The key differences between manual vs automated accounting lie in how calculations and data entry are performed and their degree of accuracy. Manual accounting requires a clerk or accountant to calculate and enter data by hand, while automated accounting involves the use of digital software for automatic calculations and data entry. Whereas manual accounting can be time-consuming and prone to errors, automated accounting systems are generally more efficient and provide greater accuracy.
Manual Accounting | Automated Accounting | |
|---|---|---|
Process & Workflow | Manual entries for journals, ledgers, and trial balance | Automated entries and updates for all accounting transactions |
Tools Used | Pen, paper, and physical ledgers | Accounting software, like QuickBooks Online and FreshBooks |
Degree of Efficiency | Limited; time-consuming and error-prone | Efficient and generally more accurate |
Accessibility | Physical presence required | Remote access via the internet |
Data Entry | By hand | Keyboard or keypad input or automated data import |
Chance of Errors | Higher due to human error | Lower due to advanced features, like automated calculations |
Cost | Lower initial costs but higher long-term labor costs | Higher initial costs but lower long-term costs |
Data Security | Prone to damage, but easily secured with physical lock and key | Secure with encryption and backups |
Reporting | Manual calculations and formatting | Automated generation |
Audit Trail | Limited | Comprehensive and easily accessible |
Manual vs Automated Accounting Systems: Process and Workflow
A manual accounting system requires an accounting clerk to perform each step by hand. For instance, they must look at amounts in the journal and then write them in the general ledger (GL). They then total the amounts in the GL and write them on the trial balance.
In comparison, an automated accounting system only requires an accountant or bookkeeper to enter the data. Once a transaction is properly input and coded, the automated accounting system will automatically complete the GL, subsidiary ledgers, trial balance, and financial statements.
However, both accounting systems strive to complete the same basic workflow required of an accounting system. They must:
- Record transactions in the cash receipts journal, cash disbursements journal, or general journal
- Carry amounts from the journal to the GL, which accumulates amounts for each account
- Carry accounts receivable and accounts payable transactions to the subsidiary ledgers for each customer or vendor, respectively
- Carry amounts from the GL to the trial balance at the end of the period
- Use amounts from the trial balance to create financial statements
Manual vs Automated Accounting: Tools Used
Manual accounting involves the use of traditional tools, such as pen, paper, and physical ledgers. Additionally, accountants also use calculators to assist with computations. However, the biggest resource required for a manual accounting system is labor, which can be quite expensive.
Meanwhile, automated accounting uses digital accounting software for managing financial data. Unlike manual accounting, these programs offer automated features, such as real-time tracking, integrated reports, and automated data entry. Also, they include built-in calculations, so there’s no need to compute figures manually. The most popular accounting software include QuickBooks Online, Xero, Zoho Books, FreshBooks, Sage 50, and Wave.
Manual vs Automated Accounting: Accessibility
In manual accounting, accountants need to be physically present at the office or a specific location where the accounting records are kept. These records are usually kept in filing cabinets or other physical locations within the office. Since transactions are recorded by hand, accountants have to be on-site to record or update entries. This limitation makes it challenging to share information quickly, especially for businesses working with remote accountants.
With accounting software, all financial data is stored in one place—making it easy to access documents. What’s more, cloud-based accounting software programs allow accountants and business owners to access records anywhere from any internet-enabled device, such as computers, tablets, and even smartphones. This approach is way more efficient than searching through files in cabinets in your office.
Manual vs Automated Accounting: Data Entry
As mentioned earlier, financial transactions are recorded by hand in manual accounting. Accountants have to record expense invoices, cash payments, deposits, receipts, and inventory logs manually. This approach can be time-consuming and prone to errors—which is why accountants have to be extra careful with each data entry they make.
In contrast, accounting software programs provide various forms and templates for different transaction types, like invoices, expenses, and journal entries that will prompt you for the required information. All you need to do is use your keyboard or keypad to type in the required information into the respective fields of the form. After completing the form, you typically have to click a “Save” button to record the transaction.
Another benefit of most modern accounting software is that you can connect your bank accounts so that transactions automatically flow into your account. In manual accounting, you have to record each transaction in your ledger as it happens.
Manual vs Automated Accounting: Risk of Errors
According to a recent report by Gartner, 18% of accountants make financial errors daily. Accountants may write numbers incorrectly, post a transaction to the wrong account, record the same transaction twice, and make computation errors. Also, they may sometimes forget to record transactions, resulting in incomplete records. Even if the original transaction is entered correctly, there is a significant chance of error at every step of the process since the numbers are transferred from journals to ledgers to the trial balance by hand.
Accounting software reduces the chance of errors—thanks to its automated features, like auto-posting and automatic calculations. Automatic accounting systems won’t allow an entry that is not in balance, i.e., credits equal debits. Once the transaction is correctly entered into the system, there is very little chance of error because everything flows through the system automatically.
Manual vs Automated Accounting: Time Efficiency
Manual accounting is more time-consuming, as each transaction has to be recorded individually and categorized and summarized manually. Also, it may take days or even months to prepare financial statements, reconcile accounts, and generate reports. Simply put, it could consume valuable time that you could otherwise spend on other important aspects of your business.
Accountants can enhance time efficiency using accounting software solutions. These tools provide many time-saving features, such as the ability to automate repetitive tasks. For instance, most accounting software provide a recurring billing feature, which allows you to create invoices that will automatically be sent at a specified time. So, instead of creating and sending invoices with similar details every month, an accounting tool can help automate this process.
