Computerised Accounting System

Computerised Accounting System, Manual v/s Computerised System,

Advantages and Limitations

Objective

After going through this lesson, you shall be able to understand the following concepts:

• Computerised Accounting System

• Distinction between Computerised Accounting System and Manual Accounting

System

• Advantages of Computerised Accounting System

• Disadvantages of Computerised Accounting System

Introduction
With the rapidly changing environment, machines are used in almost every sphere of
human lives. From small retail businesses to big MNCs, from a hotelier to Real Estate
Builders, all use computers for maintaining the record of their business transactions.
Now-a-days, with the rapid advancement of technology no one prefers to manually
record their business transactions.

This consists of a long and cumbersome process of preparing Journal, Ledgers, Trial
Balance and Financial Statements. But with the emergence of computerised accounting
system, the process of accounting has become so easy. Now, all the statements are
prepared automatically with the use of a computer system.

Computerised Accounting System

An accounting information system that produces reports and information for its users by
processing the financial events and transactions as per the Generally Accepted
Accounting Principles (GAAP) is known as computerised accounting system. It is based
on the concept of database. It is one of the database oriented application, wherein, the
transactions data is stored in a well-organised database.

Similar to the manual accounting system, computerised accounting system also

generates reports and information by following the accounting concepts and principles.
In this system, the framework where accounting data is stored and processed using
hardware and software is termed as operating environment. Thus, every computerised
accounting system requires the following two basic features.
 i. Accounting Framework- It is a set of well-defined rules, principles, coding,
grouping etc. with the help of which accounting system can produce reports as per
the requirements of the users.

ii. Operating Procedure- It is a clearly-defined operating procedure which is

appropriately integrated with the operating environment of the business.

We know that, computerised accounting system is database oriented, therefore, this

system needs to fulfill the following requirements.

i. Front-end Interface- It is an interface or an interactive link between a user and

data-base oriented software with the help of which a user interacts with the back-
end database.

ii. Back-end Database- It is a system where the actual data is stored. It is accessed
by the end user to the extent to which the user is authorised to access.

iii. Data Processing- It is a process of converting raw data into useful and valuable
information.

iv. Reporting System- It involves a function of producing reports.

Distinction between Manual Accounting System and Computerised Accounting

System
The following are the points of distinction between a Manual Accounting System and a
Computerised Accounting System.

Basis of Computerised Accounting

Manual Accounting System
Difference System

The identification of transactions in

The identification of transactions is
computerised accounting is also
Identifying based on the application of
based on the application of
accounting principles.
accounting principles.

The recording of financial

The data of financial transactions is
Recording transactions is done through the
stored in a well designed database.
book of original entry, i.e. Journal.

Summarising By ascertaining the balance of The originally stored transactions

various accounts, transactions are data is processed to give out the
 summarised to produce Trial list of balances of various accounts
Balance. Consequently, the to be finally shown in the Trial
generation of ledger accounts Balance report. Thus, the
becomes a necessary condition. generation of ledger accounts is not
a necessary condition.

Transactions recorded in the books

In order to produce ledger accounts
of original entry are further
in this system, the stored data is
Classification classified by posting into ledger
processed to appear as classified,
accounts. Thus, the data can be
such that no data is duplicated.
duplicated.

Adjusting entries are recorded to

No adjusting entries for errors and
match the expenses and revenues
rectification are made. Thus,
generated in the accounting
Adjusting Entries Journal and vouchers are prepared
period. So, these entries are made
and stored to follow the principles
to stick to the principles of cost
of cost matching revenue.
matching revenue.

The preparation of financial The preparation of financial

Financial
statements assumes the statements does not require the
Statements
availability of Trial Balance. availability of Trial Balance.

After preparing financial reports,

the accountants prepare books for
To create and store the opening
the following accounting period,
Closing the books account balances in the database,
which is done by posting of closing
year-end processing is used.
entries and reversing the closing
Journal entries.

Advantages of Computerised Accounting System

The following are the various advantages of computerised accounting system.

1. Speed- The speed of a computer system is incredible. Therefore, it is less time

consuming in performing various difficult operations. The accounting data is
processed comparatively faster through computerised accounting systems than it
can be done through manual efforts.
2. Accuracy- In computerised accounting systems, the possibility of errors is
minimised or reduced as the primary accounting data is entered only once, for
preparing various accounting reports and for subsequent usage and processes.

3. Reliability- As the computerised accounting system is well-equipped in

performing repetitive operations, so it is comparatively more reliable than the
manual system. Also, computerised accounting systems overcome the limitation
of manual accounting systems such as tiredness, boredom or fatigue, etc.,
thereby enhancing the degree of reliability.

