Computerised Accounting System

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Test Your Understanding – I
  1. The framework of storage and processing of data is called as …….. (Operating Environment)
  2. Database is implemented using …….. (DBMS)
  3. A sequence of actions taken to transform the data into decision useful information is called……. (Data Processing)
  4. An appropriate accounting software for a small business organisation having only one user and single office location would be …….. (Ready to use)
Short Answers

1. State the four basic requirements of a database applications.
The following are the four basic requirements of database applications.

  1. Front-end Interface: The front-end interface acts as the interactive link or a dialog between the user and the database. It is used by the user to communicate with the back-end database.
  2. Back-end Database: It is the data storage system. It is not directly accessble to the user. The user uses the front-end interface to access the back-end database. It services the data requirements of the user based on the extent the user is authorized to access the data.
  3. Data Processing: It is a sequence of operations executed to convert the data into information for decision-making.
  4. Reporting System: It is an integrated set of objects that constitute the reports.
2. Name the various categories of accounting package.
The following are the various categories of accounting packages:

  1. Ready to use: This is suitable for small/conventional businesses where the frequency or volume of accounting transactions is very low. It is inexpensive and number of users is limited. It is easier to learn and adaptability is high.
  2. Customised: The accounting software may be customized to suit the requirements of the user. This is suitable for large and medium businesses and can be integrated with other information systems. The cost of installation and maintenancec is relatively high.
  3. Tailored: This is generally tailored in large business organizations with multiple users and spread across the globe. It requires special training to use. This software is designed to meet the specific requirement of the users and forms an integral part of the organisational MIS.

3. Give examples of two types of operating systems.
The following are the examples of two types of operating systems.

  1. Single-User Operating System: MS-DOS, Windows 95, Windows 2000 professional
  2. Multi-User Operating System: Unix, Linux, Ubuntu, IBM AS400, Windows 10
4. List the various advantages of computerised accounting systems.
The following are the various advantages of computerised accounting systems.

  1. Speed
  2. Accuracy
  3. Reliability
  4. Up-to-date Information
  5. Scalability
  6. Legibility
  7. Efficiency
  8. Quality Report
  9. MIS Reports
  10. Real time user interface
  11. Storage and Retrieval
  12. Motivation and Employees interest
5. Give two examples each of the organisations where ‘ready-to-use’, ‘customised’, and ‘tailored’ accounting packages respectively suitable to perform the accounting activity.
The following are the examples of the organizations using the three categories of the accounting packages to perform accounting activity.

  1. Ready to use: This is suitable for small/conventional businesses like small coffee shops, clothes outlets etc.
  2. Customised: This is suitable for large and medium businesses like hospitals, super-market chains etc.
  3. Tailored: This is generally tailored in large business organizations with multiple users and spread across the globe like MNCs, Manufacturing firms etc.
6. Distinguish between a ‘ready-to-use’ and ‘tailored’ accounting software.
The following are the differences between a ‘ready-to-use’ and ‘tailored’ accounting software.

Basis Ready to Use Tailored
1. Nature of business Small, conventional business Large and typical businesses.
2. Cost of installation and maintenance Low High
3. Expected Level of secrecy (Software and Data) Low Relatively high
4. Number of users and their interface Limited Unlimited
5. Linkage to other information system Restricted Available
6. Adaptability High Specific
7. Training requirements Low High
Long Answers



1. Define a computerised accounting system. Distinguish between a manual and computerised accounting system.
A computerised accounting system is an accounting information system that processes the financial transactions and events as per Generally Accepted Accounting Principles (GAAP). Their ultimate goal is to produce the reports as per the user requirements. The computerised accounting system works on the framework of storage and processing of data. This framework is called called as operating environment. It consists of hardware as well as software. The type of the accounting system determines the operating environment.
The modern computerised accounting systems based on the concept of database and has two basic requirements.

  1. Accounting framework
  2. and operating procedure.

Just like any other database-oriented applications, a computerised accounting system has the following requirements.

  1. Front-end interface
  2. Back-end database
  3. Data Processing
  4. Reporting System

The following are the primary differences between a manual and computerised accounting systems.

