The basic advantage of a computerized accounting system are efficiency and speed. In a manual system receipts and disbursements are initially recorded in registers. This can involve writing a check and then writing a description in a register or this can be done on a one-write system. Either way the transactions in the registers must be manually posted to the general ledger and then compiled into financial statements. This manual transfer of information is time consuming and subject to error (such as transpositions).
In a computerized accounting system all the multiple steps of a manual system are collapsed into one entry. For example when you create a check there is an automatic and simultaneous posting to a register and to the general ledger accounts. Financial statements can be created at any time and as often as needed.
You would think that with these advantages computerized accounting would be both cheaper and more error free than manual accounting. But it turns out that this is not always true. First of all while software costs have come down there is a fairly big learning curve involved in using the software properly. Much of the problem lies in ill conceived software design.
The problem of poor design stems from an over ambitious attempt on the part of developers to allow users with no bookkeeping training to make entries without reference to the debit and credit structure. In other words the software hides this structure on the assumption that the user does not understand it. All manner of problems ensue from this design flaw. Often even CPAs and experienced bookkeepers cannot figure out what is going on with these software packages. This necessitates expensive training and consultation with experts in the software.
It would be far better if the software mirrored and exposed the debit and credit structure so anyone with basic bookkeeping knowledge could understand how to use the software. I am convinced anybody can learn the debit and credit system within a few hours (see my book). But the software developers believe that business owners are too stupid or intimidated to learn the system and that it has to be hidden. This causes all kinds of expensive problems.
The software developers also try to set up default charts of accounts and financial statement formats that create all manner of problems that could be avoided simply by insisting that the user learn enough about accounting and their own business. Again these “simplifying ” designs increase the reliance on expensive experts.
Finally, developers make money not by selling excellent and reliable software that works for years, but by selling frequent “new and improved” upgrades. But guess what? An accounting package that was any good to begin with should not require frequent upgrades, or for that matter any upgrades at all. Basic bookkeeping and financial statement compilation procedures have not changed for centuries. Yet any popular software package user will be inundated with new versions of the package which will require yet more expensive consultations. Most of these upgrades are simply unnecessary bells and whistles or fixes for bugs that should have never been in earlier versions.
So what should a small business do? By all means buy a software package such as Quickbooks or MYOB. But do not expect that your costs will end with the purchase of the package. Undoubtedly you will need to pay a consultant to set the program up and give you basic training. Sadly, overall cost savings from conversion from a manual system will not be as great as they should be.
Most importantly all small business owners should have at least a rudimentary understanding of financial accounting so they can see whether financial statements generated from computerized accounting software makes sense. Reading my book, Financial Accounting: A Mercifully Brief Introduction, will provide just such an understanding.