4. Up-to-Date Information- In computerised accounting systems, whenever some

new accounting data is entered and stored, the existing accounting records
automatically gets updated. For example, when a transaction related to purchase
of machinery is entered in the computerised accounting systems, then
automatically the cash balance and machinery balance on the Assets side of the
Balance Sheet gets updated immediately. This ensures that latest information is
reflected in the accounting reports at any particular point of time.

5. Real-Time User Interface- Most of the automated accounting systems are inter-
linked through a network of computers. The availability of information to various
users at the same time on a real-time basis is facilitated under computerised
system of accounting. It is very difficult to avail such facility under manual system
as this calls for availability of multiple copies of the accounting records that can be
accessed by many users at the same time.

6. Automated Document Production- Under computerised accounting system, the

accounting reports such as, Cash Book, Trial Balance, Statement of Accounts,
etc. are easily available. This is because most of the computerised systems have
standardised and user-defined format of accounting reports that are generated
automatically. On the other hand, such an ease cannot be enjoyed under the
manual system. This is because the books of accounts are prepared by different
employees, thereby subject to variations from person to person.

7. Scalability- The computerised system of accounting is highly scalable as the

requirement of additional manpower is mainly confined to data entry for recording
and storing the additional vouchers in the computer. Thus, the additional cost of
processing additional transactions is meagre as compared to the cost associated
with hiring new accountants to handle additional transactions.

8. Legibility- In computerised accounting system, the accounting records are typed

and presented in standard fonts. The various characters especially numbers,
alphabets, graphics, etc. are more clear and can be read without any difficulty and
ambiguity. But, in the manual system, the writing of different personnel varies;
consequently, reading and interpreting the written material might cause errors due
to misinterpretation.
Disadvantages of Computerised Accounting System
Given below are the various disadvantages of a computerised accounting system.

1. Huge Cost- The establishment of a computerised accounting system and the

regular updation of various hardware and software from time to time involves
substantial costs.

2. Requires Proper Control- Huge amount of important data is stored in a

computerised accounting system. Therefore, proper control needs to be
maintained at all times so as to avoid loss of data.

3. Training Cost- For efficient and effective working with the computerised
accounting system, the organisation requires specialised personnel. This requires
regular training of the staff with the implementation of newer versions of hardware
and software. Training of staff involves huge cost.

4. Destruction of Data- In a computerised accounting system, there are higher

chances of destruction of stored data due to viruses or some other technical
failures. Therefore, proper back up of the data is required to be maintained at
regular intervals.

5. Resistance- An organisation may face resistance or opposition from its existing

staff for the introduction of computerised accounting system. It may happen
because of their insecurity or fear that introduction of such a system might reduce
their individual importance in the organisation.

6. Interruption- Considerable time is involved in switching over from existing

accounting system to computerised accounting system. It is likely that the staff
might take additional time to adopt to the new working environment which may
lead to loss of work time.
Accounting Software and Factors Affecting Selection of Accounting Software

Objective

After going through this lesson, you shall be able to understand the following concepts:

• Accounting Software (or Accounting Packages)

• Different types of Accounting Software (or Accounting Packages)

• Generic Considerations before Sourcing an Accounting Software

Accounting Software or Accounting Packages

Accounting software is an integral part of the computerised accounting system. The
accounting software should be selected after considering the level of skill and
proficiency of the accounting professionals.

This is one of the important aspects that should be taken care of before introducing
computerised accounting system, as accounting professionals are responsible for
accounting not computers. The following are the two situations in which accounting
software is required.
 i. When manual accounting system is replaced with computerised accounting
system.

ii. When the existing or old computerised accounting system is replaced with the new
computerised accounting system (with the change in technology).

In a computerised accounting system, accounting software helps in recording and

processing the accounting data to generate the accounting reports. Keeping in view this
need and requirement, the accounting software can be classified into the following three
categories.

i. Ready Made or Ready-to-Use

ii. Customised

iii. Tailor Made or Tailored

Ready Made or Ready-to-use Software

This type of software is readily available in the market with prescribed and standard
features. This accounting software is basically used by the small-scale business
enterprises, where the number of transactions is not so large. The cost of its installation
and maintenance is also low. It has limited number of users. Its adaptability is very high
as it is relatively easier to learn and operate. It does not have a wide scope to link it with
other information systems.
Advantages of Ready-made Accounting Software
The advantages of Ready-made Accounting Software are enlisted below:

1. This software is easily available in the market.

2. It is less expensive, as it comes with basic and standard features.

3. It involves lesser need for training.

4. It is less sophisticated.

5. Its adaptability is very high as it is relatively easier to learn and operate.

6. It is suitable for small-scale business enterprises.

Disadvantages of Ready-made Accounting Software

The disadvantages of Ready-made Accounting Software are enlisted below:

1. It has limited number of users.

2. It is not suitable for medium and large business organisations, where the number
of transactions is very large.

3. It fails to cater to the specific needs of the users.

4. It suffers from the low level of data secrecy.

5. It does not have a wide scope to link it with other information systems.

Customised Software
Customised software is the software which has standardised features to meet the
special requirements of the users. It provides the scope of changing the features of
accounting software. The functions of this software can be programmed as per the
needs and requirements of the users.

This type of software best suits the needs of medium and large businesses. Its cost of
installation and maintenance is comparatively higher. It can be easily linked to the other
information systems.

Tailor Made or Tailored Software

Tailored or Tailor-made accounting software is the software that is developed as per the
specifications and requirements of the users. This accounting software is generally used
in large business organisations with multi-users and geographically scattered locations.
It is designed to meet the specific needs of the users and forms an integral part of the
organisational MIS. It has infinite number of users.

Advantages of Customised and Tailor-made Accounting Software

The following are the advantages of Customised and Tailor-made Accounting Software.

1. This software is suitable for medium and large business organisations.

2. It caters to the specific requirements and needs of the users.

3. It can be modified as per the needs of the organisation.

4. It has high level of security and minimises the risk of loss of data and
unauthorised access to data.

5. It cannot be easily imitated or duplicated in the market due to difference in the

needs and requirements of different users.

6. It does not involve high cost of training as the training can be imparted within the
organisation by the experienced personnel.

7. It can be easily linked to the other information systems.

8. It forms an integral part of the organisational MIS.

Disadvantages of Customised and Tailor-made Accounting Software

The following are the disadvantages of Customised and Tailor-made Accounting
Software.

1. It involves high cost of installation and maintenance.

2. Developing customised software is a time-consuming process and involves high

cost of development.

3. Maintenance of this software is difficult as there exists limited availability of

knowledge with the developers.

4. It lacks standard training module.

Generic Considerations before Sourcing an Accounting Software

The following are some of the important points that should be taken into consideration
before introducing accounting software in an organisation.

1. Flexibility- This is the most important factor that should be considered before
sourcing an accounting software. The accounting software should be flexible in
 terms of data entry, retrieval of data and generating design of reports. The
software should be able to run on different computers having different operating
systems and different configurations. It should provide some flexibility to its users.
It should also provide easy switch over between users, operating system and
hardware.

2. Cost of Installation and Maintenance- The selection of accounting software

largely depends upon its cost to the organisation. The cost of accounting software
includes cost of installing the related components and hardware, maintenance and
alteration costs, cost of training the staff and cost involved in recovering data in
case of software failure. An organisation needs to evaluate the benefits of the
software against its costs. Based on its evaluation, an organisation will introduce
the software if the benefits are more than the cost and if it is in the affordable
range of the organisation.

3. Size of Organisation- The size of an organisation also influences the selection of

accounting software. Small-sized organisations, where the volume of business
transactions is not so large, usually opt for simple and single user oriented
software. On the other hand, large scale organisations, where the volume of
business transactions is very large choose the latest and sophisticated software
for meeting the multi-user requirements.

4. Training Needs- Another factor that affects the choice of software is the training
needs. There are some accounting software that require comparatively lesser
training and are more user-friendly. Also, there are complicated software which
require continuous and thorough training.

5. Level of Secrecy- The level of expected security is one of the important factors
that an organisation bears in mind before sourcing an accounting software.
Software should be competent enough to prevent the unauthorised access and
manipulation of data. It should have in-built features of security. For example, in
tailored software the user rights may be restricted according to their work or
responsibility criteria.

6. Exchanging Data Facility- The ability of accounting software to transfer data is

another important factor to be considered in its selection. The accounting software
must provide an easy and safe transfer of data from one system to another during
migration of database.

7. Utilities/MIS Reports- Another factor which helps in software selection is the MIS
reports and the extent to which they are used in the organisation.

8. Vendor Reputation and Capability- The selection of software is also affected by

the competence of the vendor. It depends upon the reputation of the vendor in the
market, the user-reviews of the similar software, the extent of post sales support
services from the vendors, etc.