Manual vs Automated Accounting: Cost
While manual accounting typically involves lower upfront costs, the ongoing expenses are worth considering. The biggest cost is labor, as accountants may spend significant time and effort to manage your records. According to Indeed, an accountant’s average salary is $63,764, as of June 2024.
Additionally, you have to consider other miscellaneous expenses, such as printing costs and paper and supplies. Also, you may have to spend on training your employees to ensure that they are updated on the latest accounting practices.
Meanwhile, automated accounting systems require higher upfront costs as you have to purchase the software or hardware. The good thing is that these costs are offset in the long run since you can manage large transaction volumes with fewer resources. Additionally, as your business grows, you may only need to upgrade to a higher plan, which is a fraction of the cost of hiring an additional accountant.
Manual vs Automated Accounting: Data Security
Obviously, data security is more challenging to manage in manual accounting. Physical records can be prone to loss and damage from unexpected events like fire and flood. However, it’s relatively easy to secure physical records in an office or file cabinet—and it doesn’t require any specialized knowledge to do so.
Businesses can rely on automated accounting systems to back up their data in case the original is destroyed. However, securing the data—especially in a cloud-based accounting system—can be worrisome for some. Most business owners don’t have the expertise to understand how to keep online data secure and must trust the software provider to do so. Even with the software’s security expertise, the business owner must understand how to create secure passwords and keep their own computer or network secure from hackers.
Manual vs Automated Accounting: Reporting
One of the hardest parts of manual accounting is preparing reports. Accountants have to compile data from various sources, perform calculations, and format the data into comprehensible reports. This approach is acceptable, but it may consume a significant amount of time and is also prone to errors—especially when creating essential reports, like balance sheets and profit and loss statements. Manual systems generally require too much work to produce financial statements for periods less than a month.
Another good reason to consider using an accounting system is integrated reporting. Accounting software programs have real-time access to your financial data, meaning you can generate reports with just a few clicks. These solutions provide a wide range of reports, from basic profit and loss statements to balance sheets and even customized reports.
All you need to do is select the desired report, customize the parameters (e.g., date ranges and specific accounts or format), and generate the report. If needed, you can also download the report and print it so that you can share it with your teammates or stakeholders in your next meeting. Additionally, reports generated from accounting software are often more professional-looking than those created manually as data can easily be presented through graphs and charts.
Manual vs Automated Accounting: Audit Trail
Another serious concern in manual systems is maintaining an audit trail. Since each transaction is recorded only by pen and paper, it’s difficult to track down changes and identify and correct errors. Also, manual systems can be easily misplaced, damaged, or lost—and this could make it even more difficult to audit your books.
In contrast, accounting software solutions provide easily accessible and comprehensive audit trails. Every entry made is automatically logged with timestamps and user information. This makes it easy for you to track and review transactions, identify errors, and spot potential fraudulent activities.
Benefits of Using Automated Accounting Systems
Based on our detailed comparison above, below are the top benefits of switching from manual to automated accounting systems.
- Saves time: By using accounting software, you can significantly reduce the time needed to perform routine tasks, like recording transactions, posting to ledgers, and running reports. With just a few clicks, you can easily enter new transactions, import bank statements, categorize income and expenses, and update financial records in real time.
- Produces real-time reports: Automated accounting systems allow you to view important reports at any time, while manual systems only produce reports at the end of an accounting cycle, generally monthly.
- Improves employee retention: Since employees won’t be bogged down by repetitive and monotonous tasks, they are likely to feel more engaged and valued. In fact, according to an accounting industry report by Xero, 66% of businesses claimed that they experienced better staff retention from using accounting software.
- Reduces the risks of errors: Humans can easily make mistakes, and accountants are no exception. Accounting software reduces the risks of human errors, like writing incorrect amounts, misposting entries, and making calculation errors.
- Improves productivity: You can complete more tasks quickly using accounting software than a manual system. For instance, reconciling transactions in a manual system may take days but only a few minutes when done in an accounting system.
- Makes it easy to retrieve files: Using a built-in search feature, accounting software lets you easily find specific transactions by entering relevant keywords, dates, or account details. This means you don’t have to search through physical files and folders to retrieve the document you need.
- Allows you to work remotely: Cloud-based accounting software allows you to perform accounting tasks or access your files anywhere you are. Whether you need to invoice your customers and view an important report on the go, you can do it from any internet-connected device.
Frequently Asked Questions (FAQs)
Manual accounting involves recording transactions and preparing financial reports by hand using traditional tools, like pen, paper, and physical ledgers. Automated accounting uses digital software with automated features to record and manage financial data.
Yes, as these solutions can help them automate their processes, save time, reduce errors, and improve overall efficiency and productivity.
There are plenty of accounting solutions on the market, and some of our top recommendations include QuickBooks Online, Zoho Books, and Wave. See our guide to the best accounting software for small businesses for additional options.
Yes, and Wave and Zoho Books are two of the best solutions. You may also explore other options in our best free accounting software guide.
Bottom Line
Manual accounting systems can still be an option for businesses with basic accounting needs and a fear of computers, but even the most novice computer users can save hours of tedious work using very simple, free accounting software. These solutions offer many advantages and flexibility, which can help any business.
