Difference between Computerized Accounting and Manual Accounting

Accounting is a record of financial transactions that is typically done within an enterprise or business organization. These financial transactions are recorded and then financial reports or statements are made on a regular basis. Financial statements are created for the audience so that they can understand the position of an enterprise and make further decisions on whether to invest or not.

Earlier, accounting used to be manual rather than digital. In manual accounting, a proficient and experienced accountant is required to make accounts, books, and copies by hand. Depending on the data, manual accounting may require multiple accountants or assistants. But nowadays, technology is used to make financial statements as well. Computerized accounting has become common and can be used with computer systems and specific finance software. Computerized accounting also requires a knowledgeable person to register the entries of the enterprise; however, this reduces the overall workload to a great extent and ultimately improves accuracy.

Let's discuss them in detail, including the major differences between them:

Computerized Accounting: What is it?

Computerized accounting is a means by which systems like computers and software are used to maintain financial transactions and create financial reports. Software like Tally, Excel Sheets, and PDF Readers/Editors are used. In this accounting system, the data are taken down on customized databases. Financial statements are easy to make and are made quickly in computerized accounting. Instead of writing the information on a piece of paper, it is simply jotted down by clicking a few buttons.

It takes much less time as it is made on an electronic device using software. The calculations are automatically made while recording the data on a computer. Also, as the software does its calculations, the output data is more accurate in this accounting system. The entries made while recording financial transactions can be saved for future reference as well. A person will have to back up to store the data and restore it when needed. Notably, the adjustment of entries could be better in computerized accounting.

But on the other hand, computerized accounting can lead to data loss sometimes. Additionally, people can steal data and can make fraudulent data.

Features of Computerized Accounting

• Scalability: Computerized systems have scalability where the storage for massive amounts of data can be increased or changed accordingly.
• Quick decision-making: This gives the opportunity to managers and people who invest in businesses to recognize the financial power of a company through its financial statements. The manager uses financial statements to discover solutions to a particular problem. Investor uses this information to know whether they should invest in the company or not. This is because financial power or statements decide the profit that the investors will be getting.
• Efficiency: The computerized accounting system is very efficient compared to manual or other types of accounting. It requires a computer system with software, making the data more valuable and appropriate.
• Instant Reporting: This system makes an instant report and provides space to make changes as required.
• Digitally Data Storage: Here, the data is stored digitally, making all the files and folders accessible when required.

Types of Computerized Accounting Software

1. Readymade Software: This type of software is used by all those firms where the work is less and straightforward. These are mainly used by small enterprises or businesses. They are often affordable and require minimum system requirements.
2. Customized Software: Customized software is designed for the specific needs of enterprises, especially large companies. It is used for particular work.
3. Tailor-made Software: This type of software is specifically used by significantly large enterprises. These have become a significant part of MIS (Management Information System).

Requirements of Computerized Accounting

• Operating System & Software: Computerized systems solely depend on the operating system. A computer system with an operating system is required for the computerized accounting. Further, it needs a backup-end database and a front-end interface so that the reporting system can be made easily and the data can be stored digitally. Depending on the needs, a company can choose and install accounting software.
• Accounting Framework: There is a set of principles and conventions which are universal. The financial statements or records are made based on these principles.

Advantages of Computerized Accounting

• Reliability: Computerized accounting is very reliable as all the documents remain in a single place, making it easy to locate any particular details instantly. The data is typically stored in a PDF format or in Excel Sheets.
• Accuracy: Computerized accounting is known for accuracy. We are already aware of the fact that humans may commit a lot of mistakes unintentionally while making financial statements or doing accounting work manually. But, in computerized accounting, the chances of error are reduced. These errors are checked before adding to the final and the last record.
• Simple: Computer software reduces work at a glance. The accounting software is easy to use if learned by an individual (a user). It enables the user to record, store, and/ or retrieve any specific information easily.
• Speed: The computerized system contains software that manages everything from receiving the data by a user, calculating everything, and presenting the reports with a rapid speed. So, the speed of working is high in computerized accounting.
• Greater Control: An enterprise has better control over its operations. The financial statements and accounting are made with the help of software quickly, allowing managers to make quick decisions for a specific problem.
• Up-to-date Information: The updated information can be stored and found immediately. The data is regularly updated when something is added to it. So, a computerized system of accounting provides up-to-date information.

