Bookkeeping 101: Should My Business Use a Manual or Computerized Accounting System?

There are many choices when it comes to picking a bookkeeping system to use for your business. You can use a set of manual journals and ledgers in which you write the details of the transactions and manually post them into the ledgers. You can also purchase one of the myriad of computer software programs that perform accounting for small businesses. It can be difficult to decide what's best for you. Let's look at the pros and cons of some of these systems:

Manual Ledger and Journals

This is usually the least expensive solution but the most time consuming. You will need to purchase at least two books: a general journal and a general ledger. You can purchase these from most office supply stores.

The general journal will be a large wire-bound book with eight, sixteen or thirty-two columns. In it, you will record the details of your transactions (we will discuss this in detail later in the chapter). Each column will represent either a balance sheet or income statement item.

The general ledger is usually a three ring binder with ledger sheets in it. Each sheet represents a balance sheet or income statement item. The monthly summaries from the general journal are posted in the general ledger, which keeps a running total of each account balance. Note that most accounts only have either a debit or a credit column, depending on the nature of the item. For example, revenue is a credit; all expenses are debits. Any unusual transaction that required a debit to revenues or a credit to an expense would be shown with brackets around it. Exceptions to this are the bank columns. Here we have both a debit and credit column as well as a balance column. This is because there can be either debits or credits to the bank with regular frequency. The balance column allows us to keep track of our cash at any point in time. Note also that, in this system, each row nets out to zero, meaning that the debits equal the credits.

At the end of the month, all of the columns are totaled and posted into the general ledger.

The benefit of this type of ledger and journal system is the cost, however, you may find that the time that you spent bookkeeping could have been spent on more income-generating activities for your company. Not only will it take you longer to post the transactions after they have occurred, you must also hand-write (or type on a typewriter) all of your invoices, customer statements, checks and letters to customers and suppliers.

Computerized Bookkeeping Systems

If you go into any office supply store, you will find many accounting packages for small businesses. How do you know which will be the best for your business? There are a few things you can do to minimize the risk of choosing a program that doesn't meet your needs:

* Read the back of the software box to find out the main features of each program.
* Talk to other business owners in your industry. Some software works for certain industries better than others.
* Talk to your accountant. She should have a good idea of the benefits and downfalls of many of the popular programs. However, make sure that your accountant is familiar with multiple systems, otherwise they may simply recommend the only one they are familiar with.
* Try demonstration versions. Go onto each software's website. Many of them have demo versions that you can try, or at least screen shots of the main features. This will give you a feel for what the program does, before you invest in it.
* Make sure that you understand whether the program will require you to upgrade every year. Some of the popular programs require that you keep current with the new payroll tables (which they sell you every six months to a year) or other features. Other programs will allow you to override outdated functionality. Make sure that you know how much upgrades will cost you so that there are no surprises later on.
* Make sure that the company that produces the software is large enough and stable enough that they will be around five years from now. You do not want to find out that you have tracked all of your business transactions in a program that no longer exists and cannot be exported to another program. Manual conversion can be a costly endeavor.

Three of the largest international players in the small business software arena are MYOB (stands for Mind Your Own Business), QuickBooks, and Simply Accounting (Peachtree in the U.S.). There are literally dozens of others, each with benefits and drawbacks but these are the three big ones.

The main drawback of computerized systems is the cost. Not only do you have to purchase the software program (and perhaps upgrade frequently) but you also need to make sure that you have an adequate computer system and a printer in order to print out your reports.

The benefits are many:

* Much of the actual "debits and credits" happens behind the scenes in the program. For example, when you record an invoice, it looks like an invoice on the screen.
* Your balance sheet and income statement appear at the touch of a button. They are automatically generated from the transactional detail.
* Your invoices, customer statements, checks and letters to customers and suppliers are generated from the accounting system. There are two benefits of this: they look more professional coming from the computer, and you save a step. For example, when you prepare an invoice in your accounting system, you print off a copy for your customer and the software automatically records it in the Accounts Receivable system. In a manual system, you would have to hand-write the invoice and post it to the books after the fact.
* Searching for historical transactions is easy. Most programs have a "find transaction" function that allows you to go directly to entries that you have made in the past. No flipping pages.
* Most programs have warning functions. For example, if you are recording a credit sale to a customer that is in excess of their credit limit, the system will warn you as you are writing up the sale. It is much easier to track credit terms, outstanding receivables and other critical customer information with a computerized system.
* Most of the systems will "walk you through" the initial set up process with wizards. The system asks you a number of questions regarding your business and then it automatically sets up the recording system, based on your industry and your preferences.

As you can see, there are many considerations to take into account in the initial setup process for your bookkeeping system. However, it is comforting to know that you have so many options. Another comforting fact is that no choice is permanent. If you start with a manual system and find it too onerous after six months, you can convert your bookkeeping over to a computerized system relatively easily. If you despise the software that you purchased, most accounting software has a conversion function that will import your accounting history and customer and vendor lists with a few clicks of the mouse.

So, take some time to consider your method up front, but know that you can always change it later on.