Why computerise my accounting system?

The decision generally comes down to the business owner and their previous experience.

Those who have had a computerised accounting system in the past can see the benefits. They wouldn't contemplate the idea of a manual system and realise they need an efficient accounting system to be serious in business and to get a financial ‘reading’.

New business owners need to be aware that the easiest time to set up a computer-based accounting system is the day they open their business bank account. The longer it’s left, the harder it is to get on top of the initial business purchase entries and get up to date to file the first GST return.

On the other hand, another new business owner may be perfectly happy (for years) using a shoebox system and getting their accountant to prepare their GST. For them to change, they need to see benefits both in efficiency and cost saving. They may reluctantly on-board 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.

More and more business owners are moving their existing or new enterprises to cloud based accounting systems. It is usually only the very small business (such as those owners who are self-employed sole traders or baby boomers) 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:

Pros & Cons of Computerised Accounting Systems

Pros

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
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 final reports 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.
Bank feeds
Feeds come directly from the bank to your software daily. The bookkeeper can either add them or match to existing entries. Bank feeds have revolutionised the bookkeeping function more than anything else. The time saving and accuracy is mind blowing. Your keystrokes are heavily reduced.

What can go wrong with my computerised accounting system?

Inadequate investment
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.
Good setup 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 of subsidiary ledgers (debtors, creditors, 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's 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 Word 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. Finally, never employ an accounts person without a thorough reference check or test - so many people bluff their way into an accounts job. They can destroy your file in a matter of hours. Frightening but true.

Conclusion:

Not surprisingly, we think the pros more than outweigh the cons. But that said, you should be aware of the following if you're going to switch to a computerised accounting system...

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.

Correct setup is vital – done poorly and you have wasted your valuable time. It is really important to have things done right from the start with a correct structure for the Chart of Accounts. Final reports (Profit & Loss account and Balance Sheet) are based on this information.

Unlike Word 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. 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.

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.

Training is critical. 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 destroy your file in a matter of hours. Frightening but true..

Lynley Averis

Lynley is an MYOB Certified Consultant & has been involved in training in New Zealand since 1985. She's written various accounting & MYOB workbooks including co-authoring “Bookkeeping for Dummies”. She has consulted on all versions of MYOB Accounting, Retail and Payroll over the past 18 years and has previously worked for MYOB. She currently consults to NZ businesses on all aspects of business systems - her mission for clients is for them to spend as little time as possible doing accounting!