Lesson 1 : Introduction to Computerized Accounting

MEANING OF COMPUTERIZED ACCOUNTING

Computerized accounting system is software that helps businesses to manage the big financial transactions, data, reports, and statements with high efficiency, speed, and better accuracy. Better quality work, lower operating costs, better efficiency, and greater accuracy, minimum errors are some of the advantages of Computerized Accounting.

Features of Computerized Accounting :Environment This Accounting System and its awareness among entities have become a necessity in the present environment. Businesses of whatever field and size are shifting from the practice of maintaining accounts manually. The manual process is more time-consuming and exposed to human error. Storage and retrieval of data and generation of a report cannot be ensured in real time in the traditional system. There is a need to shift to computerized accounting systems. They have empowered business to project accurate information of financial performance.

1. Simple and Integrated: It helps all businesses by automating and integrating all the business activities. Such activities may be sales, finance, purchase, inventory, and manufacturing etc. It also facilitates the arrangement of accurate and up-to-date business information in a readily usable form.

2. Accuracy & Speed: Computerized accounting has customized templates for users which allow fast and accurate data entry. Thus, after recording the transactions it generates the information and reports automatically.

3. Flexibility: It has the flexibility to record the transactions with the changing volume of business.

4. Instant Reporting: It can generate a quality report in real time because of high speed and accuracy.

5. Security: Secured data and information can be kept confidential as compared to the traditional accounting system.

6. Quick Decision Making: This system Generates real-time, comprehensive MIS reports and ensures access to complete and critical information, instantly.

7. Reliability: It generates the report with consistency and accuracy. Minimization of errors makes the system more reliable.

Advantages of Computerized Accounting System: The main advantages of using a computer accounting program are as follows:

(i) Faster Processing: Computers require far less time than human beings in performing a particular task. Therefore, accounting data is processed faster using a computerized accounting system.

(ii) Accurate Information: There is less space for error because only one account entry is needed for each transaction unlike repeated posting of the same accounting data in manual system.

(iii) Reliability: Computer systems are immune to boredom, tiredness or fatigue. Therefore, these can perform repetitive functions effectively and are highly reliable as compared to human beings.

(iv) Easy Availability of Information: The data can be made available to different users at the same time. This is called data sharing.

(v) Up-to-date Information: Account balances will always be up to date since the records are automatically updated as and when accounting data is entered or stored.

(vi) Efficiency: The computer based accounting system ensures better use of time and resources.

(vii) Storage and Retrieval: Computer based systems require a fractional amount of physical space as compared to the books of accounts in the form of journals, ledgers and accounting registers.

(viii) Works as a Motivator: Employees using computer systems feel more valued as they are trained and specialized for the job.

(ix) Automated Document Production: Accounting reports like cash book, trial balance and financial statements are generated automatically and are easily accessible just by a click of mouse.

(x) MIS Reports: It is easier to monitor and control the business using the real time management information reports generated by the computerized information systems.

(xi) Better Quality Work: The accounts prepared with the use of computerized accounting system are usually uniform, neat, accurate, and more legible than a manual job.

(xii) Lower Operating Costs: Computer is a reliable and time-saving device. The volume of job handled with the help of computerized system results in economy and lower operating costs. The overall operating cost of this system is low in comparison to the traditional system.

(xiii) Facilitates Better Control: From the management point of view, there is greater control possible and more information may be available with the use of the computer in accounting. It ensures efficient performance in accounting records.

(xiv) Improves Efficiency: This system is more efficient in comparison to the traditional system. The computer makes sure speed and accuracy in preparing the records and accounts and thus, increases the efficiency of employees.

(xv) Greater Accuracy: Computerized accounting makes sure accuracy in accounting records and statements. It prevents clerical errors and omissions in records.

(xvi) Relieve Monotony: Computerized accounting reduces the monotony of doing repetitive accounting jobs. Which are tiresome and time-consuming?

(xvii) Facilitates Standardization: Computerized accounting provides standardization of accounting routines and procedures. Therefore, it ensures standardization in the accounting records.

(xviii) Minimizes Mathematical Errors: While doing mathematical work with computers, errors are virtually eliminated unless the data is entered improperly in the system

(xix) Cost-Effectiveness Hiring an in-house bookkeeper or outsourcing the work to a bookkeeper or accounting firm can be costly. The software program has an upfront cost and might require contracting a bookkeeper to set up the accounts and coach the business owner on using the program, but it quickly becomes cost-effective. The owner doesn’t need to pay for anything beyond the software purchase and setup. Most programs work with operating systems for years and only occasionally require an inexpensive upgrade.

(xx) Simplicity Most business owners are not accountants or bookkeepers by trade and find it challenging to do most accounting tasks. This is where accounting software programs give a business owner advantages. A wide variety of accounting software programs are consumer friendly. Business owners can shop around to find a program that is easy to install, learn and use. Many programs provide prompts for the type of data that should be entered in each section. Once the system is established with bank accounts, debts and vendors, the business owner only needs to update information as it comes in.

