Computerized Accounting Systems: Parts, Types and Controls

Quick Answer: A computerized accounting system is software that records a business's transactions once and posts them automatically to journals, ledgers and financial reports, using a chart of accounts you set up. Compared with paper or spreadsheet books it removes arithmetic and posting errors and keeps an audit trail, but it does not catch wrong categories or missing transactions, so bank reconciliation and review still need a person.

A computerized accounting system replaces the paper journal, the ledger book and the hand-built trial balance with software that does the posting for you. You enter or import a transaction once, assign it to an account, and the program updates the ledger, the balance sheet and the profit and loss at the same moment. The judgment calls stay with you.

What is a computerized accounting system?

In a textbook manual system, a bookkeeper writes each transaction into a book of original entry (a sales journal, a cash payments journal, a general journal), then copies totals into ledger accounts at the end of the period, then adds up every ledger balance to prepare a trial balance, then builds the financial statements from that. Every copy step is a chance to transpose digits or post to the wrong page.

A computerized system collapses those steps. The transaction is the record. When you save an invoice, the software debits accounts receivable and credits sales without being told, and the trial balance is always in balance because the program will not accept an entry that is not. The structure of debits, credits and accounts is identical to the paper version; what changes is who does the copying.

That distinction matters for anyone learning bookkeeping. The software does not know accounting rules about what an item is. It only knows the account you picked. For a refresher on who decides what, see bookkeeping vs accounting.

The parts, in the order a transaction passes through them

1. Source document. The invoice, bill, receipt, payroll run, bank or card statement line. The IRS lists sales slips, paid bills, invoices, receipts, deposit slips and canceled checks as the supporting documents behind your books on its records page.
2. Chart of accounts. The list of buckets every transaction lands in: assets, liabilities, equity, income, cost of goods sold and expenses. Setting it up well is most of the work; this site's chart of accounts guide has a numbered example.
3. Entry screens, which act as the journals. Separate forms for invoices, bills, checks, deposits, sales receipts and journal entries. Each form knows which accounts it touches, so a bill always credits accounts payable.
4. General ledger. Updated on save. You can open any account and see every posting with a link back to the form that created it.
5. Subsidiary ledgers. Customer and vendor balances (receivables and payables aging), inventory items, fixed assets. The software keeps them tied to their control accounts in the general ledger.
6. Reports. Trial balance, profit and loss, balance sheet, cash flow, aging reports, sales tax liability. Generated on demand for any date range, not only at period end.
7. Controls and audit trail. User roles, closing dates that lock earlier periods, and a log of who changed what.

Manual versus computerized: what changes?

The row people underrate is "errors that remain." A balanced trial balance in software proves only that debits equal credits. If a $2,400 equipment purchase was booked to office supplies, every report will agree with every other report and all of them will be wrong.

Desktop, cloud and ERP: the three common forms

Desktop software is installed on a computer, with the company file stored locally or on a shared drive. QuickBooks Desktop and older Sage products are the familiar names. It suits a single office that wants its data on its own machines, and it needs a backup routine you run yourself.

Cloud accounting runs in the browser, with the data held by the vendor. QuickBooks Online, Xero and FreshBooks are typical. Bank feeds, multi-user access and an accountant logging in from elsewhere are the usual reasons people choose it. The hosting side, including what you give up, is covered in what is cloud accounting.

ERP systems (enterprise resource planning) such as NetSuite or Microsoft Dynamics 365 put the general ledger inside a larger system that also runs purchasing, inventory, manufacturing and sometimes HR. They fit companies with several entities, warehouses or currencies, and they need an implementation project rather than a weekend setup.

If you are choosing among the small-business products, the accounting software comparison goes through them by need and price.

What data goes into the system?

Most entries come from five streams:

• Bank and credit card transactions. For most small businesses, the IRS notes, the business checking account is the main source for entries in the books. Software pulls these through a bank feed or a file import.
• Sales. Invoices you raise, or daily sales summaries from a point-of-sale or ecommerce platform.
• Bills and purchases. Vendor invoices entered as bills, then paid.
• Payroll. Wages, withholdings and employer taxes, usually posted by a payroll service as a summary entry.
• Adjustments. Depreciation, accruals, prepaid expenses and corrections, entered as journal entries by whoever closes the books.

Bank feeds break. A bank changes its connection, an account is closed, or you need two years of history the feed will not reach back to. The fallback is the statement itself: most systems accept a CSV or a QBO/QFX file. If all you have is PDF statements, QuickBankConvert turns them into CSV, Excel or (on paid plans) a QBO file you can import, one row per transaction. Check the opening and closing balances against the statement before importing.

Which checks still need a person?

Software shifts the work from arithmetic to review. These are the checks that stay manual:

• Bank and card reconciliation every month. Match the ledger to the statement, line by line, and explain every difference. This is what catches missing, duplicated and phantom transactions. The basics are in what is bank reconciliation.
• Reviewing categorization rules. Automatic rules apply a mistake consistently. Scan expense accounts each month for things that do not belong.
• Clearing accounts. Undeposited funds, suspense or "ask my accountant" accounts should be empty, or explained, at month end.
• Aging reports. Receivables and payables in the subsidiary ledgers should match what customers and vendors say they owe or are owed.
• Locking the period. Set a closing date once the month is reviewed so nobody edits it by accident. A full list of steps is in the month-end closing checklist.
• Backups and access. Remove users who leave. For desktop files, test that a backup actually restores.

What does the IRS expect from software records?

The IRS does not require a particular system. Its recordkeeping page says that, except in a few cases, the law does not require any special kind of records, and the records page adds that electronic accounting software should meet the same basic principles as paper books, with all hard-copy requirements applying to electronic records too. You still keep the source documents behind the entries.

In an examination, the IRS electronic records FAQ explains that it may request the software's backup file early, using an Information Document Request, along with an administrator login to read it. The FAQ suggests setting a temporary administrator password for the backup and changing it back afterwards. That is one more reason to keep your file clean: an examiner can see the whole ledger, not only the lines in question. Publication 583 covers how long to keep each kind of record.

Related guides

• Chart of accounts for a small business
• What is cloud accounting
• What is bank reconciliation
• Bookkeeping vs accounting