Before we learn the difference between manual accounting and computerized accounting, it is important to know the actual meaning of the term accounting.
Accounting is the process of analyzing, classifying, presenting, recording, and summarizing the financial transactions of the business entity along with it also accountable for retrieving, sorting, storing, summarizing, and presenting the results in various reports and analyses.
The main difference between manual accounting and computerized accounting is technology. Since ages, manual accounting system has been used for keeping the records of financial transactions written by hands on a piece of paper. On the other hand, the computerized accounting system is roughly around two generations old and has been used for keeping the digital records of each transaction into accounting software programs.
The second main difference between manual and computerized accounting is the speed. In manual accounting, the speed of data entry and processing is slow; in this system, the data is recorded twice. First, the data is recorded in the books of original entry after that. The data is entered into a ledger account. At each stage, information is checked for accuracy and relevance. On the other hand, computerized accounting software processes data and creates reports much faster than manual systems.
Entering data with the use of a keyboard and letting the software programs do the calculation automatically is faster than writing the data with the help of a pen on a paper and calculating the math with the help of a calculator.
Difference between Manual Accounting and Computerized Accounting
|Manual Accounting||Computerized Accounting|
|Definition||Manual accounting is the type of system in which we use the physical register of the journal, ledger, or paper for keeping the records of each financial transaction||Computerized accounting is the system in which we use the computer and different accounting software for keeping the digital recording of each financial transaction|
|Data Entry||Before manually processing the data into ledger accounts, transactions are recorded in all the books of the businesses at various stages of financial data entry||In computerized accounting system financial data is entered only one time in the system, and after that, it is automatically transferred to all the relevant books accurately|
|Ledger Accounts||In manual accounting, data is recorded twice. After checking the physical journal, information is transferred into ledger accounts||In the computerized accounting system, the data is processed automatically in classified ledger accounts|
|Trial Balance||After the preparation of ledger accounts, we have to collect the information of the balances of all the ledger accounts to prepare a trial balance to summarize the data||There is no need to develop ledger accounts to produce trial balance. The data in each transaction is processed automatically to show the balance report|
|Financial Statements||We have to prepare the financial statements based on the trial balance in the balance sheet and income statement||However, in the computerized accounting system, there is no need to make financial statements because these statements are directly processed automatically using the stored initially data|
|Speed||Manual accounting takes much time to generate data because from data entry to report generation everything is done manually||Computerized accounting systems save much time and produce information much quicker than the manual ones. Once data is entered, preparation of ledger, trial balance, financial statements, and report generation is done automatically|
|Accuracy||In the manual accounting system, there are more chances of errors such as arithmetical errors and misplaced numbers||In the computerized accounting system, there are fewer chances of processing errors. If the input entered is correct, the output will also be correct|
|Storage||It involves the storage of financial data in a large volume of books||It involves the storage of financial data in well-designed databases|
|Recovery of Data||It is difficult and time-consuming to recover manual data as there are bulk of journals have to be gone through, and they may get deteriorated with time||It is much easier to recover data as the records are kept in soft copy in the database, and all the data can be backed up|
|Cost||Manual accounting is much cheaper than the computerized accounting and requires basic necessities like a pen, paper, journals, etc.||It is expensive to buy accounting software, and the system also requires maintenance. It also needs other supplies, such as printers, papers, inks, etc.|
What is Manual Accounting?
It is one of the ancient types of accounting system where financial records are written on pads of paper or journals by hand without using any digital technology.
The manual accounting system is most commonly used by small and less complicated businesses, as this accounting system is cheaper and relatively easier to use than computerized accounting systems. However, the processing time of this system is much slower, with high chances of error.
Benefits of Manual Accounting
Many people still prefer using pen and paper then working with computers. The manual accounting system is one of the easiest types of bookkeeping and works even when electricity is off. One of the top benefits of a manual accounting system is that it is much cheaper than the computerized accounting system and requires paper pads, journals, and a pencil or pen.
