In traditional accounting, an accountant makes calculations and inputs financial data manually. For centuries, accountants worked with ledgers, entered information with a pen, and made calculations by hand.
Some accountants still use pen and paper. Others use computers to store financial data, but make calculations and enter figures by hand.
Computerized accounting, on the other hand, automates many of the processes of traditional accounting. Accounting programs use algorithms to cull data and use it for various calculations, reports, and accounting tasks.
This automation varies from program to program. Users may set up specific tasks for the program, such as collecting figures for tax documents or creating a business budget based on forecast expenses.
These two methods each have a set of advantages and disadvantages when it comes to accounting tasks. Here is a closer look at these tasks and at how manual and automated accounting methods handle them.
Table of Contents
Reporting
In traditional accounting, someone needs to look for information for the tax report from different sources. They then enter the figures into the correct place in the report.
Because you usually have to pull information from different ledgers, reporting can be time-consuming when using traditional accounting methods.
Well-organized ledgers can help speed up the process, but a computerized accounting system is almost always going to be faster when it comes to reporting. Accounting programs put all information in one place. You can find it through a search function or by calling up specific files.
You’re also able to use accounting software to create custom reports. For example, if you want to see the figures that go into your credit score, you can create a report with information about loans, payments, and debt.
You could set up a computerized accounting program to compile the report for you automatically. You choose the information (such as debt, cash flow, and income) needed for the document, and the program will locate the data and enter the necessary figures without any additional input from you.
Because of this level of speed and convenience, computerized accounting is a time-saver for financial reporting. This level of automation is one of the main reasons to use accounting software in a business.
Time Management
Even business people familiar with manual accounting methods may find recordkeeping and calculations time-consuming.
Large businesses have dedicated accountants, but small businesses, freelancers, and entrepreneurs often handle accounting tasks by themselves. For small companies or sole proprietors without full-time accountants, accounting programs can automate data collection and calculation tasks.
A computer program will not only save you time on day-to-day recordkeeping, it will also help with reporting and tax document creation. The more tasks a business person can automate with computerized accounting, the more time they will have to focus on other aspects of entrepreneurship.
Backup Process
Computerized accounting systems are easy to back up. A business can put its financial data on a thumb drive or store it in the cloud. Some programs allow you to back up books daily or work in the cloud so that your digital ledgers are always accessible and backed up.
Yes, it is possible to make copies of a physical ledger and store them in a secure place, but this process is time-consuming and tedious.
However, easy backup on a computerized system is only advantageous if you remember to back it up regularly or set up automatic backup. You’ll need to double-check backup processes to ensure that the accounting data is indeed getting saved.
Data Accessibility and Security
Accounting programs let users access their data quickly. A cloud-based infrastructure is one of the advantages of programs like Intuit Quickbooks. Intuit Quickbooks is a leader in this space and is constantly offering promotions and new customers incentives. With computerized accounting options, you can securely access your data from multiple devices without installing additional software.
A business owner could also let multiple users have access to the accounting software. This accessibility is a distinct advantage compared to having physical ledgers or accounting software only installed on a single computer.
Most computer programs offer secure, encrypted access to your financial information. However, there is always the danger of a security breach with any internet-connected device.
A recent study in England showed that the number of cybercrime incidents has eclipsed physical crime. It’s more likely that a criminal will try to access your financial data online than break into your place of business and steal a physical ledger.
Choosing a quality accounting program with proper security features can alleviate cybersecurity concerns.
Tax Compliance
It is much easier to deal with tax compliance issues with a computerized system. This advantage is especially important for businesses that have to pay sales taxes, which could require daily calculations to ensure compliance.
Businesses can use a computer program to collect the data necessary to file income taxes and calculate payments. In case of an audit, you can easily call up the necessary data to provide evidence to the Internal Revenue Service.
Accuracy
Accounting programs are able to take human error out of the equation. These applications can also perform calculations that might be too complex for people who perform accounting tasks for their company but are not professional accountants.
The chance of human error is a significant drawback for traditional accounting methods. Mistakes could include entering the wrong figures, making faulty calculations, or putting numbers in the wrong place.
The one drawback of computerized accounting is that many programs do have a learning curve. You need to take the time and learn to use the program correctly to ensure accuracy and get the other benefits that such digital accounting tools offer.
Cost
On paper, traditional accounting is a cheaper option. Ledgers only cost a few dollars, and a pen and calculator will not ruin your business budget. Accounting software generally costs more, especially when you figure in updates and the cost of a computer.
Cloud-based accounting systems may offer memberships instead of one-off purchases. Both subscriptions and one-time downloads are typically more expensive than traditional accounting ledgers and equipment.
However, because of the advantages of computerized accounting, these software options often offer more value than traditional accounting ledgers. By saving time, improving accuracy, and ensuring backups and data access, computerized accounting systems can provide better value in the long term than traditional accounting methods.
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