OVERVIEW OF

COMPUTERISED
1
ACCOUNTING SYSTEM
Learning Objectives Introduction
After studying this chapter you will be
able to: In modern business accounting transactions are
• Understand the need of processed through computers. Usage of computers
Computerised Accounting and Information Technology (IT) enables a business
System. to quickly, accurately and timely access the
• Appreciate the impact of information that helps in decision-making. This
Information Technology on sharpens the competitive edge and enhances
Financial Accounting System. profitability. The computer systems (Figure 1.1)
• Describe the major works with the data which is processed by the
functions of Accounting hardware commanded by the user through
Information System (AIS). software. The Computerised Accounting System
(CAS) has the following components:
Procedure : A logical sequence of actions to
perform a task.
Data : The raw fact (as input) for any
business application.
People : Users.
Hardware : Computer, associated peripherals,
and their network.
Software : System software and Application
software.
These are the five pillars on which Computerised
Accounting System rests. This chapter discusses
the concept and components of CAS alongwith its
advantages and disadvantages. It is followed by
the discussion of software packages on CAS. In
this chapter we will also discuss the concept about
grouping of accounts and codification methods to
be used for CAS.

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1.1 COMPUTERISED ACCOUNTING SYSTEM

Computerised Accounting System refers to the processing of accounting
transaction through the use of hardware and software in order to
produce accounting records and reports. CAS takes accounting

Figure 1.1 : Components of Computer

transactions as inputs that are processed through Accounting Software

to generate the following reports:
• Day books/Journals
• Ledger
• Trial Balance
• Position Statement (Balance Sheet)
• Statement of Profit and Loss (Profit and Loss Account)

Basic flow of Accounting Transaction

2
Figure 1.2 : Data to Information by Business Application Software

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Overview of Computerised Accounting System

Data and Information

Various elements (items) of accounting transactions are essentially
the data items, which are processed through an accounting software
to generate different sets of information in the form of accounting reports
such as journals, ledger, etc.
A data-item (data element) is the smallest named unit of data in
the information system. In accounting, a transaction consists of four
data elements, such as name of account, accounting code, date of
transaction and amount.

The transaction is a record of inflow and outflow of resources.

We may observe (Figure 1.3) how data (days worked and rate per day)
is being (multiplied together) converted into information (amount to
pay). The information may be viewed as data at one level; and when it
is processed keeping in view the requirements of decision maker, it
becomes the information at another level.

1.2 COMPONENTS OF CAS

The manual system of accounting is
traditionally most popular method of keeping
records of financial transactions of an
organisation. Financial statements are the end
products of the accounting process, which are
prepared in accordance with G e n e r a l l y
Accepted Accounting Principles (GAAP)
(GAAP). The
accounting cycle means the processes involved
in identifying, measuring and communicating
the information. The basic phases of the cycle
are as follows:
Figure 1.3
• Business transactions are analysed.
• The transactions are recorded in the journal.
• Journal entries are posted to the ledger accounts.
• A trial balance is prepared from balances of accounts.
• Accounts are reviewed and the necessary adjustments made.
• Adjustments are posted in the ledger to prepare adjusted trial
balance.
• Adjusted trial balance is used to prepare the balance sheet and
profit and loss account.
• Financial Statements are prepared from the finally adjusted ledger
and balancing the accounts.
The above accounting cycle can be processed through the use of 3
computers.

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1.3 SALIENT FEATURES OF CAS

Following are the salient features required for CAS software:
1.3.1 SIMPLE AND INTEGRATED
CAS is designed to automate and integrate all the business operations,
such as sales, finance, purchase, inventory and manufacturing. CAS
is integrated to provide accurate, up-to-date business information
rapidly. The CAS may be integrated with enhanced MIS (Management
Information System), Multi-lingual and Data Organisation capabilities
to simplify all the business processes of the organisation easily and
cost-effectively.
1.3.2 TRANSPARENCY AND CONTROL
CAS provides sufficient time to plan, increases data accessibility and
enhances user satisfaction. With computerised accounting, the
organisation will have greater transparency for day-to-day business
operations and access to the vital information.
1.3.3 ACCURACY AND SPEED
CAS provides user -definable templates (data entry screens or forms)
for fast, accurate data entry of the transactions. It also helps in
generalising desired documents and reports.
1.3.4 SCALABILITY
CAS enables in changing the volume of data processing in tune with
the change in the size of the business. The software can be used for
any size of the business and type of the organisation.
1.3.5 RELIABILITY
CAS makes sure that the generalised critical financial information is
accurate, controlled and secured.

