The Different Types of Accounting Systems
It’s now an exciting time to start a new business in the Philippines, thanks to the steadily improving economy and the easy access to tools that were once just within the reach of larger businesses.
While social media and cloud computing are obvious developments that have changed the nature of running a small enterprise in the past 10 years, the wide availability of accounting systems and other types of enterprise resource planning (ERP) software has likewise created a revolution in Philippine small businesses.
Modern accounting and ERP systems such as SAP Business One have given small business a decisive improvement in both accuracy and labor savings, which in turn allowed more organizations to focus on their growth rather than on the day-to-day minutiae of bookkeeping and accounting.
However, there are multiple types of accounting systems available, and this can confuse small business owners and managers about which ones they may actually need. In this article, we’ll shed some light on the major types of accounting systems as well as some of their differences.
Manual vs. Computerized Accounting Systems
Manual accounting systems are systems that are completely offline, essentially done with traditional journals and ledgers. While they’ve long been obsolete, they are still widely used by many local businesses, particularly microbusinesses. They have the advantage of being relatively quick and easy to get started on. However, human error can be a major issue with these systems, as is the relative slowness and the inevitable duplication of efforts that come from using such systems. They are also much more difficult to scale compared to modern computerized systems.
As the name implies, computerized accounting systems are dependent on computers or computer networks. When one says “accounting system” these days, this is generally the type meant. Computerized accounting systems have been around for decades. However, it’s only recently that they have been widely available even to microbusinesses with very small capitalization.
Generally speaking, they are faster, more accurate, and offer more functionality than any manual system. For instance, SAP Business One is an example of an enterprise resource planning (ERP) system that integrates an organization’s accounting processes with other important business functions, such as inventory, customer service, payroll, and more.
Single-entry vs. Double-entry
Single-entry systems only record each transaction once. This offers simplicity and ease of use, which allows even non-accountants to easily grasp the principles. This makes these systems particularly attractive to single proprietorships and microbusinesses. However, single-entry systems are not able to track liabilities, accounts receivable, and accounts payable, among several other types of advanced transactions. This makes these systems unsuited for an SME or larger.
Double-entry systems are, by far, the most common type of accounting system. You will not typically find accounting software that isn’t double-entry. These systems let you track accounts payable and receivable, liabilities, and all other advanced types of transactions. Double-entry systems allow for accurate reporting and easy error detection and are generally recognized all over the world.
On-site vs. Cloud-based accounting systems
On-site accounting systems can only be accessed from a specific computer or network. They are generally hosted on on-site servers or local drives. They offer a theoretical additional level of security but are also comparatively inconvenient to access and are susceptible to hardware failure and localized disasters. However, many businesses still demand on-site accounting solutions due to unique needs.
The widespread use of mobile technology and secure high-speed internet has popularized the use of cloud-based accounting systems that can be accessed from any compatible device. The use of modern ERP systems like SAP Business One allows internal IT teams to spend less time maintaining servers and enables access from virtually anywhere in the world. This is often the preferred solution for organizations with multiple offices or those that require high mobility.
These are just some of the general types of accounting systems. There are also hybrid systems that incorporate different characteristics from each type. For instance, some ERP and accounting systems like SAP Business One can have both on-site and cloud functionality. They may also be classified according to modularity, specific functions, customization, and other qualities.