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What Is the Difference Between Accounting Software and ERP?

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Last Updated

April 24, 2023

The difference between an ERP and accounting software is that accounting software is designed to run the basic functions of a small business and calculate its taxes, while an ERP is used to manage your finances and operations.

An ERP usually replaces the need for accounting software and is designed for higher-volume businesses. So naturally many people think of ERP as just a more powerful version of their accounting software. But it is much more than that. An ERP is designed as a business platform to run your whole company.

This fundamental distinction in purpose is reflected in five practical differences between the two types of software.

Data. Accounting software is designed to manage, categorise and report on a list of financial transactions. It also stores a very limited amount of information about customers, suppliers, and inventory items. A small business will usually use other applications to manage these areas. ERPs can contain detailed records about financial transactions, inventory items, and people and companies (employees, suppliers and customers). This means a business can manage multiple areas of a business with an ERP rather than multiple applications or spreadsheets.
Capability. ERPs typically include multiple modules that cover other areas of a business besides accounting. These modules can manage inventory, customers, partners and suppliers, human resources, and more. Accounting software is designed to track your tax compliance process. An ERP is designed to track all your key business processes, from finance to managing inventory, shipping and delivery, or employee capacity and HR.
Reporting. Accounting software is designed to create reports that show the tax position of a business and its financial health. These are the two primary concerns for small businesses. An ERP can report on many more departments because it contains records for inventory, customers, suppliers, partners and employees as well as financial transactions. The high degree of detail in the records gives the ERP the ability to show deeper insights into the levers that drive the business. These reports can be displayed as interactive dashboards, and can be delivered to all employees, not just the finance and leadership teams.
Scale. ERPs are built to run high-volume businesses. They can process and manage a higher number of financial transactions, inventory items, employees and customers. Accounting software can struggle to load reports that include high numbers of transactions or products. They also have hard limits set by the software vendor that constrain the number of employees on payroll or the number of tracked items in inventory.
Cost. Accounting software is sold as a single licence per business and costs anywhere from US$150 to US$700 a year. An ERP is priced according to the number of users and modules and other factors. It typically starts at US$5,000 a year for small businesses, while mid-size businesses will pay US$30,000 a year and more. Large enterprises can pay more than US$1 million a year.

These five areas are explored in greater detail below.

The difference in data between ERP and accounting software

ERPs and accounting software store the same types of records; financial transactions, people and companies (customers, suppliers and employees), and items (raw materials, parts and components, and items for sale).

However, an ERP can store more data and better quality data than accounting software can.

A small business typically needs less data to operate. It may do several hundred transactions a month, have 20 employees on the payroll and stock 50 items in its inventory for sale.

ERPs, which power national and global businesses, can require a lot more data to operate. An ERP can store millions of data records – it is built to hold a high quantity of data. More importantly, an ERP can also store a lot of detail on each record – it is built to hold a high quality of data.

This is best demonstrated by how the two applications manage inventory data. Accounting software usually includes a lightweight inventory management function with a dozen fields per item record to track quantity, average cost and stock at hand. By comparison, an ERP can have an advanced inventory management module that tracks stock across multiple warehouses. An ERP can display over 180 fields on the item record that track details about manufacturing, shipping, components and kit assembly, sales details and revenue recognition.

Field item record in accounting software

Quantity on hand	Sale unit price
Average Cost	Cost of goods sold account
Total Value	Sales account
In commited quotes	Purchase tax rate
Quantity on order	Sale tax rate
Purchase unit price	Description

