A manual accounting system is a written, paper-based accounting system that does not involve a computer or software. If you own and operate a very small business, a manual system has several major advantages for you. Like many small businesses, you may start with a manual system, then move to a software-based system as your company grows.
In a manual accounting system, generally you or your bookkeeper records all transactions manually in a book called a general ledger and in subsets of books often called journals. You can use a bound general ledger but, for ease of use, most use a binder and general ledger paper. You also make all calculations manually but may use a calculator or adding machine. Because you can lock the accounting books in a safe, manual accounting can provide a high level of security. In addition, manual accounting systems remove the risk of computer problems erasing your records.
A major strength of using a manual accounting system is it requires you to develop a deeper understanding of accounting. Knowing how what you do in your business affects the numbers and accounting values can help you use the accounting and financial information to make decisions that drive value to your company. On a base level, you must clearly understand debits and credits and how the increase in one account causes a decrease in another account. Many small business owners with computerized systems never fully grasp the debit and credit relationship.
As a part of deepening your understanding, you must clearly know how to classify accounts receivable and payable, reduce the book value of an asset by its depreciation and decrease loan liabilities by the amount of the principal payments. You must understand what constitutes a direct general ledger transaction and what goes into the sub-books or journals. Without this knowledge, you cannot properly perform your accounting duties. With a software-based system, the software performs many of these functions automatically.
Another major strength is the paper trail that manual accounting produces. Your business may track enough data to complete annual tax returns but have large amounts of missing support data for an Internal Revenue Service audit. Not so with a manual accounting system. Your company must manually record each and every transaction and save the corresponding receipts in case of human error. You must transfer data from the journals into the general ledger. This requires a significant level of attention to detail.
As your business grows and you move to computerized systems, you will have developed the excellent habit of maintaining a strong paper trail. If your business grows large enough to justify an external audit by a CPA firm, your company will only need to document its processes. If you obtain government contracts in the future, you will have minimal concerns about contract compliance audits because you established your internal tracking system at the beginning.