Basis Manual Accounting System Computerised Accounting System
1. Identification of transactions Based on the application of accounting principles. Large and typical businesses.
2. Recording of transactions Through books of original entry Stored in a well-designed accounting database.
3. Classification of transactions By posting to ledger accounts. This results in duplicity. Data is stored only once. Different forms of stored transaction data is processed to appear as classified and presented in the form of reports.
4. Summarising of transactions: Ledger accountings need to be prepared before in-hand, for preparing the trial balance. Trial balance is then produced by ascertaining the balances in various accounts Preparation of ledger accounts is not necessary. The originally stored transactions data is processed to obtain the list of balances of various accounts. This is finally shown in the trial balance report.
5. Adjusting Entries The entries are made as per the principle of cost matching revenue. So, the entries are recorded to match the expenses of the accounting period with the revenues generated by them. Some other adjusting entries may be made as part of errors and rectification. Journal vouchers are prepared and stored to follow the principle of cost matching revenue. There won’t be any adjusting entries for errors and rectification. However, when an error of principle is committed, for example by recording a wrong voucher i.e. using payment voucher for a receipt transaction, the adjustments are made.
6. Financial Statements Trial balance need to be prepared before preparing the financial statements. The financial statements are prepared by directly processing the originally stored transaction data. So, preparation of trial balance is not required.
7. Closing the books Once the financial reports are prepared, preparation for the next accounting period requires posting of closing and reversing journal entries. There is year-end process to create and store opening balances of accounts in database.

2. Discuss the advantages of computerised accounting system over the manual accounting system.
The following are the advantages of computerised accounting system over manual accounting system.

.

Basis Manual Accounting System Computerised Accounting System
1. Speed Humans require relatively more time in processing a task. Hence data is processed slower. Computers require far less time than human beings in performing a task. Hence data is processed faster.
2. Accuracy The same set of original data is posted several times while preparing different types of accounting reports. So, there is more possibility of error. The primary accounting data is entered once and subsequently used and processed in preparing the accounting reports. So, the possibility of error is eliminated.
3. Reliability Humans are prone to tiredness, boredom and fatigue and not efficient in performing repetitive operations. So, it is comparatively less reliable. Computers are immune to tiredness, boredom and fatigue and are well adopted to performing repetitive operations. So, it is comparatively more reliable.
4. Up-to-Date Information The updation of accounting data is not in sync with time and more likely to lag behind. So, the latest information related to accounting may not be reflected when accounting reports are produced. The accounting records are updated automatically as soon as the accounting data is entered and stored. So, when the accounting reports are produced and printed, they reflect the latest information related to the accounts.
5. Real time user interface When information is required by other users, it has to be prepared and submitted manually. So, there is huge time gap by the time the latest information is available to the users. These are mostly inter-linked through a network. So, the information is available to various users at the same time on a real time basis.
6. Automated Document Production As these are prepared manually, automation is not available. Equipped with standardised, user-defined formats of accounting reports. So, these reports are generated automatically just by the click of a mouse.
7. Scalability Limited scalability and even that with the addition of hugh and skilled manpower. Highly scalable as it requires the addition of very few data-entry operators for storing additional vouchers. However, the processing of these additional transactions is almost negligible. Due to these reasons, it is highly scalable.
8. Legibility Prone to errors due to untidy written figures. So, it is likely to be illegible. The characters (alphabets, numerals etc) used for displaying the data are type written and uses standard fonts. So, it is legible
9. Efficiency Humans are prone to tiredness, boredom and fatigue. So, the resources are not utilized to the best possible extent making them relatively less efficient. They ensure better use of resources and time. So, the generation of decisions, useful information and reports are more efficient.
10. Quality Reports Prone to errors and mal-practice. So, the reports are relatively less reliable. The data goes through inbuilt checks and is untouchable. This makes it possible to generate hygienic and true accounting reports that are highly objective and reliable.
11. MIS Reports It takes time to prepare the reports and the results may not be accurate. MIS Reports can be generated in real time. This helps the management to monitor and control the business effectively.
12. Storage and Retrieval Books of accounts i.e. journal, ledger and other accounting registers occupy lot of physical space for storage. The manual retrieval of data and information is time consuming. The accounting data is stored in hard-disks, CD-ROMs, floppies that occupy fractional physical space as compared to manual storage. It also allows fast and accurate retrieval of data and information.
13. Motivation and Employees Interest Sometimes, people feel get used to the comfort zone of manual entry and tend to remain there as they feel that it is easy for them to do what they’ve already beeing doing. The specialized training required to work on the computerised accounting system may make the employees feel more valued and motivates them to develop interest in the job. However, there might also be resistance to move over to a computerised accounting system.
3. Describe the various types of accounting software along with their advantages and limitations.
The following are the various types of accounting softwares along with their advantages and disadvantages.