Field item record in ERP Software

Primary information	Alternate Source Item	Default Return Cost	Minimum Quantity
UPC (SKU) Code	Lead Time	Inventory	Enforce Internally
Display Name/Code	Reorder Point	Quantity On Hand	Shipping Information for Items
Vendor Name/Code	Preferred Stock Level	Value	Item Weight
Primary Units Type	Safety Stock Level	Quantity Committed	Package
Primary Purchase Units	Lot Sizing Method	Quantity Available	Ships Individually
Primary Sale Units	Supply Type	Quantity on Order	Shipping Cost
Primary Consumption Units	Demand Time Fence	Quantity in Transit	Handling Cost
Primary Base Unit	Planning Time Fence	Quantity Back Ordered	Preference Criterion
Product Name	Seasonal Demand/Historical Demand	Inventory Count	Schedule B Number
Subitem Of	Expected Demand Change	Inventory Classification	Schedule B Quantity
Print Items	Transfer Price	Inventory Count Interval	Schedule B Code
Display in Web Site	Round Up Quantity as Component	Last Inventory Count Date	Account information on items
Include Children	Supply Chain Future Horizon	Next Inventory Count Date	COGS Account
Description	Manufacturing Details	Other	Asset Account
Payment Method	Manufacturer	Last Purchase Price	Income Account
Product Name	Manufacturer's Part Number	Build Point	Deferred Revenue Account
Rate	Producer	Manufacturing Work In Process	Intercompany Deferred Revenue Account
Classification	Manufacturer Address	Planning	Gain/Loss Account
Subsidiary	Manufacturer City	Preferred Stock Level	Price Variance Account
Class	Manufacturer State	Reorder Point	Quantity Variance Account
Department	Manufacturer Postal Code	Demand Planning	Exchange Rate Variance
Location	Manufacturer Tax ID	Demand Source	Customer Return Variance Account
Item and cost details	Manufacturer Tariff	Supply Type	Vendor Return Variance Account
Track Landed Cost	Shipping Details	Fixed Lot Size	Production Quantity Variance Account
Costing Method	Carrier	Lot Sizing Method	Production Price Variance Account
Cost Category	Shipping Methods	Periods of Supply Increment	Unbuild Variance Account
Total Value	Default Shipping Method	Periods of Supply Type	Purchase Price Variance Account
Purchase Price	Vendor Bill Matching Details	Planning Times	WIP Cost Variance Account
Average Cost	Vendor Bill - Purchase Order Quantity Tolerance	Forward Consumption Days	Scrap Account
Purchase Description	Vendor Bill - Purchase Order Amount Tolerance	Backward Consumption Days	WIP Account
Copy from Sales Order	Vendor Bill - Purchase Order Quantity Difference	Demand Time Fence	Account
Stock Description	Vendor Bill - Item Receipt Quantity Tolerance	Planning Time Fence	Expense Account
Drop Ship Item	Vendor Bill - Item Receipt Amount Tolerance	Reschedule In Days	Group with Undeposited Funds
Special Order Item	Vendor Bill - Item Receipt Quantity Difference	Reschedule Out Days	Liability Account
Match Bill to Receipt	Lot, Serial, and Bin Numbering	Sales information for items	Non-posting
Inventory management details	Lot number	Sales Description	Revenue Recognition and Amortization Information on Items
Use Bins	Bin number	Cost Estimate Type	Revenue Recognition Template
Default ATP Method	Assemblies	Item Defined Cost	VSOE Price
Preferred stock level	Locations	Average Cost	Deferral
ATP Lead Time	Location	Last Purchase Price	Permit Discount
Special Work Order Item	Currency	Purchase Price	Default as Delivered
Mark Sub-Assemblies Phantom	Currency	Preferred Vendor Rate	Tax and Tariff Information on Items
Item Source	Preferred Location	Derived from Member Items	Tax Schedule
Reorder Multiple	Costing	Item Defined Cost	Apply Before Sales Tax
Work Order Lead Time	Location Costing Group	Billing Schedule	OSS Applies
Supply Source (buy or build)	Cost Accounting Status	Days Before Expiration	Preferences on Item Records
Replenishment Method	Average Cost	Number of Allowed Downloads	Available to Adv. Partners
Master Production Scheduling	Standard Cost	Immediate Download	Offer Support
Material Requirements Planning	Inventory Cost Template	Soft Descriptor	Can be Fulfilled/Received

The difference in data records for inventory items - ERP versus accounting software

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Storing such a level of detail for every record gives a company a completely different view of its inventory. An ERP could show the components that are used to make each product, the cost of those components, the suppliers who provided the components and the average cost to build the item.

A company could use this information to assess the quality of items made by different combinations of suppliers, the profit margin based on the mix of suppliers, and analyse ways to improve quality and reduce cost of supply.

Companies using accounting software usually store this additional information in a spreadsheet or a third-party application. This separation of data across multiple locations makes it much harder to analyse and find ways to improve operational and financial metrics. Storing all the data in a single location with an ERP also removes any headaches and expense around integrating data between accounting software and a separate inventory application.

ERPs can also store more information about people and companies than the basic equivalent records in accounting software. ERPs can then use this data to perform activities such as marketing, customer analysis and supply chain management.

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The difference in reporting between ERP and accounting software

Reporting is a critically important area that is underused in small business yet essential to growing into a medium-sized business.

Accounting software produces two categories of reports. Reports that your bookkeeper and accountant use to determine how much tax you have to pay. And management reports (and budgets) that a business owner can use to determine how the company is performing.

