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Advantages and disadvantages of a manual accounting system

Accounting is an important part of every company. Gama Sdn Bhd. has to reveal certain financial and management information to the external and internal users. Moreover, accounting is a necessary tool in business decision-making process. From this point, there are two structures of financial system in preparing the financial statement, which consists of Manual Accounting System and Computerized Accounting System. These two accounting system acquire to help an auditor to do an inspection or checking on the ledger, journal, and cashbook in order to avoid an error.

2.0 MANUAL ACCOUNTING SYSTEM

According to the www.completebusinessstartup.co.uk, (2009) Manual Accounting System is defined as a traditional form of maintaining a business’s accounts and records. Although the use of basic manual accounting system requires little knowledge or competence in accounting, it is still the preferred method of accounting for those who have used it in the past. Manual accounting system is controlled by an auditor to check all documents in the right position by using paper, pen and calculator. In addition, all entries are handwritten and all records are prepared by hand, although admittedly with the aid of a calculator.

Manual accounting system implies that employees of Gama Sdn Bhd perform the completely accounting cycle manually on a periodic basis. Mr Felix, as a chartered accountant of Gama Sdn. Bhd calculates the trial balance, journal transaction, and prepares financial statements. Of course it takes much time, resources and effort in completing these works. According to the scenario, Ms Jane instantly prepares a listing of the cash and cheques and a duplicate deposit slip. Cash and cheques are deposited daily in the bank of Jane. In addition, she uses the listing to prepare the cash receipts journal and update account receivable in the general ledger system. This shows that Ms Jane did her work manually whereby she did the preparation and update by hand.

The steps of Manual Accounting System

Source : www.turbocashuk.com

The first step is input. All transaction data of document sources such cash slips, deposits, cheques, invoices, and else are sorted according to the type of transactions, physically entered into specific journals via handwritten.

The second step is process. The journals are balanced off, and then posted to the general ledger and subsidiary ledgers. For examples are debtor's ledger, creditor's ledger, stock records, and many more.

The third step is output. A trial balance lists the entire debit and credit balances. It is drafted to check the arithmetic accuracy and financial reports and statements. Some reports are including Income Statement, Balance Sheet, Debtor Statements, Creditor Remittance Advises, and else.

The last step is safeguard records. The books of account and supporting documents need to be safeguarded from unauthorized access, fire, theft, and so on.

2.1 ADVANTAGES OF MANUAL ACCOUNTING SYSTEM

The first advantage is that the system is easily understandable. An auditor can monitor all transactions including journal, ledger, cash book and else easily because it has hard copies of all records. Furthermore, calculating figures, insert the details, and writing down numbers and transactions helps mind to remember all the details and figures easily rather than typing in computerized accounting system. Therefore, Mr Felix may gain a greater understanding through this manual accounting system because every step is written by hand in paper system.

Secondly is skilled workers availability. For example, an auditor audits all documents by using all skills and knowledge in auditing. These workers have been trained by the management in order to avoid an error in preparation of the financial statement. In addition, the identity of the person entering the data can possibly be proven by the person's handwriting. Through the evidence of person’s handwriting, it is easy for manager to determine who is accountable to make a correction of error in these documents. That person will be responsible for errors or fraud.

2.2 DISADVANTAGES OF MANUAL ACCOUNTING SYSTEM

Meanwhile, there are few disadvantages for Gama Sdn Bhd to consider in maintaining the manual accounting system. By using this manual system, it can be time consuming because an auditor has to move numbers from one report to another manually.

For example, Mr. Felix enquires Ms Jane to audit on all the documents of Gama Sdn. Bhd. However, the Head of Internal Audit Department informed to Mr Felix that Ms Jane had persistently made several posting transaction errors in the accounting systems that it affects company’s financial statement. She did so by overstating figures in sales, recording improper credits to recorded account receivable and overstating receivable. This makes it difficult for the auditor to make corrections because it takes time for an auditor has to check again all the correct figures and particulars in manually.

Besides that, it reduced speed in using manual accounting system. The reason is an auditor has to check all the particulars and figures compared to using a computerized system. In addition, an auditor checks all the figures by using calculator manually while computerized system is automatically calculated by using software such Microsoft Excel. Therefore, it reduces the speed of works for an auditor to check the documents and prepare the financial statement as a result.

3.0 COMPUTERIZED ACCOUNTING SYSTEM

The computerized accounting system is based on the concept of database. A computerized accounting system also processes all the transaction from the sources such journal, ledger, cashbook, trial balance and many more by using software.

Besides that, computerized accounting system has two components, which is hardware and software. According to the Weygandt, Kieso and Kell (1997), hardware can be defined as the physical equipment associated with a computerized accounting system. The physical equipment is consists of disk drives, monitors, printers, and network to connect. Most systems require a network to link different computers sharing the same information.

Based on the T.H. Charles, (2000), software is a set of programs that drives the computer. Accounting software consists of programs that relate to specific parts of the accounting process. For example, there are programs for the general ledger and each subsidiary ledger, and there are programs for performing the steps in the accounting cycle such as record into the journal, posting, and preparing a trial balance. In addition, there is software for business function such as billing, preparing the payroll, and budgeting. Gama Sdn Bhd bills all its clients rather than collecting in cash and cheques when services are provided.

