What is Manual Accounting? | Definition, Uses and 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 methodology called manual accounting is prevalent among business entities and companies.

This kind of accounting system entails keeping transaction records in the form of books and journals which are then manually converted into a set of 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.

Who use Manual Accounting Systems?

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

In today’s digital world, companies have the choice to use either manual or computerised or both types of accounting systems.

However, when it comes to small or new companies, the manual accounting system is favoured more. 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 the usage of 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 the accountants.

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

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

In contrast to that, 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 and the like are jotted down in the remaining columns.

The paper pads are often 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 provide support to the manual accounting process by helping the accountant to keep separate records for different types of transactions.

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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 then combined into one journal entry in the business entity’s general ledger.

Advantages of Manual Accounting 

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

  1. Cheaper: It is much 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 when it comes to accounting.
  4. Not dependent on electricity: Unlike Computerised accounting, Manual accounting can be done even when there is no electricity.
  5. No duplication or corruption of data: Unlike in Computerised accounting, there is no risk of data duplication or corruption.
  6. Detection of potential errors: Manual accounting system entails double-entry accounting that is entering of 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. During the trial balance, if the debits are found not matching the credits, an error is detected.

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 and requires a lot of 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. Potential of human error: One cannot dismiss the chances of possible human error in data entry when it comes to 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 and the like. 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