  1. Ready-to-use: Ready-to-use software comes with standard accounting features and is readily available in the market. This is mostly targeted towards small and conventional businesses where-in the frequency or volume of accounting transactions is very low and the number of users are limited. It will cater to all the needs of the business. It has lower levels of secrecy and authenticity checks. It can serve limited number of users.
    1. Advantages:
      1. Available at a relatively lower cost.
      2. As the name suggests it is readily available in the market.
      3. Serves all the standard accounting requirements of the small business firms.
      4. Cost of installation and maintenance is low.
      5. Relatively easier to learn and people (accountant) adaptability is high. In otherwords, it is easier for the business to find employees who are already familiar with the accounting software or who can easily learn and be ready for the job. In otherwords, employee on-boarding is easier and less time consuming.
      6. Sometimes, the vendor offers the training on the software for free.
    2. Disadvantages:
      1. Level of secrecy is low
      2. Prone to data frauds
      3. Scope of linking to other softwares is very low.
      4. Number of users and user-interface is limited.
      5. Not suitable for medium and large businesses
      6. Difficult to achieve any new implementation beyond what the software offers. In otherwords, it is difficult to implement the customisaion.
  2. Customised: Along with the standard features, it comes along with any other customised features to suit the requirements of the business. This is suitable for medium and large businesses. It can also be linked to other information systems.
    1. Advantages:
      1. Suits the specific customized/special requirements of the business.
      2. Level of secrecy is relatively higher (compared to Ready-to-use)
      3. Number of users that can connect and operate simultaneously is relatively higher.
      4. Can link to other MIS systems.
      5. Adaptability is relatively higher.
    2. Disadvantages:
      1. Cost of installation and maintenance is relatively high. The vendor will charge additional amount for the customizations and maintenance of the customisations.
      2. Though the basic features are readily available, the customizations require time to implement and install.
      3. Requires additional training for the customized implementation.
      4. Additional/specific training comes at additional cost.
      5. Comparatively requires additional skill-set on the customised features. So, it takes time to bring the employees on-board
  3. Tailored: This is tailored as per the special requirements of the business. It is designed to meet the specific requirements of the business. It forms an integral part of the organisational MIS. It maintains robust levels of secrecy and authenticity checks. It also offers high flexibility interms of the number of users.
    1. Advantages:
      1. Tailored to the specific requirements of the business.
      2. Level of secrecy is relatively higher (compared to Ready-to-use and Customised)
      3. Enables unlimited number of users to connect.
      4. Unlimited user interfaces.
      5. Highly scalable.
      6. Forms an integral part of MIS.
      7. Adaptability is specific.
      8. As it requires special training needs, motivates the employees to feel special and previleged.
    2. Disadvantages:
      1. Cost of development and maintenance is relatively high
      2. As it has to be tailored to the specific requirements of the user, it is not readily available and takes time for implementation.
      3. Requires additional training for the tailored implementation.
      4. Additional/specific training comes at additional cost.
      5. Comparatively requires additional skill-set on the tailored features. So, it takes time to bring the employees on-board due to the special training needs.
4. ‘Accounting software is an integral part of the computerised accounting system’ Explain. Briefly list the generic considerations before sourcing an accounting software.
Accounting software is an integral part of the computerised accounting system. Before acquiring the accounting software, it is important to consider the accounting expertise of the people who are responsible for accounting work in the organisation. Ultimately, it is the people who are responsible for accounting, not the computers. The following are the two situations in which the need for accounting software arises.

  1. When the manual accounting system is replaced with the new computerised accounting system.
  2. When the current accounting system is replaced with a new one in view of the changing needs.

The extent to which the accounting software fulfils the requirement of computerisation of account depends on how effectively the organisation has chosen the accounting software and whether the accounting software fulfils all the needs of the business or not. In otherwords, the accounting software can be considered as the primary means to achieve the computerisation of accounting process. So, we can say that the accounting software is an integral part of the accounting system.
The following are the generic considerations before sourcing an accounting software.

