The accounting industry has evolved with leaps and bounds over the last few decades. Slowly, the traditional method of maintaining accounts on paper has changed into modern accounting technologies with the help of internet tools and software applications.
Possibly the newest and most advanced development in accounting is the advent of cloud accounting. This technology has revolutionized the whole business world, and emerging accountants are being taught to harness its power in their daily duties.
To understand cloud accounting and how it differs from traditional accounting methods, you first need to get an idea about cloud technology. Cloud computing is the on-demand storage and availability of resources without being controlled or managed actively by the user.
This means that you can use data centers for storage and computing without downloading anything to your device. This service is available to many users on the internet and can be used as a shared resource for your needs.
Definitions and Meanings
Traditionally, accounting comprised recording every single invoice received or issued by a business. These invoices and related information were stored in a dedicated folder or hard drive. After computers replaced pen and paper, traditional accounting software was developed for businesses.
The software can be installed on a computer and used to store financial data. The user can access the data, its storage, and services on that particular computer. No other device or network can be used to gain access to this data.
Since there is a lack of remote access, traditional accounting requires you to sit behind a desk and work all day. Plus, it increases the chances of losing your data as it is solely dependent on the competence of a single device.
Needless to say, if this is the right choice for your business, you can always invest in backups and maintenance for the traditional software.
Cloud accounting has the same functionality as traditional accounting. The only difference is that it runs on remote servers over the internet, so you do not have to download large software applications on your work computer.
The financial data is present on a web-based interface, which you can access from anywhere with an internet connection. This model has increasingly gained popularity for its flexibility, cost-effectiveness, and range of features. For many modern organizations, cloud accounting is the answer to their financial management needs.
Difference between cloud accounting and traditional accounting
Although both traditional and cloud-based platforms basically serve the same needs, there are massive differences between the two. Let’s discuss how these two concepts differ in the following aspects.
It is known that any technology that you have to maintain and repair incurs higher costs than a shared platform. Since cloud accounting uses remote servers, the overhead costs in a business are greatly reduced.
You only have to pay the subscription fee for the amount of storage space your business needs. Moreover, software updates and basic maintenance functions are covered in this cost.
Traditional accounting uses software that is installed on your computer. This occupies server space, needs updates, regular maintenance, and troubleshooting. All this may prove to be expensive for small to mid-sized organizations.
The biggest difference between traditional and cloud accounting is accessibility. Traditional systems are on-premise, which means you have to be in a particular location or on a specific computer to access financial data. This may affect your commitments, schedule, and efficiency.
With the cloud, you can log in from any compatible device with your secure credentials and access the data. This off-premise arrangement helps in many ways.
- It keeps data sources updated in real-time.
- It ensures secure data backups and eliminates redundancy.
- It reduces manual labor in terms of maintenance and work hours.
- It provides extreme flexibility in terms of location and time.
3. Data Security
Security can be assessed in two ways. Traditional accounting software offers security in a way that it is stored in a specific computer and cannot be accessed by anyone who does not have access to that location or machine.
However, it cannot guarantee safety against hardware failures, system crashes, theft, or other risks to the computer. In fact, if the computer is compromised, you stand the risk of losing all your data in the absence of backups.
In cloud accounting, financial data is stored on the internet, leading to cybersecurity and hacking concerns. However, these software platforms have robust security measures.
Measures such as authentication, encryption, secure backups, and so on are employed by the servers to ensure data security. The advantage is that security is not your responsibility in this kind of setup. You can choose the level of security needed for your business and rely on it.
Any business requires scalability in its software to keep up with the change in size and scale. In traditional accounting software systems, scalability proves more difficult compared to cloud systems. With changes in requirements, you need to update and manage your on-premise software manually, leading to complications and unprecedented costs.
On the other hand, cloud software is supportive of business growth and provides ample scalability for a booming organization. This is more so because it is not dependent on local servers or storage limitations.
Since the whole platform is web-based, you do not need to upgrade your devices or purchase additional hardware to accommodate growth. Cloud accounting also offers features, such as:
- Multi-entity access
- Role management
- Resource allocation
- Automatic updates as well as backups
Collaboration is a key element of a healthy workspace. Financial matters also require discussions, meetings, multiple reviews, and other collaborative efforts. In the case of traditional accounting, collaboration becomes a tough task as all the data is stored at a physical location and can only be transported in a limited manner.
In the COVID and post-COVID era, traditional accounting software would give rise to more complications as organizations are shifting to a virtual workspace. It is becoming quite impossible for all stakeholders to be physically present in a room to collaborate on a project. This also makes it difficult to generate reports, share them with multiple people, and receive all inputs.
Cloud accounting solves these problems as it essentially exists in a virtual space that can be accessed from anywhere in the world. Authorized personnel can access data through their credentials and leave inputs on the same report if required.
This makes collaboration easy and helps businesses maintain transparency in their functions. Any accounting report or spreadsheet can be shared with multiple people on demand. Along with this, features like multi-person access and approval chains can make collaboration a piece of cake.
6. Environmental Sustainability
In this day and age, all businesses strive to be environment-friendly in their operations. After all, it is our duty to reduce our carbon footprint and be responsible for the well-being of our planet.
Traditional accounting compromises the environment as it relies mainly on paper trails, printouts, and hardware support.
On the other hand, cloud accounting is paperless and remotely hosted. It does not use up any resources that are harmful to the environment. So, ethically this is the better option for your business.
The correct choice between traditional and cloud accounting ultimately depends on your requirements and the type of your business. Both accounting systems have their pros and cons and are suited to particular work setups. Depending upon your budget, business intelligence, and account payables and receivables, you should make the right choice.