3.1 ADVANTAGES OF COMPUTERIZED ACCOUNTING SYSTEM

The first advantage of computerized accounting system is timesaving. It is fair to say that a computerized accounting system is much quicker than a manual accounting system as all the user has to do is enter the data into the computer. Then, the computer will make the calculations, produce, and print out any reports, invoices or credit notes at a touch of a button. Thus, it can save time for accountant to do the other job as well.

Besides that, speed and accuracy is increased by using computerized accounting system. The main benefit of the computerized accounting system is to carry out the processing stage quicker, more consistently and accurately than the manual accounting system. These are few of the main benefits of a computerized system as it is able to produce reports immediately for example customer statements or more enhanced reports such as a cash flow analysis. In addition, an error of calculation will not happen by using computer, unless if there is overstated, understated, or misstatements of figures. Therefore, it shows accuracy by using computerized accounting system because software of Microsoft Excel calculates all figures correctly.

3.2 DISADVANTAGE OF COMPUTERIZED ACCOUNTING SYSTEM

The first disadvantage is that it is costly. This is because a system must be updated, electrical charges, training cost for staff to use the system effectively and many more. For example, Mr Felix must provide full training to Ms Jane in term of auditing knowledge and skill and applying it to the system. The purpose of training is to avoid errors from occuring.

Besides that, computerized accounting system can be affected by virus. There are so many viruses accessible nowadays that it may destroy the software and files in the system including data and transaction. All the files in the system will be lost and it will affect the financial statement of Gama Sdn Bhd as well. In addition, sometimes power failure, breakdowns or crashes may affect the system and data loss may occur. Moreover, computer hackers can be one of the factors that may affect the financial statement of Gama Sdn Bhd. This unauthorized people can gain access to a computer files and make amendments to those files.

4.1 SOURCE OF DOCUMENT

The source of document is the original record of transaction. Example of sources documents includes receipts, invoices, memos, cheques, credit note and many more. Ms. Jane prepares a listing of the cash and cheque and a duplicate deposit slip regarding to the receipts of cash and cheques.

For example, Gama Sdn Bhd purchases furniture RM5,000 on 1st January 2010 from Joseph James on credit. The purchase of furniture on credit will be transfer to journal transaction.

4.2 BOOKS OF ORIGINAL ENTRY

Books of original entry are a book, which used in recording the transactions for the first time. This original entry must be recorded first in journal transaction. There are three types of journal, which consists of general ledger, purchase journal, and sales journal.

4.3 DOUBLE ENTRY SYSTEM

A double entry system is used to record the business transactions which then recorded in a ledger accounts. The ledger account is usually referred to as ‘T’ Account. This double entry must be recorded in both debit and credit sides in appropriate format. The example of double entry system is shown below:

Based on the account above, Gama Sdn Bhd purchased a furniture of RM5,000 from a creditor, Mr. Joseph James on credit. In double entry system rules, every transaction affects at least two accounts as above, purchases account and Joseph James as creditor. Moreover, both of these accounts must be recorded in the appropriate side of debit and credit.

Sometimes, mistake occurs from this transaction where there is not balanced off for both debit and credit sides. In a simple word, once transaction is debited, and one more must be credited for equal transaction in balancing them. This double entry will then be posted into the trial balance.

4.4 TRIAL BALANCE

The purpose for preparing this trial balance is to make sure that debits are equal with credits. Normally, an auditor makes a mistake in a ledger and journal that may affect on trial balance. If the trial balance is not in balance, then an error has been made somewhere in the accounting process. The example mistakes made such as transaction recorded in the wrong accounts, transaction for which the debit and credit were transposed, neglecting to post a journal entry to the ledger, error in calculation and many more. The example of trial balance is shown below:

4.5 INCOME STATEMENT

Preparing the income statement is to find out gross profit or gross loss and net profit or net loss. Example of income statement is shown below. Assuming net sales is RM12000.

4.6 BALANCE SHEET

The items including on this balance sheet are non-current assets, current assets, non-current liabilities, current liabilities, and owner’s equity or capital.

5.0 CONCLUSION

As conclusion, Gama Sdn Bhd does not manage the accounting system efficiently because Ms Jane made a mistake by made several material posting transaction errors that distorted the financial statement of company. Therefore, Gama Sdn Bhd can make a corrective action by applying computerized and manual accounting system properly. Moreover, training in term of skills and knowledge in auditing must be given to Ms Jane. In addition, all of the steps in accounting cycle must be following accordingly in order to prepare a good financial statement of company.

Finally, we recommend Gama Sdn Bhd using computerized accounting system because this system allows Gama Sdn Bhd to record business transactions accurately and generate financial reports quickly for management review. We recommend Gama Sdn Bhd to use computerized accounting system because it reduces cost and risk in order to get it efficient and achieve at the minimum level. Moreover, the speed is faster than manual accounting system. It influence decision-making of auditor towards Gama Sdn Bhd and reduce failure of computer system such disaster recovery. The last one is getting a proper authorization from information technology department such initial signature and official chop stamp.

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