  1. Flexibility: Flexibility is an important criteria to be considered when sourcing an accounting software. The accounting software should offer flexibility interms of data entry and the availability and design of various reports generated by it. In addition it should offer some flexibility between the users of the software, the switch over between accountants(users), operating systems and hardware. It should be capable of running on a variety of platforms and machines ex: Widows 10, Mac OS, Unix, Linux etc.
  2. Cost of Installation and Maintenance: Both the software and hardware should be affordable to the organisation. The organisations should do the cost benefit analysis before chosing one of the available softwares. They should also take the financing options available to them into consideration. Even if the software is cheaper to buy, it might involve heavy maintenance and alteration cost interms of adding new modules, training of staff, version upgrade, data failure and restoration expenses. A software which might be expensive to buy might prove out to be cheaper in the longer run.
  3. Size of Organisation: Size of the orgarnisation and the volume of the transactions affect the choice in deciding the type of software. Small organisations and those that involve few transactions might opt for simple, single user operated software. Where as large organizations and those organisations where in the volume of transactions are hugh in number should chose more sophisticated software that can allow multiple users, distributed globally and connected through complex networks.
  4. Ease of Adaptation and Training needs: Few of the accounting softwares require simple training. This will motivate the users and attract them towards it. On the other hand, some of the softwares need intensive training periodically. So, this factor should be taking into consideration.
  5. Utilities/MIS Reports: The MIS Reports and the extent to which they’re used in the organisation also plays a key role in deciding about acquiring software. If the organisation just produces simple reports, it can go for ready-to-use software. On the otherhand, if the requiremnt is to produce cost records etc, it should consider for a custom software.
  6. Expected Level of Secrecy (Software and Data): Security features to the unauthorized persons from accessing or manipulating the data in the system is also one of the important considerations when deciding on to buy an accounting software. Operating system should also be considered. Operating systems like Windows might be configured to let the users to login without a password. Operating systems like Linux will not allow the user to access it without providing a password.
  7. Exporting/Importing Data Facility: Sometimes, the software requires transfer of database to other systems or software. Sometimes transfer of information to spreadsheet applications like Excel or Lotus is needed for more flexible reporting. The software should enable hygienic and untouched data transfer. Accounting software might need to be integrated with MIS systems in the organizaton. However, some ready-to-use softwares might allow export only to MS Office modules. However, tailored softwares are designed to allow interaction and sharing of information with other MIS systems in the organisation.
  8. Vendors Reputation and Capability: We need to look into how long the vendor has been in the business of software development and whether there are any other users for this software. The availability of product support from third party vendors etc should also be taken into consideration.

5. ‘Computerised Accounting Systems are best form of accounting system’. Do you agree? Comment.
Yes, I agree that the computerised Accounting Systems are best form of accounting system, especially when compared to the manual accounting systems. As per the definition itself, a computer accounting system is an accounting information system that processes the finacial transactions and events as per the Genrally Accepted Accounting Principles(GAAP). They comply with the two aspects of the accounting system namely

  1. Working under a set of well-defined concepts called as accounting principles.
  2. Possess the user-defined framework for maintenance of records and generation of reports.

They are also classified into Ready-to-use, Customised and Tailored categories to cater to the needs of the organisation. In addition, they work on the concept of database which is a popular and well-adopted form of storage of data in the software industry. As the database can be easily copied and backed up, the loss of data is minimal. Also, as they occupy less physical space, transferring the data from one place to another is very easy. Many of the computerised accounting systems have evolved over a period of time and the number of errors that are inherent in the software are resolved or minimal.
On top of this, they’ve the following advantages over a manual system.

  1. Speed: Computers are much faster and hence can process the data at a much faster pace.
  2. Accuracy: As the primary data is entered only once, the possibility of error is eliminated.
  3. Reliability: Computers are immune to tiredness, boredom or fatigue. They’re well adopted to perform repeated operations. So, they’re highly reliable.
  4. Up-to-Date Information: The accounting records are updated automatically as and when the accounting data is entered and stored. So, the reports generated reflect the latest information.
  5. Real Time User Interface: As the automated accounting systems are connected through a network, the information is available to all the users on a real-time basis.
  6. Automated Document Production: They have standardised and well-defined formats of accounting reports. So, the accounting reports can be generated automatically.
  7. Scalability: When the volume of transactions is increased, only few additional data-entry operators are required for storing additional vouchers. However, the cost of processing these additional vouchers by the computerised accounting system is negligible. So, they’re highly scalable.
  8. Legibility: The characters used on the computer screen uses standard fonts. So, it is highly legible.
  9. Efficiency: The generation of decisions, useful information and reports is more efficient as the computers ensure better use of resources and time.
  10. Quality Reports: Computerised accounting systems have inbuilt checks and untouchable features of data handling. This ensures that the accounting reports are hyigenic and true. Thus these reports are highly objective and can be reliable.
  11. MIS Reports: It facilitates the real time production of MIS reports. This facilitates the management to monitor and control the business activity.
  12. Storage and Retrieval: The data is stored in a very less physical space. Compared to books of account, this is fractional. In addition the data retrieval is fast and accurate.
  13. Motivation and Employees Interest: Computerised accounting systems require a specialized training of staff. This makes the employees more valued and motivates them to develop interest in the job.

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