Picking Your Bookkeeping Method

Bookkeeping is an essential task when it comes to managing the finances of your small business. It involves keeping track of your incoming and outgoing expenses, recording transactions, and maintaining accurate financial records. Not only does it help you stay organized, but it also enables you to make informed decisions based on your financial data. 

One of the crucial decisions you need to make is choosing the bookkeeping method that works best for your business. There are two primary methods to consider: manual bookkeeping and computerized bookkeeping. Each has its benefits and drawbacks, so let's take a closer look at each one:

1. Manual Bookkeeping:

Manual bookkeeping involves recording financial transactions by hand in a physical ledger or journal. It requires you to create separate accounts for different types of transactions, such as sales, expenses, and inventory. Here are some advantages and disadvantages of manual bookkeeping:

Advantages:

• Cost-effective: Manual bookkeeping doesn't require any expensive software or equipment. All you need is a pen, paper, and a ledger.

• Simplicity: If you're a small business owner with relatively few transactions, manual bookkeeping may be easy to manage.

• Control: Some business owners prefer the hands-on approach of manual bookkeeping, as it allows

  them to have direct control over their financial records.

Disadvantages:

• Time-consuming: Manual bookkeeping can be time-consuming, particularly if you have a high volume of transactions. Recording and consolidating information manually can be a tedious process.

• Prone to errors: Human error is an inherent risk in manual bookkeeping. Transposing numbers, omitting entries, or making calculation mistakes can result in inaccurate financial records.

  
  

• Limited scalability: Manual bookkeeping may not be suitable for businesses with complex financial transactions or those planning to grow rapidly.

2. Computerized Bookkeeping:

Computerized bookkeeping involves using accounting software to record and manage your financial data. You input your transactions into the software, which automates calculations, generates reports, and provides real-time tracking of your finances. Here are some advantages and disadvantages of computerized bookkeeping:

Advantages:

• Time-efficient: With computerized bookkeeping, transactions can be recorded and processed more quickly. This saves you significant time and effort compared to manual bookkeeping.

• Reduced errors: Accounting software comes with built-in checks and balances that help minimize errors. It can catch inconsistencies and prompt you to correct them before they become serious issues.

• Scalability: Computerized bookkeeping is highly scalable, making it suitable for businesses of all sizes

Disadvantages:

• Potential Fraud: Relying too heavily on computers can result in significant issues. As software data continues to migrate to the cloud, the chances for hackers to exploit your company's financial information increase. This not only puts your assets at stake but also exposes you to potential legal liabilities if hackers misuse your employer tax identification details for credit card and business loan frauds. Moreover, there is a risk of internal individuals within the organization accessing this sensitive information, which could lead to embezzlement of funds from daily deposits and manipulation of data in the system. Business owners must be proactive in safeguarding their financial data.

• Technical Issues: When encountering computer-related problems, it is not uncommon for various issues to arise. For instance, while compiling year-end data for your accountant, a power outage might occur, causing disruptions. Additionally, computers can become infected with viruses and malfunction. Furthermore, there is the possibility of users attempting tasks they are unfamiliar with and making mistakes. Rectifying such errors can often be time-consuming and require significant effort.

• Incorrect Information: The accuracy of bookkeeping records relies heavily on the quality of the data entered into the system. If business owners fail to establish account categories correctly, they risk entering incorrect data and generating inaccurate reports.

  Taking the time to properly set up account categories is crucial for maintaining reliable and precise bookkeeping records.