What is Manual Accounting? | Definition, Uses vs Working

Before the advent of the digital revolution, most business-related activities, mainly financial accounting, used to be done by hand using pen, pencil and paper.

Even today, this traditional manual accounting methodology is prevalent among business entities and companies.

This accounting system entails keeping transaction records in books and journals manually converted into financial reports.

It is important to note that there is no difference between the ideas behind computerised accounting and manual accounting. The only difference is the medium used for recording and accounting transactions.

Key Takeaways

  1. Manual accounting is a bookkeeping method that records financial transactions manually using pen and paper or accounting books.
  2. It is a traditional method used by small businesses and individuals and is inexpensive and straightforward.
  3. Manual accounting requires high accuracy and attention to detail, which is time-consuming compared to computerized accounting.
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Banking Quiz

Test your knowledge about topics related to banking

1 / 10

Which of the following is a type of loan provided by banks?

2 / 10

A loan to pay for a home, business or other real estates over a period of time is a:

3 / 10

What is a mutual fund?

4 / 10

Which of the following is not a currency?

5 / 10

What is the name of the type of loan where a borrower pledges an asset as collateral for the loan?

6 / 10

Which of the following is NOT a banking service?

7 / 10

Which of the following is NOT among the functions of a central bank?

8 / 10

What is a foreign exchange rate?

9 / 10

What is the name of the type of mortgage where the loan balance decreases over time as the borrower makes payments?

10 / 10

What is the name of the investment vehicle where a group of individuals pool their money to invest in a portfolio of securities?

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Who uses Manual Accounting Systems?

Any business or organisation requires an efficient accounting system to gather, store, and maintain financial information.

In today’s digital world, companies can use either manual, computerised, or both accounting systems.

However, the manual accounting system is favoured more when it comes to small or new companies. It is because:

  1. The day-to-day transactions of small and new companies are not that vast.
  2. The manual accounting system is far easier to use than complex accounting software.

How does Manual Accounting work?

Manual Accounting primarily entails using the following physical tools to record and maintain the minutest details of a business’s financial information.

Paper pads and Books

 In the absence of computer spreadsheets and software as the principal mode of keeping financial records, paper pads and books with rows and columns are used by accountants.

Generally, there are four or more printed columns, each separated by two consecutive lines running down the sheet.

The paper’s first column to the left is assigned for writing dates. Therefore, the amount of space left for this column is narrow.

In contrast, the second column is employed for jotting down descriptions. Accordingly, the accountant provides the broadest amount of space for this column.

Transaction amounts and other related details like sales and inventory are jotted down in the remaining columns.

The paper pads are printed in white stock or light green with a room for noting down each digit so that no handwriting-related issues arise.

Journals and Ledgers

These are used for jotting down functioning and final financial documents.

Journals and ledgers support the manual accounting process by helping the accountant keep separate records for different types of transactions.

For example, one set of journals may be assigned for accounting cash sales. In contrast, another group may record payroll.

Once the transactions of these separate accounts are computed, the outcomes are combined into one journal entry in the business entity’s general ledger.

Advantages of Manual Accounting 

Even though it is an old accounting system, its relevance in the contemporary world has not entirely become superfluous.

  1. Cheaper: It is much more economical than installing computerised systems and software.
  2. Less expenditure on employees: As the manual accounting system doesn’t require personnel with specialised knowledge in computers and software, companies have to spend less on accountants.
  3. Less complicated: Not all people are at ease with computers or software. Instead, a pencil and paper make them more efficient in accounting.
  4. Not dependent on electricity: Unlike Computerised accounting, Manual accounting can be done even without electricity.
  5. No duplication or corruption of data: Unlike in Computerised accounting, there is no data duplication or corruption risk.
  6. Detection of potential errors: Manual accounting system entails double-entry accounting, entering credits and debits in two different accounts. This method provides a natural way of detecting errors as the entered debits and credits are compared in a trial balance. An error is detected during the trial balance if the debits do not match the credits.

Disadvantages of Manual Accounting

Despite its various advantages, one cannot deny that Manual accounting has some significant limitations.

  1. Labour intensive:  Manual accounting is an uphill task requiring patience, time, and appropriate accounting knowledge. Therefore, the recruitment of financial accountants is necessary for this accounting method.
  2. Time-consuming:  Unlike Computerised accounting, manual accounting is a slow and time-consuming process.
  3. The potential of human error: One cannot dismiss the chances of possible human error in data entry regarding Manual accounting.
  4. Loss of hard copies: Disasters do not give a warning before arriving. Physical documents like ledgers and journals are prone to theft, loss, fire, water, etc. Producing and storing duplicates is indeed a tedious job. 
References
  1. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3008043
  2. http://search.proquest.com/openview/1609c8ebb95b3a9030a40b81e16c6d4b/1?pq-origsite=gscholar&cbl=48426

Last Updated : 11 June, 2023

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