Why computerise my accounting system?

The decision generally comes down to the owner and their previous experience. Those who have had a computerised accounting system in the past can see the benefits and the pitfalls. They wouldn’t contemplate the idea of a manual system and realise they need an efficient accounting system to be serious and compete in the market place.  Owners may also be aware, that the easiest time to set up a computer based accounting system is the day they open their business cheque account.

On the other hand, another owner may not have prior experience and be perfectly happy (for years) using a manual cashbook. For them to change, they need to see benefits both in efficiency and cost saving. They may reluctantly change after a heart-to-heart with their accountant. Occasionally owners computerise only one part of the system (typically invoicing) but all other parts are done manually. I know of one business owner (an accountant in a previous life!) who using a computerized system but still calculates his GST using a simple cashbook (using a spreadsheet).

All that aside, more and more business owners are moving their existing or new enterprises onto computerised systems. It is usually only the very small business (such as those owners who are self-employed sole traders) who continue to work with a manual handwritten cashbook and handwritten invoices. These small businesses are heavily reliant on their accountant for financial reports.  They generally keen an eye on their bank statement for a financial ‘reading’. They have only a vague idea of their ‘profit’ until 6 months after the end of the financial year (when they get their accounts).

There are both advantages and disadvantages of using computer based systems over manual systems so here goes:

Advantages (& benefits) of computerised accounting:

Automatic ledger entries

The general ledger accounting systems gets automatically updated once the entry in a subsidiary ledger is posted. For example, when invoicing a debtor through the Debtors Ledger there is an automatic entry made to the general ledger. This means if all entries are recorded the general ledger is up to date.

Accounts always in balance (Debits = Credits)

Computerised systems recognise double entry bookkeeping where for every debit entry there is a corresponding credit entry made. The computerised accounting system accounts are always in balance.  For example, when entering a payment, the system will not allow you to record a transaction unless you have allocated to an expense (or other) account.

Accuracy and speed of automatic calculations (such as GST and invoices)

Computerised systems have automatic calculations built in and therefore there is a slim chance of making mistakes calculating invoices and GST. The system automatically calculates GST inclusive and exclusive figures. This means GST reports and forms provided all relevant entries have been made. Invoicing is usually a breeze because all lines (quantity x price) is calculated automatically.

Automatic production of a trial balance from ledger entries

Computerised systems create a trial balance automatically. For example, when electricity is paid, the Bank account (Asset) gets credited and Electricity (Expense) account gets debited. Both figures would be included if you were to run a trial balance. From a trial balance we produce a Profit and Loss Statement and a Balance Sheet and both are generated in seconds.

Potential to create customised reports and provide additional analysis

Computerised systems allow you to customise professional looking reports (which may include your company details and logo). These reports provide additional analysis which may be needed by the bank, shareholders, suppliers and/or the owners. Far less time is spent creating reports than using a manual system.

Lower accounting fees

This may or may not eventuate and depends on the ability of the business to produce an accurate set of accounts from their computerised system. With competent set up and good training and accurate inputting, then yes, accounting fees should definitely be lower as you are reducing the workload of your accountant doing your bookkeeping.  If your fees increase, then ask why! You can always ask for timesheets to justify your accounting fees.

Computerised files produced by businesses  and supplied to accountants vary from very bad to outstanding. If  your file is on the ‘bad’ end of the scale it will need many corrections done! Good communication between you and your accountant is vital.

Disadvantages of computerised accounting systems:

Incorrect or inadequate structuring of Chart of Accounts

Business owners often believe that they should take the DIY approach to accounting/bookkeeping. They think the investment is in the hardware (computer) and the software (accounting programme) and that’s all there is to it. The rest they will pick up as they go along – WRONG! The biggest cost is usually that of your consultant (who may be your accountant) so budget for it.

Consultancy and training is vital – done poorly and you have wasted your valuable time. It is really important to have things done right from the start starting with a correct structure for the Chart of Accounts. Final reports (Profit & Loss account and Balance Sheet) are based on this information. The more accurate your chart of account is, the better the reports would be and better the information they give. An incorrect or inadequate list will produce entirely wrong reports and that would not benefit any business. It defeats the purpose of accounting and printing reports if the chart of accounts is not correct. This all comes down to correct set up.

Incorrect set up (debtors, creditors, cashbook, inventory)

Best practice must be adhered to when it comes to setting up debtors, creditors, cashbook, inventory and job costing. Your consultant and/or accountant will advise you here. They won’t necessarily do the work but should point you in the right direction.

Increased training requirements

It is true that computerized systems require competent, well trained staff to run them. The term GIGO (Garbage in, Garbage out) has never been more true of a computerized accounts system. Unlike MsWord or Excel where a little knowledge goes a long way, staff must be properly trained in the correct use of their accounting software as they have choices – if a bad choice is made then we may end up with a wrong entry. It could be that one staff member treats an entry one way, while another does something entirely different! This lack of consistency can turn the accounts into a nightmare and cost the business more than less as someone (usually the consultant or accountant) needs to sit down and fix it. Staff need to be properly trained on the correct use of the program and new employees also need good training.

Never employ an accounts person without a thorough reference check or test – so many accounts people bluff their way into an accounts job. They can distroy your file in a matter of hours. Frightening but true..

Higher initial costs

For businesses to change from manual accounting system to computerised system there are costs involved. The businesses with one workstation needs to spend the following:

Items Costs

1. Computer (prices vary) $1000+
2. Printer $100+
3. Computerised accounting software (one off cost) $450+
4. Set up, consultancy and training $1000+ (depends on complexity and prior experience)
5. Business Support Fee $50 per month (optional)

Total Costs (one off) $2500+