Unit -5

COMPUTER AND COMPUTERISED ACCOUNTING SYSTEM

With the expansion of business the number of transactions increased. The manual method of keeping
and maintaining records was found to be unmanageable. With the introducton of computers in
business, the manual method of accounting is being gradually replaced. And finally,the
databasetechnology has revolutionised the accounts department of the business. organisations. In this
lesson, we will study about characteristics of computer, role of computers in accounting, need of
computerised accounting, etc.

COMPUTER AND ITS CHARACTERISTICS

Computer is an electronic device that can perform a variety of operations in accordance with a set of
instructions called programme. It is a fast data processing electronic machine. It can provide solutions to
all complicated situations. It accepts data from the user, converts the data into information and gives
the desired result. Therefore, we may define computer as a device that transforms data into
information. Data can be anything like marksobtained in various subjects. It can also be name, age, sex,
weight, height, etc. of all the students, savings, investments, etc., of a country. Computer is defined in
terms of its functions.

Computer is a device that accepts data, stores data, processes data as desired, retrieves the stored
data as and when required and prints the result in desired format

Characteristics of computer

A Computer is better than human being. It possesses some characteristics. These are as follows:
Speed
It can access and process data millions times faster than humans can. It can store data and information
in its memory, process them and produce the desired results. It is used essentially as a data processor.
All the computer operations are caused by electrical pulses and travels at the speed of light. Most of the
modern computers are capable of performing 100 million calculations per second.

Storage
Computers have very large storage capacity. They have the capability of storing vast amount of data or
information. Computers have huge capacity to store data in a very small physical space. Apart from
storing information, today’s computers are also capable of storing pictures and sound in digital form.
Accuracy
The accuracy of computer is very high and every calculation is performed with the same accuracy. Errors
occur because of human beings rather than technological weakness; main sources of errors are wrong
program by the user or inaccurate data.

Diligence
A computer is free from tiredness and lack of concentration. Even if it has to do 10 million calculations, it
will do even the last one with the same accuracy and speed as the first.
Versatility
Computer can perform wide range of jobs with speed, accuracy, and diligence. In any organisation, often
it is the same computer that is used for diverse purposes such as accounting, playing games, preparing
electric bills, sending e-mail and so on.

Communication
Computers are being used as powerful communication tools. All the computers within an office are
connected by cable and it is possible to communicate with others in the office through the network of
computer.

Processing Power
Computer has come a long way today. They began as mere prototypes at research laboratories and
went on to help the business organisations, and today, their reach is so extensive that they are used
almost everywhere. In the course of this evolution, they have become faster, smaller, cheaper, more
reliable and user friendly.

LIMITATIONS OF A COMPUTER AND COMPURISEDACCOUNTING

The limitations of computer are depending upon the operating environment they work in. These
limitations are given below as :

l Cost of Installation
Computer hardware and software needs to be updated from time to time with availability of new
versions. As a result heavy cost is incurred to purchase a new hardware and software from time to time.

l Cost of Training
To ensure efficient use of computer in accounting, new versions of hardware and software are
introduced. This requires training and cost is incurred to train the staff personnel.

l Self Decision Making

The computer cannot make a decision like human beings. It is to be guided by the user

Maintenance
Computer requires to be maintained properly to help maintain its efficiency. It requires a neat, clean and
controlled temperature to work efficiently.

l Dangers for Health

Extensive use of computer may lead to many health problems such as muscular pain, eyestrain, and
backache, etc. This affects adversely the working efficiency and increasing medical expenditure.

Role of computers in accounting

The most popular system of recording of accounting transactions is manual which requires maintaining
books of accounts such as Journal, Cash Book, Special purpose books, ledger and so on. The accountant
is required to prepare summary of transactions and financial statements manually. The advanced
technology involves various machines capable of performing different accounting functions, for
example, a billing machine. This machine is capable of computing discount, adding net total and posting
the requisite data to the relevant accounts. With substantial increase in the number of transactions, a
machine was developed which could store and process accounting data in no time. Such advancement
leads to number of growing successful organisations. A newer version of machine is evolved with
increased speed, storage, and processing capacity. A computer to which they were connected operated
these machines. As a result, the maintenance of accounting data on a real-time basis became almost
essential. Now maintaining accounting records become more convenient with the computerised
accounting.

