Industry Trends

Cloud Accounting Explained in (Mostly) Plain English

Caleb Newquist Editor-at-Large, Gusto 

When I began covering accounting nearly 10 years ago, I was NOT interested in the cloud. Bloggers and talking heads in the accounting world threw “the cloud” around, sounding cutting edge in a very self-assured way. But I did not care what these dweebs were talking about. I did not read their articles; I did not watch their videos; I did not attend their sessions at conferences.

4,000+ accounting firms actually like running payroll for their clients now

I dealt in the idle chatter of overworked, underworked CPAs and could not be bothered.

At some point, I surrendered to my curiosity and dug into this cloud business. Long story short, what I learned was that accounting software and its data were, more and more, located on the Internet, and, yeah, it was going to be the next big thing.

But, as is customary with accountants, when it comes to emerging trends—some might say fads—there were skeptics. Can we trust this cloud? Where is this cloud and who owns it? Are people cirrus1 about the cloud?

What came next was a sort of sweeping cloud evangelism in accounting. Everyone seemed to be preaching the good word of the CLOUD. Cloud explainers abounded. Hipster accountants were asking people to get over it in 2013.

The cloud was here and accountants needed to get on it.  

Cloud accounting goes mainstream (but not for everyone)

Not everyone was sold, though. Holdouts remained, as many accounting firms questioned whether using the cloud for their clients was the right thing. The cloud enthusiasts, satisfied that they had convinced enough people, moved onto other things.

Today, if you follow accounting news, you’ve probably noticed in recent years that the cloud is kinda old hat. EVERYONE IS ON THE CLOUD.

Whatever the general consensus is among the accounting tastemakers, there are businesses and their accountant advisors who haven’t jumped on the cloud bandwagon. And hey, that might even be you.

In this post, we’re going to answer a bunch of the common questions asked about the cloud. It should be helpful for anyone who’s recently come to the “if you can’t beat ‘em, join ‘em” conclusion. If these following questions sound like the ones you might ask, then you’re in the right place. And we aren’t judging! We’re just happy you’re here. Okay? Okay.

First things first—where is the cloud?

This is one of those things that many experts skip over because to them, it seems so obvious that everyone should just know it. Everyone knows where the cloud is. It’s in the cloud! The cloud is the cloud, so the cloud is everywhere the cloud is.

Except. No.

The cloud is the Internet. The Internet is the cloud. When someone says, “We keep our accounting in the cloud,” they mean “Our accounting is on the Internet.”

All right, but what does that mean, “The accounting is on the Internet?”

It means that your accounting information is stored on a remote server (i.e., a computer) rather than on the hard drive of your computer or on a local server. This means you can access your accounting whenever you like, from wherever you want. All you do is log onto the service (e.g., QuickBooks Online or Xero) and voilà.

What benefit is there to having accounting on the Internet?

There are several, but the main ones are:

  • You can access it anywhere. Because it’s on the Internet, you do not have to be working on the computer that houses the software on its hard drive.
  • Faster updates. Updates to cloud accounting happen regularly, without you having to buy a new version of the software. That saves you money, too.
  • It’s cheaper. You don’t need a server to store all your information on, and you don’t need to build an elaborate backup system. The cloud platform does all that for you.
  • They got integrations. Cloud accounting software is built so that it will work with other software such as payroll, point-of-sale, or online banking to simplify processes. No more manual entry!

Got it. But is cloud accounting secure?

Think about it from a practical standpoint. There are countless examples of things that are in the cloud that we don’t give a second thought to. Email. Banking. Amazon. Google. Facebook.

All them contain private information that you wouldn’t want bad dudes to get ahold of. Names, addresses, Social Security numbers. Your SEARCH HISTORY (Yes, even the incognito windows). And yet, we blithely spread our sensitive information all over the Internet.

With this kind of perspective, what do you care if cloud accounting is secure?

But wait, wait, wait. I’m not being glib. Cloud security is actually relatively simple. A cloud accounting service such as QuickBooks Online or Xero is run from a data center. Data centers are basically warehouses for digital information. They are never onsite (i.e., not at Intuit HQ), and they use both digital and physical security measures to keep the stored data safe. For cloud services in sensitive areas, such as accounting, health, and other fields, cloud providers often use bank-level digital security and encryption to ensure your most confidential information is safe.

Furthermore, the data is encrypted which means that even if someone hacks into it, they can’t read it. Yes, some super hacker could try to break the encryption, but if it’s, say, 256-bit encryption2, that means there are 2256 possible encryption keys, and it would take 3×1051 years to break it.  

That’s security, my friends. And good cloud accounting software comes with all that included. It’s a pretty sweet deal.

Fine. The cloud is secure. Is there anything else I can do to keep my data safe?

There are lots of things you can do! Yes, the cloud is very secure, but nothing is ever 100% secure. We all hear about big hacks regularly, so it’s essential to use best practices when it comes to data security:

  • Require your team to use strong passwords—This means no “password1” or your pet’s name. These days, your best bet is to use a passphrase, a combination of several unrelated words. You can make a virtually impregnable good one with Diceware, or Correct Horse Battery Staple.
  • Be careful with saved passwords—Browsers that save your login are great, but be sure the device is secure and that others do not have access to it.
  • Multi-factor authentication—Multi-factor (fka two-factor) authentication adds an extra layer of security by requiring users to enter an additional code to confirm that it is indeed an authentic user. Usually, the way it works is that a user logs into a platform or system like normal, and then a numerical code is sent to their mobile, often a smartphone. Here’s an example:

    The user enters the code into the prompt, the system verifies the code and then allows them access to the system.
  • Monitor the activity of your systems—Lots of software allows you to review who has logged on, for how long, and even the geographic location. Administrators can review this history to look for any unusual patterns or activity. 
  • Use anti-malware—Aka “anti-virus” software. This may seem obvious, but be sure that you’ve installed it on all your devices where you use cloud accounting and other cloud-based platforms.
  • Stay vigilant for phishing scamsPhishing scams usually come via email, so be wary of an unexpected message that asks you to click on a link to change personal or password information, have attachments, bad spelling, or is from someone at your company but the email is slightly erroneous (e.g., a zero instead of a letter O).

The best way to ensure that these data security methods are followed is to train your staff and make sure to update software regularly.  

Doesn’t all this fancy technology and security make cloud accounting expensive?

Cloud accounting is a service (remember SaaS?), and its users subscribe to it like, say, HBO, making it relatively inexpensive. Very simple plans can be as low as $9 per month, and range up to $50-$60 per month. You can stop the subscription at any time, and software updates—which happen automatically, remember?—do not require you to upgrade to a new version. Presumably, you’re already shelling out a monthly fee for Internet service, so there’s no additional cost there. Again, it’s a good deal.

Okay, okay. But what if I can’t connect to the Internet?

Oh, for pete’s sake. Find a Starbucks.

1Sorry not sorry.
2Pretty much what all the cloud accounting platforms use.

Updated: April 30, 2019

Caleb Newquist
Caleb Newquist Caleb is Editor-at-Large at Gusto. In 2009, he became the founding editor of Going Concern, the one-of-a-kind voice on the accounting profession, serving in the role for 9 years. Prior to Going Concern, Caleb worked as a CPA for nearly 6 years in New York and Denver. He lives in Denver with his wife, daughter, and two cats.

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