Accounting is an act of recording, analyzing, classifying, summarizing and presenting the financial information of a business entity.
When we complete all the steps in accounting, it is called accounting cycle. All the financial transactions of a business are passed through all of the five steps of accounting cycle in five different sets of books. All the financial transactions are first recorded then analyzed, classified, summarized and finally presented to the stakeholders of the business. To complete all the five steps in accounting cycle there are five sets of books of the business including:
- Source documents
- Books of prime entry
- Trial balance
- Financial statements
All the financial transactions are recorded at first instance in source documents. Then these transactions are analyzed in books of prime entry after which these are classified in ledgers. Summary is prepared in trial balance and then are presented in financial statements. All the users of financial information of a business take all the information from financial statements because these are also made available publicly. All the books of the business can be prepared manually or on different accounting software using computers.
This article looks at meanings of and key differences between a manual accounting system and a computerized accounting system.
Definitions and explanations
When we prepare all the books of the business on paper, it is called manual accounting. In manual accounting all the relevant and material financial transactions are recorded on source documents. After this all the transactions are moved to books of prime entry, ledgers, trial balance and financial statements manually. When financial transactions are transferred from general journal (a book of prime entry) to ledgers, it is called posting. Each transfer from one set of books to next is done manually and ensured that no errors are made at any stage.
Computerized accounting means performing all the accounting tasks on accounting software or other similar applications using computers. In computerized accounting all the accounting books are integrated with each other and there is no need to do entries in all books. Financial transactions are entered in accounting system only once and then these transactions are posted to all the relevant books automatically by the computer.
Difference between manual and computerized accounting
The main points of difference between manual and computerized accounting are as follows:
1. Data entry
In manual accounting data is entered in all the books of the business at various stages of financial data processing. At each stage data is checked for accuracy and relevance.
In computerized accounting financial data is entered only once in the accounting system and after that it is automatically transferred to all the relevant books accurately.
2. Speed of processing
In manual accounting speed of data processing is slow whereas in computerized accounting data can be processed more speedily.
3. Accuracy of data processing
In manual accounting there are more chances of errors due to inherent nature of human error whereas in computerized accounting there are less chances of processing errors. Error will only occur if there is some error in programming the accounting software or applying a formula.
4. Volume of data handling
In manual accounting less volume of data can be handled at a time whereas in computerized accounting large volume of data can be handled at a time.
5. Storage of financial data
In manual accounting, storing large volume of financial data becomes difficult as manual records may deteriorate and are difficult to recover. In computerized accounting storing financial data is easy and all the data can be backed up so that it can be recovered in case of data loss.
6. Accounting skills required
In manual accounting more accounting skills are required to perform all the accounting tasks whereas in computerized accounting fewer skills are required because computer systems or accounting systems automatically process all the transactions once entered at first instance.
Accounting concepts, conventions, frameworks and procedures are the same in manual accounting and computerized accounting. In manual accounting, all the accounting tasks are performed by humans whereas in computerized accounting, all the tasks are performed by computers after having first input from humans. Managing accounts using computerized systems is easier than managing accounts in manual systems.