Applications of Computers in Accounting

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Test Your Understanding – I
Fill in the correct words :

  1. The user oriented programmes designed and developed for performing certain specific tasks are called as ……….. (Application software)
  2. Language syntax is checked by software called as ……….. (Language processor)
  3. The people who write programmes to implement the data processing system design are called as ……….. (Programmer)
  4. ………..is the brain of the computer. (CPU)
  5. ………..and ………..are two of the important requirements of an accounting report. (Timliness, Relevance)
  6. An example of responsibility report is ……….. (Cash position, Management responsibility)
Short Answers

1. State the different elements of a computer system.
A computer system consists of the following six elements.

  1. Hardware: Hardware comprises of electronic and electromechanical physical components. Examples include Processor, Hard Drive, Keyboard, Mouse, Monitor etc.
  2. Software: Software comprises of a a set(s) of programs. These programs work with the hardware. When a set of instructions are coded and stored in the form of circuits, it is called as firmware. Software is further classified into the following:
    1. Operating System: Operating system comprises of specialized programmes. These specialized programmes are integrated. They manage the resourses of a computer and also facilitate its operation. It functions as interface between the user and the hardware.
    2. Utility Programmes: Utility programmes comprises of a set of computer programs designed to perform specific supporting operations. Examples include
      1. programmes that format a disc
      2. programmes that duplicate a disc
      3. programmes that physically recognize stored data and other programs
    3. Application Software:Application software comprises of user oriented programs. These are designed and developed to handle certain specific requirements. Examples include payroll accounting software, inventor accounting software, financial accounting software etc.
    4. Language Processors: They comprise of the software that
      1. Take the source program (A source program is a language written in a computer language like C, Java, Python etc)
      2. Check the language syntax and highlight any errors
      3. Finally translate the source program into machine language (Machine language is the language that a computer can understand)
    5. System Software: They comprise of a set of programmes that control internal functions like
      1. Reading data from input devices
      2. Transmitting the data to the output devices
      3. Checking the system to ensure that its components are functioning properly.
    6. Connectivity Software: It comprises a set of programmes that will help the computer to create a connection between the computer and the server. They also control the connection once the connection is established. The purpose is
      1. Communicate with the server and other connected computers.
      2. Share the resources available on the server and other connected servers.
  3. People: People are the most important elements of the computer system. They comprise of the people interacting with the computer. They are also called as live-ware of the computer system. People can be classified into
    1. System Analists who design the data processing systems.
    2. Programmers who develop the programmes to implement the data processing systems as per the design.
    3. Operators who operate the computers.
    4. People who respond to the procedures installed for executing the computer programmes
  4. Procedures: Procedures refer to a series of operations executed in a certain order or manner to achieve the intended results. Procedures in a computer system can be classified as:
    1. Hardware-oriented: These procedures provide details about the components and their method of operation.
    2. Software-oriented: These procedures provide a set of instructions for using the software.
    3. Internal Procedures: They are put in place to ensure that there is smooth flow of the data to the computers. This is achieved by sequencing the operation of each sub-system of the computer system.
  5. Data: Data usually exists in the form of numbers, text etc. The data is collected and fed into the computer system. The computer system processes this data and produces the information according to a predetermined set of instructions by
    1. storing
    2. retrieving
    3. classifying
    4. organizing
    5. and sythesising the data

    Processed and organized data can then be used for decision-making.

  6. Connectivity: This is also called as the sixth element of a computer system. The element of connectivity is the manner in which a computer system is connected to other computer systems i.e. through telephone line, microwave transmission, satellite link etc.
2. List the distinctive advantages of a computer system over a manual system.
The following are the distinctive advantages of a computer system over a manual system.

  1. Speed
  2. Accuracy
  3. Reliability
  4. Versatility
  5. Storage

3. Draw block diagram showing the main components of a computer.
The following is the block diagram of the main components of a computer.
Block Diagram of Main Components of Computer
Block Diagram of Main Components of Computer
4. Give three examples of a transaction processing system.
The following are the examples of a transaction processing system.

