Manual vs Computerized Accounting

Ever since Lucas Pacioli wrote about and spread the knowledge of double entry accounting in his “Summa di Arithemetica” in 1494, modern manual accounting was born (Hendrickson, 2007), though manual accounting has existed in many forms since ancient times. In contrast, computerized accounting systems are a more modern invention, as the first computer was invented between 1943 and 1946 (“Great Events in Accounting & Business History”, (n. d.)) and Arthur Anderson first computerized the payroll of General Electric in 1953 (“Great Events in Accounting & Business History”, (n. d. )).

Powerful personal computers were not readily available to the average person until the 1980’s and 1990’s. Manual accounting, for the purposes of this paper, is the completion of the accounting cycle by hand without the use of a computerized accounting system. The accounting cycle for manual accounting is the process by which companies produce their financial statements for a specific period (Horngren & Harrison, 2007).

Typically, in a manual accounting cycle the following steps are taken: Analysis of transactions, journalizing entries, posting to the ledger, preparing an unadjusted trial balance, preparing a worksheet, preparing financial statements, adjusting the ledger accounts and posting adjusting journal entries, closing the temporary accounts (posting and journalizing the closing entries), preparing a post-closing trail balance, preparing and posting optional reversing entries, and interpreting the accounting information (Yacht, 2008, p. 42).

The financial statements derived from manual accounting are the summation of many individual transactions performed by hand and kept, usually in paper form, in journals and ledgers. Many small businesses use manual accounting and manual accounting has its advantages. From my experience managing a small business, performing the accounting cycle manually gives the manager or owner of the business a hands-on idea of how, and on what, money is being collected and spent and gives a good overview of the performance of the company on a day to day basis.

Manual accounting is tried-and-true and has been around for centuries. It is cost effective for a small volume of transactions as would exist in a small business and is fairly transparent, as the journal entries and general ledger are in paper form and readily available. However, there are disadvantages to a manual accounting system. It can be slow and laborious, and requires meticulous, timely record keeping.

Data must be written, and “must be manually posted to the general ledger and then compiled into financial statements” (Elmaleh, 2006). Manual accounting, by its very nature, involves many calculations which must be done by hand. One could make an argument that it might be a bit more error prone than computerized accounting since it could potentially involve transcription and more calculation errors, though data entry errors can (and do) occur with computerized systems.

Lastly, manual accounting systems are impractical for a large volume of transactions or for a large company. Computerized accounting, for the purposes of this paper, is the completion of the accounting cycle using commercially available computer software. Much of the journalization of entries is automated behind the scenes and the computer performs many of the calculations and prepares many of the forms an accountant would do manually if he/she were keeping manual accounting records.

The accounting cycle for Peachtree Complete Accounting, for example, includes the following steps: Creating a new company, analysis of transactions, journalizing entries, posting to the ledger, printing the unadjusted general ledger trial balance, account reconciliation, journalizing and posting adjusting entries, printing the general ledger trial balance, printing the financial statements, changing the accounting period, and interpreting the accounting information (Yacht, 2008, p. 45) With a computerized accounting system, data is entered manually into the computer, but most of the calculations are automated for the user.

Computerized accounting systems have advantages. They can increase the speed and efficiency of the accounting process and can be less labor intensive owing to the automation of many functions like journalization and calculation. Performing the summation of all the individual transactions entered is automated and printing financial statements from the data is quick and easy. Although there may be data entry errors, these may be easier to find in a computerized system, and there should be no transcription error as the computer performs the transcription for you.

Computerized accounting systems, since they can easily handle large numbers of transactions with ease, are more practical for large companies with a large volume of transactions. Lastly, one advantage I’ve seen with computerized accounting is the generation of financial statements at any time during the accounting cycle, if you wish to do this. With manual accounting, this is labor and time intensive and impractical. Computerized accounting systems are not without their disadvantages, though.

For example, many small businesses don’t have a lot of start-up capital and most computerized accounting systems are somewhat cost-prohibitive for them. They are dependent upon computers with all the attendant problems that can come with that – power outages, viruses, data security, and computer fraud. I believe, as well, that the computerized accounting systems are less transparent than manual accounting. Though the journal entries and general ledger are available (drilling down), they are not always immediately apparent to the casual or non-accountant user.

Computerized accounting also requires specialized computer knowledge which manual accounting does not require, and with this specialized computer knowledge comes higher employee costs, especially at a time when many companies are outsourcing their accounting functions to countries like India where labor costs are cheaper. Elmaleh (2006), in his article entitled “Cost Savings from Computerized Accounting are Not What They Should Be”, makes the point that there is “a fairly big learning curve involved in using the software properly”.

Additionally, he feels that “[y]ou would think that…computerized accounting would be cheaper and less error free than manual accounting. But it turns out that is not always true. ” Manual accounting and computerized accounting, both start at the same place (business transactions) and end at the same place (financial statements and reports), so, in that respect, they are similar. They are, also, both based on underlying accounting principles and double entry accounting. Each has its advantages and disadvantages and neither is inherently better or worse than the other.

The decision to use either a manual or computerized accounting system is one each business will face. Comparing the advantages and disadvantages of both methods can help the business accounting user to best decide which method will work for them considering such factors as cost, availability of cheap labor, time factors, volume of business transactions, and computer expertise and accounting knowledge.

Reference List

  • Elmahleh, M. S. (2006). Cost Savings from Computerized Accounting are Not What They Should Be. Retrieved December 02, 2009, from http://www. understanding-accounting. net/computerizedaccounting. html
  • Great Events in Accounting & Business History, (n. d. ), Retrieved December 02, 2009, from http://acct. tamu. edu/giroux/timeline. html
  • Hendrickson, Harvey. "Accounting. " Encyclopedia of Business and Finance, 2nd ed.. Thomson Gale. 2007. Retrieved December 02, 2009 from Encyclopedia. com: http://www. encyclopedia. com/doc/1G2-1552100011. html
  • Horngren, C. T. , & Harrison, J. R. (2007). Accounting, Chapters 1-13 (7th ed. ). Upper Saddle River, NJ: Prentice Hall. Yacht, C. (2008). Computer accounting with Peachtree Complete 2008, Release 15. 0 (12th ed. ). New York: McGraw-Hill.