30 Sept to 1 Oct.

The chart of accounts is a comprehensive table categorizing all the transactions that can appear in a business. This includes trading income, cost of sales, and various expenses.

The chart already contains many expense categories, such as advertising, insurance fees, travel costs, and so on. However, there are several blank spaces where you can add more expense categories specific to your business.

There’s also a separate category for capital purchases—transactions that involve the purchase of fixed assets. The entire cost of capital purchases is not debited in the income statement; only the depreciation part is included.

Transactions

The Transaction sheet is the main action area of this template. It is where you enter all your business transactions in four simple columns: date, description, amount, and category.

Make sure you follow these instructions when entering data:

Reports

This is the template’s output sheet, where you can see your income statement, operating profit or loss, taxes paid, and net profits. On the right, there’s also a small table of capital purchases.

Cashflow

Businesses keep track of their cash flows regularly to gauge their capital needs and know their cash profits. Let’s look at a free Excel template for cash flow forecasts:

To start recording cash positions, you need the opening balance of cash in your business. For this, you can check the balance of all your checking and savings accounts at the start of the recording period. Do not forget to include the cash in hand.

The first part of the template is similar to your profit and loss statement. You have to enter all your cash income and expenses. Make sure you only enter the revenue for which you have received the money. Do not enter the receivables amount here.

Similarly, do not enter any payables in the expense section – only include the expense for which you have made a payment.

The next part of the statement consists of all other cash inflows and outflows. Cash inflows can include transactions like:

Cash outflows may include items like:

You can add rows to the template as per your business needs. Once you’ve entered all the data, you’ll get the total changes in cash and the cash you have at the end of each period.

You can make this a monthly exercise to enter all your cash transactions in this template to keep regular track of your cash positions.

Advanced Spreadsheet Accounting Techniques

If you’re using Excel for your everyday accounting functions, here are some useful formulas and techniques to help you out.

TRIM Function

When importing data from a different source, the cell values may often contain unnecessary spaces before or after the main text.

For example, when you copy and paste your bank transactions in Excel, the amount column may have spaces before the amount. When you total the column, you’ll get an error since Excel doesn’t recognize the values as ‘numbers’.

To fix this, you can use the TRIM function. It removes all spaces before and after the text to give you true values in each cell.

VLOOKUP

This is an extremely popular Excel function that allows you to look up a value in another range and return a corresponding value.

Let’s say you have a set of transactions with the account code and the number of transactions. However, you need to fetch the description of the transaction from a master table. Now, doing it manually can be time-consuming and error-prone. You can instead use the VLOOKUP function.

The function has four attributes:

So the entire function looks something like this:

=VLOOKUP(A3,$G$4:$H$15,2,False)

A few things to note about the VLOOKUP formula:

Macros

Macros are tools that help you automate a lot of redundant Excel work. It’s just like assigning a shortcut for various Excel functions. We’ll use an example to help you understand how this works.

Suppose you have the following set of data with the stock levels at the end of every month and the stock-out level set as 700. Now, if you want to insert a combo chart, you can simply do it from the ‘Insert’ bar at the top of your screen.

However, what if you have to create such charts for every dataset you have like salaries, revenue, cost of goods, and so on?

In this case, you can create a macro to save time. Let’s learn how:
Step 1 – Click Macro

Click on the ‘Developer’ tab and click ‘Record Macro’. You can even click on the Macro button at the bottom-left of your Excel workbook.

Step 2 – Name Your Macro

Give a name to your Macro and choose a shortcut. You can simply use this shortcut later on to run the action we’re about to record.

Step 3 – Record Macro

When you click ‘OK’, the macro will start recording. Select the area of the table you want to convert into a chart and select ‘Combo chart’ from the ‘Insert’ option.

Step 4 – Edit Macro Chart

Once the chart is created, you can add edits to it, which will also be recorded in the macro. For example, you can add data labels, move the legend around, change chart colors, and so on.

Step 5 – Finish Recording

Once you’ve completed all the edits, return to the Developer tab and click ‘Stop recording.’