  1. ATM
  2. Airline, Rail or Bus ticket reservation system.
  3. POS (Point of Sale) checkout systems in a store/super-market.
5. State the relationship between information and decision.
An organization is a system that accepts inputs and transforms them into outputs. To achieve the organization’s objectives it will have a collection of interdependent decision making units. These decision making units follow the managerial decision-making process to allocate reources in an optimum way to achieve the organization’s objectives. In this procecss they use the information to arrive at decision making. Thus information plays the role of most important organizational resource to arrive at decision.
6. What is Accounting Information System?
Accounting information system is a system that identifies, collects, processes and communicates economic information about an entity to a wide variety of users.
7. State the various essential features of an accounting report.
The following are the various essential features of an accounting report.

  1. Relevance
  2. Timeliness
  3. Accuracy
  4. Completeness
  5. Summarization
8. Name three components of a Transaction Processing System.
The following are the three components of a Transaction Processing System.

  1. Input: The entire transaction data collected through customer orders, purchase orders, invoices etc acts as input to the Transaction Processing System. The input goes through the following steps.
    1. Data Entry
    2. Data Editing
    3. Data Validation
    4. Data Manipulation
  2. Storage: The processed and validated transaction data is stored into a storage unit specific to the organization. It could be hard disc or database or in the cloud.
  3. Output: The stored data is processed to generate reports that help in decision-making process. SQL (Structured Query Language) is often used for generating reports.

9. Give example of the relationship between a Human Resource Information System and MIS.
The following are the examples of the relationship between a Human Resource Information System and MIS.

  1. Human Reource Information Systems interact with MIS and gather the details of the resource requirement. Based on this, it evaluates the need of Human Resources and hires employees.
  2. Decision-making regarding the employee/worker salaries/wages and other benefits based on the inputs from MIS.
  3. Based on the feedback from other systems in MIS, evaluate and monitor the performance of the employees/workers.
Long Answers



1. ‘An organisation is a collection of interdependent decision-making units that exists to pursue organisational objectives’. In the light of this statement, explain the relationship between information and decisions. Also explain the role of Transaction Processing System in facilitating the decision-making process in business organisations.
An organization is a system that accepts inputs and transforms them into outputs. Every organization will have its own objectives. To pursue these objectives, it will have a collection of interdependent decision making units. These decision making units follow the managerial decision-making process to allocate reources in order to achieve the organization’s objectives. In this procecss they use the information to arrive at decision making. Thus information plays the role of most important organizational resource to arrive at decision. Organizations will have a well established information systems that help them to generate the information that is needed for decision-making.
As the organizations started to depend more and more on the information systems, Transaction Procecssing Systems (TPS) started to play a vital role in supporting the business operations. A Transaction Processing System (TPS) typically consists of three components.

  1. Input
  2. Processing
  3. Output

As the Information Technology follows GIGO (Garbage In – Garbage Out) principle, it is important to feed these IT-based information systems with input that is

  1. Accurate
  2. Authorized
  3. and Complete

To achieve this, the input to these information systems is automated.
TPS is one of the computerized systems to serve the needs of large business organizations. The purpose of TPS is to

  1. record
  2. procecss
  3. validate
  4. and store

transactions that occur in various functional areas of business. The information related to these transactions is retrieved and used later.
Thus, being a sole provider of information required for decision-making, TPS plays a critical role in facilitating the decision.

2. Explain, using examples, the relationship between the organisational MIS and the other functional information system in an organisation. Describe how AIS receives and provides information to other functional MIS.
Organizations depend to a great extent on the Information Systems. The most common form of such informaiton system is Management Information System (MIS). It provides the information required for

  1. taking the decisions
  2. and managing the organization effectively

MIS works in favour of organization’s long term strategic goals and objectives.The management views and uses MIS at various levels like

  1. Operational
  2. Tactical
  3. Strategic

The organization has various sub-systems performing various functions. The business processes established in these sub-systems provide the information to the MIS. Thus MIS has close related with the various functions handled by these sub-systems. The following are the various information systems that has close related to the MIS.

  1. Accounting Information System.
  2. Human Resources Information System.
  3. Manufacturing Information System.
  4. Marketing Information System.
  5. Sales Information System.

Below is a diagrammatic representation of the same.

Relationship of the accounting system with other functional management information system
Relationship of the accounting system with other functional management information system

Accounting Information System (AIS) is one of the sub-functional area of MIS. It receives and provides information to other functional areas of MIS. AIS comprises of resources (equipment and people). It transforms the input data into information. This information is communicated to other functional areas in MIS. The other functional areas use this information in decision-making and control. A computerised accounting system is a sub-component of the Accounting Information System. It transforms the financial data into meaningful information and then communicates the information to the decision-makers. The following examples illustrate the relationship and data interface between AIS and other sub-systems of MIS.

