Cloud Based Accounting Systems: How They Work

Quick Answer: Cloud-based accounting means your accounting software and your ledger live on the vendor's servers rather than on your own computer. You sign in through a browser or app, bank feeds bring in transactions automatically, and your accountant logs into the same live file instead of waiting for a backup. Xero and QuickBooks Online are the familiar small-business examples; Oracle NetSuite is a common choice for larger, multi-entity companies.

With desktop accounting, the company file is a thing you own and store: it sits on one PC or a shared drive, and getting it to your accountant means sending a copy. Cloud-based accounting systems turn that file into a service. The data is held by the software company, everyone with permission works on the single current version, and you pay a subscription instead of buying a license.

How does cloud accounting actually work?

Follow one transaction through a typical cloud setup:

1. A card payment happens. You buy $240 of supplies with the business debit card.
2. The bank feed picks it up. Through a connection you authorized, the bank or a data aggregator passes the transaction to your accounting software, usually within a day or two.
3. The software suggests a match. Rules you set up, or the software's own suggestions, propose a category such as Office Supplies, or a match to a bill you already entered.
4. You confirm it. On your phone or laptop, you accept the suggestion or change it.
5. Reports update. The profit and loss report anyone opens now includes the $240.
6. Your accountant sees it the same day. No file transfer, no "which version is current?" email.

The ledger is the same double-entry ledger desktop software keeps. What changed is where it lives and how data reaches it.

Cloud vs desktop accounting

The lines are blurrier than they used to be. Sage, for example, now markets Sage 50 in both a cloud edition and a desktop edition. If you are choosing between packages on price and features, our small-business accounting software comparison covers that; this article stays with what "cloud" changes.

Three examples at three sizes

Xero (small businesses, especially outside the US). Xero is built only for the browser and its apps. Its US pricing page lists three plans, Early, Growing and Established, each with unlimited users, which is a meaningful difference from per-user pricing when several staff and an outside bookkeeper all need logins. Xero online accounting leans heavily on bank feeds and bank rules for daily work; see our Xero integration page for how statement files get in when a feed is not available.

QuickBooks Online (small to growing businesses, especially in the US). Intuit's cloud product sells tiers by user count and feature depth. Its pricing page showed, when checked for this article, plans from a limited free tier up to Advanced with 25 users. Many US accountants already work in it daily, which often decides the choice.

Oracle NetSuite (mid-market and multi-entity). NetSuite cloud accounting sits inside a broader ERP: inventory, orders, subsidiaries and consolidations in one system. Bank data can arrive through connectivity plug-ins or by importing statement files; Oracle's own NetSuite help on manual bank data import describes downloading a statement file from the bank and importing it for matching, and it advises against configuring an import of more than 10,000 transactions at once. Our guide to importing bank statements into NetSuite covers the steps.

What do you give up by moving to the cloud?

The benefits are well advertised. The costs deserve the same attention:

• You rent, not own. Stop paying and access changes. Before you cancel any cloud package, export the reports and transaction lists you need to keep, and read the vendor's terms on what remains available afterward.
• Internet dependence. No connection, no ledger. Mobile apps help, but heavy work like a year-end close needs a stable link.
• Price changes. Subscriptions rise, and features move between tiers. Re-check the plan you are on each year.
• Feeds break. Bank connections drop when a bank changes its systems or a login expires, and gaps appear that someone has to notice and fill.
• Migration effort. Moving from desktop usually brings over lists and balances, but detailed history may come across in summary form. Decide how many years of detail you really need in the new system.

Is cloud accounting the same as online bookkeeping?

Not quite. Cloud accounting is the software. Online bookkeeping is a service: a person or firm who does the categorizing and reconciling inside that software for you. You can use cloud software and do the books yourself, or hire an online bookkeeper who works in your file. The bookkeeping vs accounting guide separates those roles further.

Moving from desktop to a cloud system

A switch goes best when it is planned around a date rather than done whenever someone has a free weekend.

1. Pick a cutover date. The first day of a quarter or fiscal year is easiest, because opening balances come straight from a closed period.
2. Close and reconcile the old file through that date. Each bank and card account should agree with its statement, so the opening balances you carry over are proven.
3. Decide how much history to bring. Some businesses bring full transaction detail for the current year and only balances for earlier years; others keep the old desktop file in read-only use for look-ups.
4. Set up users and permissions first. Invite your accountant before the data arrives, so they can check the opening trial balance.
5. Connect feeds, then fill the gap. Anything between the cutover date and the first day the feed covers has to be imported from statement files.
6. Run both systems for one month. Compare the cloud system's month-end bank balances with the statements before retiring the old file.

What still needs a file upload in a cloud system?

Bank feeds are the reason most people switch, yet every bookkeeper who has moved a client to the cloud knows the feed does not cover everything.

Picture a bakery that moves to QuickBooks Online on July 1. The owner connects the operating account, and the feed brings in a limited stretch of recent history; how far back depends on the bank. The accountant wants the full calendar year in the new file. January through the start of the feed has to come from somewhere, and the only complete record is the bank's monthly statements. The same is true of a savings account at a small credit union that never connects, a closed card the business stopped using in March, and the corporate account at a foreign bank.

Each of those needs a transaction file in a format the software accepts. Where the bank offers CSV or QFX downloads for old months, use them. Some cloud packages now read statement PDFs themselves: Intuit's help pages say QuickBooks Online can extract transactions from an uploaded English-language PDF or image statement. Where your software cannot, or where you want to check the rows in a spreadsheet first, QuickBankConvert reads the PDF and gives you rows to download as CSV, Excel, QBO or Xero CSV, depending on your plan, which you then import yourself. The guide to importing old transactions into QuickBooks Online walks through that backfill, including how to avoid duplicating transactions the feed already brought in.

Related guides

• Accounting packages for small business compared
• Import bank statements into NetSuite
• Bookkeeping vs accounting
• Export formats explained