For many small businesses, the only people who use reports in their accounting software are the bookkeeper or accountant. While modern, cloud-based accounting software makes it much easier to produce management reports, a lot of business owners lack the financial literacy to use them.

If accounting software is designed and mainly used for tax compliance, ERPs are designed and used for performance management. They can produce reports with great detail for all areas of a business, from managing staff hours on projects to analysing margins on different inventory items.

Thanks to the high volume and high quality of data they store, ERPs produce reports that are far more detailed and useful. A manager can pull a report on their division, compare it to another division and click on the numbers in the report to see the individual sales or expenses. Because the ERP stores detailed information about items, people and companies in the one application, it can produce operational reports rather than just financial reports. There is no need to export and clean data from different applications into a reporting tool or Excel.

*An example of a live dashboard from an ERP tracking human resources*

ERPs are also designed to produce reports for many different roles in a business besides the finance team and CEO. An ERP uses role-specific access to give each employee the ability to create reports for narrow data sets which wouldn’t be possible in accounting software. An ERP can create a report for a single sales executive that shows only their sales to date, their sales target and a list of customers who are coming up for renewal. Accounting software lacks the permissions framework to produce targeted reports; giving an employee access to the sales data would reveal the sales for every sales executive.

*An example of a live dashboard tracking sales in an ERP*

And rather than producing a static report, an ERP can create real-time dashboards that constantly update with the latest information. This opens the door to all sorts of operational use cases.

Some examples:

A warehouse manager can create a live dashboard showing the orders that are due to arrive that day and check them off as they arrive.
A sales manager can view the performance of their sales team and whether they are on track to hit monthly targets.
A senior accountant can produce budget vs actual comparisons for division managers and advise them on how to stay in the black.
The board of directors can see a dashboard that updates monthly

In some ways, an ERP democratises access to data that runs a company, helping employees make better decisions and do their jobs better.

Overall, reporting in an ERP is a massive upgrade over accounting software. Storing operational and financial data in the one application and reporting in real time gives greater visibility of what is happening in the business. This leads to faster, better decision making in the boardroom and on the warehouse or factory floor.

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The difference in capability between ERP and accounting software

The difference in capability between ERP and accounting software reflects their difference in purpose.

Accounting software is primarily designed as a tax compliance tool. Your accountant or bookkeeper uses it to track income and expenses and determine how much tax the company should pay every year.

The role of accounting software has expanded to include managing payroll for employees and producing management reports for business owners. By connecting third-party applications through their expansive software ecosystems, accounting software can pull in data from many other sources.

But the central purpose of accounting software hasn’t changed. It remains primarily a tool for calculating your taxes.

While ERP falls in the category of financial software, its purpose is to track the use of all resources in a business. An ERP does this by recording all operational and financial data and key business processes that turn activity into profit.

One of those processes includes finance and accounting; an ERP can produce the compliance reports for calculating taxes just like accounting software. However, an ERP also drives processes in operations such as supply chain, production/manufacture, inventory, and sales and marketing processes.

In brief, accounting software looks after the tax compliance process, while ERP software is built to manage all business processes.

ERP modules include hundreds of options that are highly configurable to match a wide range of business processes. For example, a company may order inventory items as a bundle and sell them individually. An ERP can be configured to account for these details and maintain a more accurate picture of stock on hand and cost price versus sale price.

Sometimes a company has processes that can’t be configured within the ERP. In these scenarios, a company can hire a software developer to customise the ERP by adding custom fields or functions.

Accounting software is much less customisable, partly because it is designed to track only financial data rather than operational data, and because small businesses tend to maintain simpler operations. On the other hand, the lack of customisation makes accounting software much easier to set up compared to an ERP.

An ERP is a comprehensive suite of software that integrates all of the various functions of a business, including accounting, human resources, inventory management, supply chain management, customer relationship management, and more.

An ERP’s increased depth and breadth of capability translates into greater visibility and control over operations. This operational awareness gives a business more opportunities to streamline processes and more levers to increase efficiency, growth and profitability.

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The difference in scale between ERP and accounting software

Behind every accounting software and ERP software is a database that stores all the information about the company. Every transaction, item, customer, supplier and employee is stored as a line in the database.

When a company runs a report, the software builds it by pulling information from the database. Building a report from a database requires computing power; the bigger the database, the more computing power is required.

Accounting software uses a database designed to store a relatively small volume of information. Most small businesses are modest in their requirements.

As a company grows – it makes more sales (transactions), stocks more items, amasses more customers – so does the database. If a business stores millions of transactions to its database, accounting software will struggle to generate a report. The software may take a very long time to produce the report, or it may give up altogether and display an error message such as a timeout.