  1. Accounting Information System, Manufacturing Information System and Human Resource Information System: The relationship between these three sub-systems is illustrated in the following figure:
    Relation of Accounting Information System with Manufacturing Information System and Human Resources Information System
    Relation of Accounting Information System with Manufacturing Information System and Human Resources Information System

    1. The manufacturing department receives the list of workers from the Human Resources department.
    2. The manufacturing department then sends the details of the production achieved by the workers to the Human Resources department.
    3. The Human resources department uses this information, prepares the details of wages to be paid and sends this information to the Finance and Accounts(F&A) department.
    4. The Finance and Accounts (F&A) department then sends the details of the wages paid and statutory dues to the production and HR department.
    5. HR and production/manufacturing department uses this information and continue to monitor the performance of the workers.
    6. HR department communicates to other departments the information related to good/bad performance of workers.
    7. The other departments use this information for decision-making with respect to various operational aspects.
  2. AIS and Marketing Information System and Sales Information System: In the marketing Information System, the business processes involve the following activities
    1. inquiry
    2. contact creation
    3. entry of orders
    4. dispatch of goods
    5. billing to customers

    The accounting sub-system handles the transactions that include

    1. processing of sales orders
    2. credit authorization
    3. custody of the goods
    4. inventory position
    5. shipping information
    6. receivables
    7. keeping track of customer accounts i.e. Ageing Report.

    The information related to the above processes (generated by AIS) will be used by the Marketing and Sales Information Systems for decision making.

  3. AIS and Manufacturing Information System: In the Manufacturing Information System, the business processes involve the following activities
    1. preparation of plans and schedules
    2. issue of material requisition forms and job cards
    3. issue of inventory
    4. issue of orders for procurement of raw materials
    5. handling of vendor invoices
    6. payment to vendors

    The accounting sub-system handles the transactions that include

    1. processing of purchase orders
    2. advance to suppliers/vendors
    3. inventory status updates
    4. accounts payable etc

    The information related to the above processes (generated by AIS) will be used by the Manufacturing Information Information Systems for decision making.

3. ‘An accounting report is essential a report which must be able to fulfil certain basic criteria ‘ Explain? List the various types of accounting reports.
Data is processed to generate information. When the related information is summarized to meet a specific need, it is called as report. The content and design of the report varies depending on the level to which it is submitted and decision to be made on the basis of the report. The report generated should be effective and efficient to the user for whom it is generated. The report should also act as a strong supporting factor for the decision to be made. To fulfil the above requirements every accounting report must fulfil the following basic criteria:

  1. Relevance
  2. Timeliness
  3. Accuracy
  4. Completeness
  5. Summarisation

The following are the various types of accounting reports:

  1. Summary Reports: In this, all the activities of the organisation are summarised and presented. Examples include Profit and Loss account and Balance Sheet.
  2. Demand Reports: These are the reports that are prepared only on demand basis from the management. Examples include Bad Debts report for a give product, Stock Valuation Report etc.
  3. Customer/Supplier Report: These are the reports that are prepared as per the specifications from the management. Examples include Top 10 Customer reports, Interest on Customer Account/Invoices, Statement of Account, Customer Reminder Letters, Outstanding/Open Deliver order, Purchase Analysis, Vendor Analysis report.
  4. Exception Reports: These are the reports that are prepared according to the conditions or exceptions. Examples include Inventory Report in short supplies, Stock status query, Over stocked status etc.
  5. Responsibility Reports: These are the reports that are prepared for the management at different levels. The level of details in the report depend on the responsibilities of the manager for whom this report is prepared. So, these reports completely depend on the MIS structure. Examples include Cash Position to be submitted by the head of the Finance and Accounts department etc.
4. Describe the various elements of a computer system and explain the distinctive features of a computer system and manual system.
A computer system consists of the following six elements.