The computerised accounting uses the concept of databases. For this purpose an accounting software is
used to implement a computerized accounting system. It does away the necessity to create and
maintain journals, ledgers, etc., which are essential part of manual accounting. Some of the commonly
used accounting softwares are Tally, Cash Manager, Best Books, etc.

Accounting software is used to implement a computerised accounting. The computerised accounting is

based on the concept of database. It is basic software which allows access to the data contained in the
data base. It is a system to manage collection of data insuring at the same time that it remains reliable
and confidential.

Following are the components of Computerised accounting software:

1. Preparation of accounting documents

Computer helps in preparing accounting documents like Cash Memo, Bills
and invoices etc., and preparing accounting vouchers.

2. Recording of transactions
Every day business transactions are recorded with the help of computer software. Logical scheme is
implied for codification of account and transaction. Every account and transaction is assigned a unique
code. The grouping of accounts is done from the first stage. This process simplifies the work of recording
the transactions.

3. Preparation of Trial Balance and Financial Statements

After recording of transaction, the data is transferred into Ledger account automatically by the
computer. Trial Balance is prepared by the computer to check accuracy of the records. With the help of
trial balance the computer can be programmed to prepare Trading, Profit and Loss account and Balance
Sheet.:
Computerised Accounting
Transaction processing system (TPS) is the first stage of computerized accounting system. The purpose
of any TPS is to record, process, validate and store transactions that occur in various functional areas of
a business for subsequent retrieval and usage. TPS involves following steps in processing a transaction:
Data Entry, Data Validation, Processing and Revalidation, Storage, Information and Reporting. It is one of
the transaction processing systems which is concerned with financial transactions only. When a system
contains only human resources it is called manual system; when it uses only computer resources, it is
called computerised system and when it uses both human and computer resources, it is called
computer-based system.

These steps can be explained with an example making use of Automatic Teller Machine (ATM) facility by
a Bank-Customer.
1. Data Entry : Processing presumes data entry. A bank customer operates an ATM facility to make a
withdrawal. The actions taken by the customer constitute data which is processed after validation by the
computerized personal banking system.

2. Data Validation: It ensures the accuracy and reliability of input data by comparing the same with
some predefined standards or known data. This validation is made by the ‘Error Detection’ and ‘Error
Correction’ procedures. The control mechanism, wherein actual input data is compared with
predetermined norm is meant to detect errors while error correction procedures make suggestions for
entering correct data input. The Personal Identification Number (PIN) of the customer is validated with
the known data. If it is incorrect, a suggestion is made to indicate the PIN is invalid. Once the PIN is
validated, the amount of withdrawal being made is also checked to ensure that it does not exceed a
prespecified limit of withdrawal.

3. Processing and Revalidation: The processing of data occurs almost instantaneously in case of Online
Transaction Processing (OLTP) provided a valid data has been fed to the system. This is called check
input validity. Revalidation occurs to ensure that the transaction in terms of delivery of money by ATM
has been duly completed. This is called check output validity.

4. Storage: Processed actions, as described above, result into financial transaction data i.e. withdrawal
of money by a particular customer, are stored in transaction database of computerized personal banking
system. This makes it absolutely clear that only valid transactions are stored in the database.