Limitations of Computerized Accounting

• High Cost: In this system of accounting, resources like computers and others are needed. A huge amount is required in order to invest in these resources. Therefore, companies prefer to adopt this system when they are capable enough to afford it.
• Heavy Installation and Training Cost: Computerized accounting software is sophisticated. Therefore, it can be run only by those who are experts in it. Therefore, enterprises need to conduct regular training which requires a large amount of money. Additionally, accounting software is also expensive.
• Loss of Employment Security: For this accounting system, machines are generally used, which automatically reduces the number of employees in a company and thus leads to job loss.
• Health Issues: Spending too much time on the screen affects eyesight. Using screens too much can affect a person's eyesight.
• Online Threatening: All the data and information are usually saved digitally. So, it is possible that the information can be hacked. So, it may be dangerous for companies with sensitive or personal data. Proper care has to be taken before choosing computerized accounting.

Manual Accounting: What is it?

Manual accounting is where all the works of accounting are performed using physical things like a pen, paper, file, etc. The account books are made to keep financial statements. The recording is done on the basis of the original entry. However, calculations once made cannot be modified, or doing so can be a cumbersome process. It is very time-consuming and slow. Moreover, when the accounts are made by hand, the chances of making mistakes increase. The entire data needs to be double-checked and one has to repeat the entire process to correct any particular thing. Backups are not possible as it is manual. The accounting books are made at the end of the year when GST and everything are considered. So, one cannot get the up-to-date information.

Types of Manual Accounting

1. Single-entry System: A single-entry system is a system in which the transactions are recorded in a ledger. It doesn't need any major skill. It is cheaper and largely used by small firms.

Features of Single-entry System

• In a single-entry system, the cashbook is maintained which shows the cash receipt and payments.
• The single-entry system keeps track of debited and credited accounts. It reveals the total purchases and sales made in a particular period.
• This system prepares the vouchers. Also, it doesn't consist of a set of principles showing the profit distribution. Hence, in a single-entry system, the distribution of profit varies accordingly.

2. Double-entry System: As its name indicates, in a double-entry system, the transactions are taken down on the basis of a dual concept. The dual concept includes one amount being debited and the other being credited in two different ledgers. This is particularly made to show the company's finances which other firms use. This system is typically used by relatively large firms.

Features of Double Entry System

• In a double-entry system, one person pays the amount and the other receives it.
• One account receives the money, and the other pays.
• The primary concept that the double entry system is based on is - "each debit must be accompanied by a credit of equal amount".

Advantages of Manual Accounting

• Easily Accessible: A manual accounting system is easily accessible as it can be used or reached without power (electricity). Power is not required as it is prepared by hand on paper or physical registers.
• Cheaper: It is cheaper than computerized accounting. Manual accounting saves money on installation fees. With this accounting, the cost is spent on the books, papers, and pens. This cost is relatively cheaper.
• Less Expenditure on Employees: Less money is invested in training employees because they already have sufficient knowledge of manual accounting. They do not require additional training to operate software or computers.
• Detection of Potential Errors: Manual accounting is based on a double-entry accounting system where the debit and credit entries are made in two different accounts, after which they are checked in the trial balance. If one side becomes unequal whether debit or credit, it is rectified accordingly.
• Less Complicated: It is less complex and sophisticated than computerized accounting systems, where trained people are needed with skills. But here, it is easier because a person is already trained in a particular way to meet the requirements of manual accounting.
• Durability and Permanence: Manual accounting consists of hard copies. It remains permanent until and unless it is lost. It is more durable than a computerized system of accounting because, in computerized accounting, the data may get deleted and can be hacked. But here, in the manual method of accounting, it stays.

Limitations of Manual Accounting

• Potential Loss of Physical Copies: In a manual accounting system, the accounting books, like ledgers and journals, are made in a physical form consisting of papers. Sometimes, these ledgers and journals are lost by theft or fire, which eventually discards the company's financial statements.
• Knowledge of Accounting Preparation: The manual accounting system asks for an individual's accounting preparation knowledge. So, for preparing accounts, the individual must be well addressed with the rules, principles, and conventions required in manual accounting.
• Tedious: In manual accounting, all the accounts are made by hand; hence the data recording takes place, which includes calculations as well. The calculations made by an individual may have errors sometimes. So, to correct that error, an individual will have to go again and check from the start. Hence, it is tedious work.
• Laborious: In manual accounting, the double entry system is used, so the transactions are recorded twice; it is first debited and then credited. So, for this, a lot of effort is required.
• Time-Consuming: This accounting system is very time-consuming as all the process is done by hand rather than by machines. So, more time is needed to make accurate financial statements.

Key Differences between Computerized Accounting and Manual Accounting

Conclusion

Both manual and computerized accounting are done with the same set of data and provide the same results if done correctly. Both are prepared on the same parameters like principles, conventions, etc. The notable difference is manual accounting uses hardcopy like pen and paper, whereas computerized accounting requires a computer, operating system, and software.