  1. Hardware: Hardware comprises of electronic and electromechanical physical components. Examples include Processor, Hard Drive, Keyboard, Mouse, Monitor etc.
  2. Software: Software comprises of a a set(s) of programs. These programs work with the hardware. When a set of instructions are coded and stored in the form of circuits, it is called as firmware. Software is further classified into the following:
    1. Operating System: Operating system comprises of specialized programmes. These specialized programmes are integrated. They manage the resourses of a computer and also facilitate its operation. It functions as interface between the user and the hardware.
    2. Utility Programmes: Utility programmes comprises of a set of computer programs designed to perform specific supporting operations. Examples include
      1. programmes that format a disc
      2. programmes that duplicate a disc
      3. programmes that physically recognize stored data and other programs
    3. Application Software:Application software comprises of user oriented programs. These are designed and developed to handle certain specific requirements. Examples include payroll accounting software, inventor accounting software, financial accounting software etc.
    4. Language Processors: They comprise of the software that
      1. Take the source program (A source program is a language written in a computer language like C, Java, Python etc)
      2. Check the language syntax and highlight any errors
      3. Finally translate the source program into machine language (Machine language is the language that a computer can understand)
    5. System Software: They comprise of a set of programmes that control internal functions like
      1. Reading data from input devices
      2. Transmitting the data to the output devices
      3. Checking the system to ensure that its components are functioning properly.
    6. Connectivity Software: It comprises a set of programmes that will help the computer to create a connection between the computer and the server. They also control the connection once the connection is established. The purpose is
      1. Communicate with the server and other connected computers.
      2. Share the resources available on the server and other connected servers.
  3. People: People are the most important elements of the computer system. They comprise of the people interacting with the computer. They are also called as live-ware of the computer system. People can be classified into
    1. System Analists who design the data processing systems.
    2. Programmers who develop the programmes to implement the data processing systems as per the design.
    3. Operators who operate the computers.
    4. People who respond to the procedures installed for executing the computer programmes
  4. Procedures: Procedures refer to a series of operations executed in a certain order or manner to achive the intended results. Procedures in a computer system can be classified as:
    1. Hardware-oriented: These procedures provide details about the components and their method of operation.
    2. Software-oriented: These procedures provide a set of instructions for using the software.
    3. Internal Procedures: They are put in place to ensure that there is smooth flow of the data to the computers. This is achieved by sequencing the operation of each sub-system of the computer system.
  5. Data: Data usually exists in the form of numbers, text etc. The data is collected and fed into the computer system. The computer system processes this data and produces the information according to a predetermined set of instructions by
    1. storing
    2. retrieving
    3. classifying
    4. organizing
    5. and sythesising the data

    Processed and organized data can then be used for decision-making.

  6. Connectivity: This is also called as the sixth element of a computer system. The element of connectivity is the manner in which a computer system is connected to other computer systems i.e. through telephone line, microwave transmission, satellite link etc.

The following are the distinctive features of a computer system.

  1. Speed: As compared to humans, computers have a fast operating cappability and require far less time in performing a specific task. The relevant unit of time is fraction of a second. Many modern day computers are capable of performing 100 million operations per second.
  2. Accuracy: Accuracy is the exactness with which computations and operations are performed by a computer. Mostly, the errors caused by the Computer Based Information Systems (CBIS) are due to bad programming or erroneous data or deviation from procedures. Mostly these are caused by humans rather than a computer itself. When an error is committed in a calculation it MIGHT take years to detect and resolve it. When an error is hardware related, the computers can detect and resolve those errors themselves. They themselves rarely commit errors and can accurately perform all types of complex operations.
  3. Reliability: Reliability is the ability of the computer to remain functional and continue to serve the user. Computers are best suited to carry out repetitive tasks without any tiredness, boredom or fatigue. In this way, even though they are more reliable than others, they are not immune to failure. The failure could be due to internal or external factors. When the computers are used for a highly automated task, such failures cause losses or other problemes for the business. So, they will use a back-up facility to immediately switch the operations to a different computer and start servicing the users.
  4. Versatality: Computers can perform any task whether it is simple or complex. Except when they’re designed for a specific application, they’re generally versatile. A general purpose computer can serve any application whether it is business, industry, scientific, statistical, technological or communication etc. Due to this versatality, it can automate the job of several specialists in an industry thereby ensuring the use of the capacity of the computer to full extent.
  5. Storage: This refers to the amount of data the computers can store and access. They can have instant access to data and have huge capacity to store data in a very small physical space.

You might also want to refer the following pages.

  1. Theory Base of Accounting
  2. Recording of Transactions – I
  3. Recording of Transactions – II
  4. Bank Reconciliation Statement