Step 6 – Use The Shortcut

The next time you want to insert a combo chart for a dataset, just type the shortcut. In this case, the shortcut is Ctrl+Shift+Q.
This was just a simple example of how you can use macros to save time. You can employ this for several accounting functions, such as sorting bank data, making tax summaries, and so on.

How To Replace Excel Accounting With Professional Accounting Software

Excel accounting is good for solopreneurs and small businesses that don’t have a lot of transactions. You can find plenty of free templates and with a bit of time spent on learning the formulas and their application, you can do your everyday accounting on Excel.

However, as your business starts to grow, you’ll find Excel becoming redundant for your needs. There are also limitations on the types of reports you can generate with Excel. Businesses that depend on regular, accurate reports for decision-making might find the platform a bit too basic.

We recommend switching to dedicated accounting software, such as Freshbooks and Xero, instead of relying on Excel. You can even find free accounting platforms good enough to handle your bookkeeping workload.

The Best Accounting Software in 2024

If you’re looking for the best accounting software, there are plenty of options in the market. However, not every platform is ideal for your needs. We’ve done some intensive research and picked only the standout accounting software that will help you switch smoothly from manual Excel accounting.

Remember, with Excel, you have to spend a lot of time designing these reports and ensuring that the correct data flows into them. However, with Freshbooks, you don’t have to worry about all that.

However, the feature we loved the most about Freshbooks was its automated bank reconciliation. You can connect your bank account directly with the platform and import all transactions. Freshbooks will then reconcile every transaction in just a single click.

This saves you the time of importing data into Excel, sorting it, making a macro to reconcile transactions, and then checking if everything is done correctly.

You can also invite your accountant on board your Freshbooks account and they can make journal entries, record expenses, and generate reports as needed.

We also like how flexible Freshbooks is – there’s a plan for every need. If you’ve outgrown its basic plan, you can switch to its Plus plan at $9.90/user/month, which is ideal for small businesses.

There’s also a Premium plan for mid-sized and large businesses. The best part is that you can try it out risk-free, thanks to its 30-day free trial.

Xero

If you do have the budget, we recommend switching to Xero, an all-in-one accounting platform for businesses of all sizes. Sure, it costs $29/month, but it’s worth every cent, given that it can perform the job of several business tools.

In addition to accounting functions, you can use Xero as a project management software. You can add projects, assign tasks to your team members, and track the time taken for each task.

Xero also allows you to assign bills and expenses to projects, allowing you to keep track of each project’s exact cost and bill clients accordingly.

Businesses usually have to spend extra to get a dedicated project management platform. However, Xero will do this for you.

As we discussed in our detailed Xero review, the platform also handles a lot of the tax work for you. For instance, its auto sales tax feature covers all US states and more than 13,000 tax jurisdictions.

This way, you don’t have to keep going back to your Excel sheet for each invoice and think about the tax to be charged – Xero helps you automate the whole process.

Besides this, Xero helps you collect W-9s from vendors, track their statuses, and manage 1099 contacts in one place. You can also validate the tax ID numbers of all your vendors so that you do not submit any false information.

Xero’s other accounting features are very similar to Freshbooks – sending invoices, recording journal entries, reconciling bank transactions, and generating detailed reports. Put it to the test with a 30-day free trial and see how it compares to Freshbooks.

Using Excel As Free Accounting Software – Verdict

Microsoft Excel can undoubtedly be used as accounting software. Solopreneurs and small startups can leverage it for their day-to-day record-keeping. However, accounting in Excel can be tedious with steep learning curves. You may also find it seriously limited if you have advanced needs.

You might have to go through several trial-and-error attempts before you find the best system for yourself. And even after that, it can be prone to errors, which you’ll need to troubleshoot yourself – no customer support with Excel.

This is why we recommend switching to a dedicated accounting platform like Freshbooks. This platform will help you automate your entire accounting function. In minutes, you can send invoices, record expenses, get paid, and generate several reports.

Freshbooks also offers a 30-day free trial, allowing you to test the platform without risking a single penny. Try Freshbooks now!

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