5. Information: The stored data is processed making use of the Query facility to produce desired
information.

6. Reporting: Reports can be prepared on the basis of the required information content according to the
decision usefulness of the report

NEED AND REQUIREMENTS OF COMPUTERSIED ACCOUNTING

The need for computerised accounting arises from advantages of speed,accuracy and lower cost of
handling the business transactions.

l Numerous Transactions
The computerised accounting system is capable of handling large number of transactions with speed
and accuracy.

l Instant Reporting
The computerized accounting system is capable of offering quick and quality reporting because of its
speed and accuracy.

l Reduction in paper work

A manual accounting system requires large physical storage space to keep accounting records/books
and vouchers/ documents. The requirement of stationery and books of accounts along with vouchers
and documents is directly dependent on the volume of transactions beyond a certain point. There is a
need to reduce the paper work and dispense with large volumes of books of accounts. This can be
achieved by introducing computerized accounting system.
Flexible reporting
The reporting is flexible in computerised accounting system as compared to manual accounting system.
The reports of a manual accounting system reveal balances of accounts on periodic basis while
computerized accounting system is capable of generating reports of any balance as when required and
for any duration which is within the accounting period.

l Accounting Queries
There are accounting queries which are based on some external parameters. For example, a query to
identify customers who have not made the payments within the permissible credit period can be easily
answered by using the structured query language (SQL) support of database technology in the
computerised accounting system. But such an exercise in a manual accounting system is quite difficult
and expensive in terms of manpower used. It will still be worse in case the credit period is changed.

l On-line facility
Computerised accounting system offers online facility to store and process transaction data so as to
retrieve information to generate and view financial reports.

l Scalability
Computerised accounting system are fully equipped with handling the growing transactions of a fast
growing business enterprise. The requirement of additional manpower in Accounts department is
restricted to only the data operators for storing additional vouchers. There is absolutely no additional
cost of processing additional transaction data.

l Accuracy
The information content of reports generated by the computerized accounting system is accurate and
therefore quite reliable for decision making. In a manual accounting system the reports and information
are likely to be distorted, inaccurate and therefore cannot be relied upon. It is so because it is being
processed by many people, especially when the number of transactions to be processed to produce such
information and report is quite large.
l Security
Under manual accounting system it is very difficult to secure such information because it is open to
inspection by any eyes dealing with the books of accounts. However, in computerised accounting system
only the authorised users are permitted to have access to accounting data. Security provided by the
computerised accounting system is far superior compared to any security offered by the manual
accounting system.

Basic requirements of the computerized accounting system

The basic requirements of any computerized accounting system are the followings:

l Accounting framework
It is the application environment of the computerized accounting system. A healthy accounting
framework in terms of accounting principles, coding and grouping structure is a pre-condition for any
computerized accounting system.
l Operating procedure
A well-conceived and designed operating procedure blended with suitable operating environment of the
enterprise is necessary to work with the computerised accounting system.

The computerised accounting is one of the database-oriented applications wherein the transaction data
is stored in well- organized database. The user operates on such database using the required interface
and also takes the required reports by suitable transformations of stored data into information.

Therefore, the fundamentals of computerised accounting include all the basic requirements of any
database-oriented application in computers. On the basis of the discussions, these are the following
differences between manual accounting and computerised accounting
There are important file concepts that you will need to learn in order to understand how data are
organized in a computerized system

File Concepts
1. Entity: Some subject about which information is stored.

2. Field: A single piece of data about an entity.

3. Record: A set of related fields about a single entity

4. File: A set of related records.

5. Transaction file: Store information about events.

6. Master file: Contains information about entities other than events. Contains 2 types of
information:

a) Reference data

b) Summary data

Types of Files and Data

There are two important types of data files:

1. Master files.

2. Transaction files
Master files:
Master files have the following characteristics:

1. They store relatively permanent data about external agents, internal agents or goods and
services.

2. They do not provide information about individual transactions.

3. They have two types of data; reference or summary data.

4. All master files contain reference data. But some master files may consist of only reference data
with no summary data.

Transaction files:
Transaction files have the following characteristics:

1. They store data about events.

2. They usually include a field for the date of the transaction.

3. They usually include quantity and price information (that are associated with the event).

4. A status field could be included to show the sequence of events that follow an initial event.

To decide what transaction files are needed is to identify events in a business process

Relationship between Transaction and Master files:

• Master files and transaction files work together to record information about any event…

Benefits of separating information into Master and Transaction records:

• Using the two types of files allows us to record some information only once.

• An understanding of how Master and Transaction files work together is important to analyze an
accounting application.

• Some employees may be unaware of all the files created and used.