Another benefit of using this system is that there are no chances of data corruption or duplication, as sometimes happens with computerized accounting software. Manual accounting systems use a single file and ledger for each account.
Disadvantages of Manual Accounting
There are quite frequent chances of error in manual accounting processes. There are few common errors, such as entering information into incorrect accounts, transposing figures, and recording information backwards. These systems have no internal checks and balances. Bookkeepers researching errors will often spend several hours to locate and correct entries.
A lack of security is one more disadvantage to manual accounting. Organizations may be not capable of preventing employees from looking over sensitive data in paper ledgers and physical journals. It may allow employees to misuse financial information through fraud or embezzlement. Disgruntled employees may also irreparably damage the data and destroy critical financial records.
Computer files can easily be modified by adding and deleting data. The numbers on the screen show no trace of these changes unless you dig deeper and find out the date a file was last modified. In contrast, manual accounting systems show evidence of having been changed. If you worked with a pencil, then erasures are apparent, and if you worked with the pen, you must cross out old entries to make new ones. The difficulty of hiding changes makes it easier to tell when you have changed a manual accounting system and facilitates transparency.
What is Computerized Accounting System?
The manual accounting system was the only process of recording financial transactions until 1980 when the advent of computers and easy-to-use, accurate, and reliable software developed.
A computerized accounting system makes use of digital technology and software to record, store, and analyze financial data.
Benefits of Computerized Accounting System
Computers take far less time than human beings in performing a particular task. Therefore, accounting data is processed faster, using a computerized accounting system. Since the software handles all the calculations, computerized accounting eliminates many of the conventional and time-consuming processes connected with manual accounting.
For example, once issued, invoices are processed automatically making computerized accounting less time-consuming. This system is designed to be accurate to the minutest detail. As soon as the data is entered into the system, all the calculations, including additions and subtractions, are done automatically by the software. By using accounting software, the whole process of preparing accounts becomes faster. Moreover, statements and reports can be produced instantly at the click of a button. Managers do not have to wait for hours, even days, to lay their hands on an important report.
Moreover, this system also offers ease of data protection. For instance, if data is corrupted or reports are damaged or lost, computerized accounting provides instant restoration from backup, ensuring that critical information is not lost. Digital backups may be maintained on- or off-site for additional protection of vital information.
Disadvantages Computerized Accounting System
When dealing with computers, issues can arise. You may be completing year-end data for your accountant and experience a power outage. Computers may also acquire a virus and fail. There is also the possibility of users incorrectly performing software tasks that they are not familiar with. If a user tries to do one thing but by mistake does something else, it might take some work to undo the error.
Dependence on computers at times leads to bigger problems. With more software data being lodged in the cloud, there are more chances for hackers to get your company’s financial data and use it. It puts assets at risk and creates potential liability if hackers use employer tax identification to open credit cards and business loans. There is also the risk of someone within the business accessing the information, perhaps pilfering money from daily deposits and altering the data in the program. Business owners must diligently protect financial information.
- In a manual accounting, system accountant uses physical journals, books, and papers to record financial data while in computerized accounting system accountant uses software to store the data digitally.
- In manual accounting system, a ledger account, trial balance, and financial statements are prepared manually while in computerized accounting system once journal entries are entered, data is processed automatically and ledger accounts, trial balance sheet are automatically prepared.
- In the manual accounting system, analysis of financial statements and preparation of reports are done manually while in computerized accounting system analysis of financial statement such as ratio analysis, preparation of cash flow statement is done manually.
- Manual accounting systems are susceptible to to mathematical errors while in computerized accounting systems, data is processed automatically making it unlikely to record a mistake.
- Manual accounting systems are slow while computerized accounting systems are relatively faster. Accounting software bundles such as Quick Books and Peach tree come with built-in databases that allow users to input data.
Both manual accounting system and computerized accounting system comes up with benefits and disadvantages. The manual system is suitable for small-scale businesses and does not work efficiently for companies that have bigger and complex financial transactions. However, the computerized accounting system is specially designed for companies and large organizations to make work easier with fewer efforts involved.