Accounting software companies, keen to avoid a poor user experience, add soft and hard limitations to avoid slowing down the accounting software. For example, Xero has a soft limit of a maximum 1,000 transactions per month for its accounting software. Businesses can record more than 1,000 transactions, however at some point Xero will take longer to produce a report.

Xero has a hard limit for the number of employees – no more than 200 are allowed. It is not possible to add a 201st employee. There is also a hard limit in inventory of 4,000 tracked items.

*Accounting software enforces limitations to preserve the speed of the software. An ERP typically has no practical limits to transaction volume, inventory and employees.*

An ERP uses a database that is built to store a large volume of information. An ERP’s database runs on powerful computers that run fast enough to generate reports across a much deeper and broader set of information.

This helps a business in three ways. It can focus on growing revenue without worrying about whether it will hit a ceiling with its financial and operational software. It can instantly run standard reports such as a P&L or balance sheet, regardless of how many sales it has made or items it carries in inventory. And the depth and breadth of the information recorded in the database means the business can click through the numbers in a report to see the underlying transactions, items, customers or suppliers. This gives business users the ability to discover more of the hidden levers in their business that will impact revenue and profitability.

ERPs are also designed to scale into new markets. A company can easily add more entities to their ERP as it opens offices in new states or countries, or adds more products and service lines or even business models.

If you have plans to scale up your business, at some point you will need to scale the operational software too. This almost always means moving to an ERP. The harder question is when to make the jump.

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The difference in cost between ERP and accounting software

The most obvious difference between accounting software and ERP is the cost. Accounting software sold by monthly subscription typically costs less than US$700 a year. The software is sold as a single licence per business entity.

(The cost is rising, however. Accounting software companies have been splitting out existing features and adding new ones and selling them separately, often on a per user basis. Xero sells payroll, expense claims, project costing, and a lightweight analytics module as extras to its accounting software.)

An ERP can vary widely in price. business can select a single module or multiple modules; prices can be set as a base price per module with an additional price per user. ERPs sometimes have pricing tiers based on usage, such as a maximum number of transactions per month. ERPs can also charge to maintain integrations with popular software such as e-commerce platforms.

Given all the above factors, the licence cost for ERP can range from four figures to six or even seven figures. The cheapest cloud-based ERP is about US$5,000 a year, suitable for a simple small business. A fast-growing small business will typically pay double or triple that amount.

A medium sized business with operations in other countries can pay US$30,000 a year or more.

There is also the cost of setting up the ERP, known as implementation. This is also a widely ranging figure. How many modules are you setting up? How much do you want to customise the modules to your processes? How many staff do you need to train on the ERP?

Implementation costs can include configuration and set-up, software development, change management and training. The total bill can range from US$10,000 to US$300,000 and more.

Software licence and implementation costs are inevitable, but they aren’t the only costs. There can be HR related costs, usually in the finance department. Very busy companies may find it difficult to set aside time for a senior accountant to help the implementation team design reports, set up processes and test workflows. It may be necessary to hire an accountant on secondment to complete business-as-usual tasks such as month end for the duration of the implementation project.

*Companies will need to pay a one-off implementation fee and a monthly software licence to install an ERP. They may need to hire temporary or permanent staff to the finance team.*

Smaller businesses which have relied on outsourced bookkeeping and accounting may need to hire a part-time or full-time accountant to the finance team to help manage the ERP.

It can be hard for a small business to justify the cost of an ERP compared to other applications. Even when replacing a collection of other software with a suite of ERP modules, the ERP typically costs significantly more.

However, the value of an ERP is best represented by opportunity cost. A small business can run on a collection of accounting software and third-party applications. But once it passes a certain size, it will find it difficult to deliver products and services on time and at the targeted margins. The classic workaround is to use spreadsheets to manage the gaps in the systems and hire more people to update the spreadsheets.

This is where you see the cost-benefit of an ERP – when you compare it to additional salaries required to run finance and operations. Or when you look at the sales that were lost because you didn’t have enough capacity.

An ERP is an investment. It removes the operational ceiling on a company so that it can achieve the goals set by its board. Whether the company achieves these goals will ultimately determine the return on investment in buying and implementing an ERP.

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Accounting software and ERP software overlap in functionality and are lumped in the same category of financial software. However, there are significant differences between the two. One is an essential launchpad for a simple, small business; the other is a critical upgrade for a more complex or growing business.

Understanding the differences between ERP and accounting software can help companies decide whether they need to upgrade to ERP to meet their business goals, or if their accounting software is sufficient.