(xxi) Ability to Collaborate Many software programs allow business owners to set permissions that give an outside bookkeeper or accountant access to the data. Business owners can sync information with bank and credit accounts and import data with a click of a mouse.This allows business owners to quickly reconcile accounts and import the correct information that needs to be reviewed by key advisors.

Limitations of Computerized Accounting Systems: The main limitations of computerized systems are being dependent upon. Some of them are listed as follows:

(i) Heavy Cost of Installation: Computer hardware needs replacing and software needs to be updated from time to time with the availability of newer versions.

(ii) Cost of Training: To ensure effective and efficient use of computerized system of accounting, newer versions of hardware and software are introduced. This requires special training and cost is incurred to train the staff personnel as specialists.

(iii) Fear of Unemployment: The operating environment they work in reflects the feelings of the staff on the introduction of computerized accounting system. The staff fears redundancy and show less interest in computers.

(iv) Disruption in Work: When computerized system is introduced, there might be loss in the work time and certain changes in the working environment.

(v) System Failure: The danger of a system crashing due to some failure in hardware can lead to subsequent loss of work. This occurs when no back-up is retained.

(vi) Time Consuming: In order to avoid loss of work at the time of system failure, there is a need for providing back-up arrangements which is a time consuming process.

(vii) Unanticipated Errors not Known: Unlike human beings, computers do not have the capability to judge or detect unanticipated errors in the system.

(viii) Breaches of Security: The danger of viruses and hacking into the system from outside creates a strong need for security of system. Similarly, the person who has created the specific program can easily defraud by tempering with the original records.

(ix) Health Dangers: Extensive use of computers may lead to many health problems such as eyestrain, muscular complaints, backache etc. resultantly reducing working efficiency as well as increasing medical expenditure.

(x) Incorrect Information Bookkeeping records are only as good as the data put into the system. Business owners that don’t take the time to establish account categories properly may enter data and generate reports that are not accurate. Business owners can do a lot to mitigate the disadvantages and potential problems associated with computerized accounting with proper planning and software integration. Taking the time to establish it correctly is easier and cheaper than trying to backtrack because when a problem occurs.

(xi) Technical Issues When dealing with computers, issues can arise. You may be completing year-end data for your accountant and experience a power outage. Computers might acquire a virus and fail. There is also the potential of users incorrectly performing software tasks that they are not familiar with. If a user tries to do one thing but inadvertently does something else, it might take some work to undo the error.

Meaning of Manual Accounting,
As the name signifies, is the paper-based accounting system, in which journal and ledger registers, vouchers, account books are used to store, classify and analyze financial transactions of an organization. It is often used by small businessmen, such as sole proprietors, shopkeepers, etc. to maintain the record of the business transactions, due to lower cost.

One of the advantages of the manual accounting system is its easy accessibility. It is also characterized by confidentiality, which makes the sensitive information hacking free. Nevertheless, manual accounts can only be prepared correctly if the accountant possesses good knowledge of bookkeeping and accounting.

Moreover, human error, such as incorrect recording of the transaction, the omission of the transaction, figure transposition and so forth, is likely to occur while the preparation of manual accounts which cannot be ignored.

Definition of Computerized Accounting
Computerized Accounting can be described as the accounting system that uses the computer system and pre-packaged, customized or tailored accounting software, to keep a record of financial transactions and generate financial statements, for analysis.

Computerized Accounting system relies on the concept of a database. The accounting database is systematically maintained, with active interface wherein accounting application programs and reporting system are used. The two primary essentials are:

 Accounting framework: The framework comprises of principles and grouping structure for maintaining records.
 Operating procedure: There is a proper procedure for operating the system so as to store and process the data.
Further, it requires front-end interface, back-end database, database processing and reporting system to store data in a database-oriented application.

The merits of computerized accounting rely on its speed, accuracy, reliability, legibility, up-to-date information and reports etc.

Difference between Manual and Computerized Accounting
In accounting, the financial transactions are recorded, processed and presented to generate financial statements that are useful to the readers, in making decisions. Traditionally, accounting is done manually, by a trained accountant, with the use of registers, account books, vouchers etc. But with the emerging technology, nowadays, computerized accounting is in vogue, due to its accuracy, convenience and speed.

Both manual and computerized system is based on the same principles, conventions and concept of accounting. However, they differ only in their mechanism, in the sense that manual accounting uses pen and paper, to record transactions, whereas computerized accounting makes use of computers and internet, to enter transactions electronically.

Conclusion
As the number of business transactions increases, it is difficult to manage accounts manually, as it takes a lot of time to update a single transaction in all the accounts that it affects. In computerized accounting, a number of limitations of the manual accounting have been removed. Whenever the transactions occur, the entry is made and it is updated automatically in all the accounts that it affects, in the computerized accounting.