Manual vs Computer System
Computerized or automated accounting is currently the most popular method of handling a company’s accounting records. Nowadays, only very small businesses with a few transactions perform their accounting functions using a manual system. This is due to the reasonable cost, time-saving features, and other advantages of using an integrated computerized accounting system.
What is a Computerized Accounting System ?
A computerized accounting system is an accounting information system that processes the financial transactions and events as per Generally Accepted Accounting Principles (GAAP) to produce reports per user requirements utilizing hardware and software to accomplish this task. Every accounting system, manual or computerized, must adhere to a set of well-defined concepts and rules called accounting principles. In addition, the system needs to be set up in order to provide the necessary financial information required by users using either a manual or computer system.
Modern computerized accounting systems are based on databases. A database is implemented using a database management system, that manages and organizes data and provides access to the stored data by the use of computer software (programs). A database is a group of files that organize and store information about such things as customers, suppliers, employees, accounts, sales, inventory, bank accounts, etc. Accounting information is entered, processed, organized, stored, and reported on utilizing this database.
The computerized accounting (bookkeeping) system includes modules (major tasks and sub-tasks) that include commands (instructions) that process the data, and as stated earlier a database of files made up of records and fields that store the data. All the different modules make up the complete computerized accounting and bookkeeping system. The software nowadays often allows the user to select only the modules the business needs.
Computerized Accounting and Bookkeeping use the modules as a guide in developing a menu system that allows users to pick what they need to do such as invoice customers or record cash receipts.
Comparison between Manual and Computerized Accounting
Accounting is the process of identifying, recording, classifying and summarizing financial transactions to produce the financial reports for users needing or requiring financial information.
How this is done, Manually or with a Computerized System ?
- Identifying : The identification of transactions, based on application of accounting principles is the same for both a manual and computerized accounting system.
- Recording : The recording of financial transactions, in a manual accounting system is done using books of original entry (journals) while the data regarding transactions is entered using input screens and stored in an accounting database (defined earlier) in a computerized accounting system.
- Classification : In a manual accounting system, transactions recorded in the books of original entry are further classified by manually posting into ledger accounts. In a computerized accounting system all the journals and ledgers entries are automatically classified and updated.
- Summarizing : In a manual system the ledger balances are manually summarized. However, in computerized accounting, the originally stored transactions data are processed to automatically produce the balances of various accounts at any time requested.
- Adjusting Entries : These entries are recorded to match the expenses of the accounting period with the revenues generated by them and to correct any errors discovered made while recording transactions. These entries are also made when using a computerized accounting system; however, most errors are caught when entering the original transactions using the designed input screens.
- Financial Statements : In a manual system of accounting, the preparation of financial statements requires posting the journals and preparing a trial balance. However, in computerized accounting, there is no such requirement. The generation of financial statements is independent of producing the trial balance because such statements can be prepared by direct processing of the originally entered and stored transaction data and are available at any time requested not just at the end of a period.
- Closing the Books : After the preparation of financial reports, the accountants make the books ready for the next accounting period. This entails recording and posting closing entries to the general ledger accounts. All revenue and expense account balances are set to zero. In computerized accounting, this step is normally automatically performed.
The same steps called the accounting cycle are basically adhered to whether a manual or computerized accounting system is being used.
Advantages of a Computerized Accounting System
Computerized accounting offers several advantages over a manual accounting system, some of these are summarized as follows:
- Costs : Costs are now at a level that is affordable by almost all small businesses.
- Speed : Accounting data is processed faster by using a computerized accounting system.
- Accuracy : The possibility of error is reduced using a computerized accounting system because the primary accounting data is usually entered only once and updated and used by the system wherever needed. Normally, accounting errors in a manual accounting system occur because of repeatedly posting the same original data several times when preparing different types of accounting reports.
- Reliability : The computer system is well-adapted to performing repetitive tasks and as a result is less prone to errors.
- Up-to-Date Information : The accounting records in a computerized accounting system are updated automatically whereas a manual system requires periodically manually updating the records. Therefore, by using a computerized system the latest information pertaining to accounts get reflected when accounting reports are produced and printed.
- Real Time User Interface : Using a computer system, authorized users have the availability of current information at the same time on a real time basis (immediately).
- Automated Document and Report Production : Most of the computerized accounting systems have standardized user defined formats for accounting reports and documents such as sales invoices that are generated automatically. Some even allow the users to design custom reports.
- Storage and Retrieval : A computerized accounting system allows the users to store data in a way that does not require a large amount of physical space. This is because the accounting data is stored on hard-disks, CD's, floppies etc. that occupy a fraction of the physical space used for manual books of accounts such as ledgers, journals invoices, and other accounting records. In addition, the system permits the fast, up to date, and accurate retrieval of data and information.
Why a Computerized Accounting System ?
Timely Financial Reports
Using a manual system the summarized totals from the special journal are posted to the general ledger accounts at the end of a month. On the other hand, when using a computer system once an entry is entered all records are automatically updated. Why is this important ? Financial Statements and other reports are available at any time not just at the end of a month.
If you need to review or learn more about a manual bookkeeping system check out my free Special Journals Tutorial. To learn more about computerized accounting and bookkeeping check out my Computer Accounting Tutorial.
What System - Manual or Computerized ?
This decision should be a no-brainer !
If you have not yet computerized your accounting, you should seriously consider doing so. Most of the software being offered has a trial version that you can use to see if it fits your needs. Also, there are now many free excellent accounting software solutions being offered.
Why Use Accounting & Bookkeeping Software ?
Manual or Computerized Bookkeeping ?