1.4 GROUPING OF ACCOUNTS

The increase in the number of transaction changes the volume and
size of the business. Therefore it becomes necessary to have proper
classification of data. The basic classifications of different accounts
embodied in a transaction are resorted through accounting equation.
Accounting Equation
The modern accounting is based on double-entry system, which implies
equality of assets and equities (liabilities and capital), i.e.
A = E
Where E = L+C
4 Now A = L+C
Where A = Assets

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E = Equities
C = Capital
L = Liabilities

Thus, Assets = Liabilities + Capital

In this equation the Liabilities means claims on the firm by creditors
and the Capital means claims of owners. The claims of owners keep on
changing due to success (profit) or failure (loss) of the firm. This is
reflected by the income statement, which provides the summary of
income and expenses of business for a given accounting period. Keeping
this in view, the above equation can be re-written as:

Assets = Liabilities + Capital + (Revenues – Expenses)

Each component of the above equation can be divided into groups of

accounts as follows:

Revenue means inflow of resources, which results from the sale of goods or
services in the normal course of business and increase in capital. Expenses
imply consumption of resources in generating revenues.

• EQUITY AND LIABILITIES

§ Shareholder’s Funds
s Share Capital
s Reserves and Surplus
s Money Received against Share Warrents
s Share Application Money Pending Allotment
s Non-Current Liabilities
s Long Term Borrowings
s Deferred Tax Liabilities (net)
s Other Long Term Liabilities
s Long Term Provisions
s Current Liabilities
s Short Term Borrowings
s Trade Payables
s Other Current Liabilities
s Short Term Provisions
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• ASSETS
1. Non-Current Assets
s Fixed Assets
s Tangible Assets
s Intangible Assets
s Capital Work-in-Progress
s Intangible Assets Under Development
s Fixed Assets held for Sales
s Non Current Investments
s Deferred Tax Assets (net)
s Long Term Loans and Advances
s Other Non-Current Assets
2. Current Assets
s Current Investments
s Inventories
s Trade Receivables
s Cash and Cash Equivalents
s Short Term Loans and Advances
s Other Current Assets
• REVENUES
§ Sales
§ Other Income
• EXPENSES
§ Material Consumed
§ Salary and Wages
§ Manufacturing Expenses
§ Depreciation
§ Administrative Expenses
§ Interest
§ Selling and Distribution Expenses
There is a hierarchical relationship between the groups and its
components. In order to maintain the hierarchical relationships between
a group and its sub-groups, proper codification is required to ensure
neatness of classification.
1.4.1 CODIFICATION OF ACCOUNTS
According to Concise Oxford Dictionary, the term code means “a system
of letter or figure with arbitrary meaning for brevity and for machine
processing of information”. Thus, code is an identification mark.
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Method of Codification
The coding scheme of Account-heads should be such that it leads to
grouping of accounts at various levels so as to generate Position Statement
(Balance Sheet) and Statement of Profit and Loss (Profit-Loss Account).
For example, we may allot the codes for top-level grouping of accounts
(forming the 1st digit of the Account Code) as follows:

1 Equity and Liabilities

2 Assets
3 Revenues
4 Expenses
Under Equity and : 11 Shareholder’s funds
Liabilities 13 Non-Current Liabilities
14 Current Liabilities
Under Assets : 21 Non-Current Assets
23 Current Assets
Note: The gap in code in the 2nd digit (e.g. after 1, 3 instead of 2) is used to provide
flexibility.

The above codification scheme utilizes the hierarchy present (used)

in grouping of accounts. Major advantage of such coding is that if the
account codes are listed in ascending (i.e. increasing) order, these will
be automatically listed as per the desired hierarchy.

1.4.1.1 Sequential Codes

In Sequential Code, numbers and/or letters are assigned in consecutive
order. These codes are applied primarily to source documents such as
cheques, invoices, etc. A sequential code can facilitate document
searches. This process enables in either identification of missing codes
(numbers) relating to a particular document or a relevant document
can be traced on the basis of code.

For examples:

CODES ACCOUNTS
CL001 GCERT LTD
CL002 XYZ LTD
CL003 ARIL CORPORATION OF INDIA

1.4.1.2 Block Codes

In a block code, a range of numbers is partitioned into a desired number
of sub-ranges and each sub-range is allotted to a specific group. In 7
most of the uses of block codes, numbers within a sub-range follow

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sequential coding scheme, i.e. the numbers increase consecutively.

As an example, dealer codes for a trading firm could be as follows:
CODES DEALER-TYPE
100 - 199 Small Pumps
200 - 299 Medium Pumps
300 - 399 Pipes
400 - 499 Motors

1.4.1.3 Mnemonic Codes

A mnemonic code consists of alphabets or abbreviations as symbols to
codify a piece of information. SJ for “Sales Journals”, HQ for “Head
Quarters” are examples of mnemonic codes. Another common example
is the use of alphabetic codes in Railways in identifying railway stations
such as DLH for Delhi, NDLS for New Delhi, BRC for Baroda, etc.

1.4.2 METHODOLOGY TO DEVELOP CODING STRUCTURE AND CODING

Let us assume that we have to do coding for students in one of seven
schools run by a trust. The first step is to develop a coding structure
(scheme), which will be used to develop individual codes for each
student. Development of coding structure requires identification
(finalisation) of hierarchy of schooling system and that of various
attributes (parameters) associated with a student. A hierarchy in such
a situation could be as follows:

Trust → School → Entry-year → Stream → Class → Section → Student

The “Stream” could be science stream, commerce stream or general

Stream. A class may be divided into more than one section when the
number of admitted students increases the class capacity. We can
decide the coding structure after the following considerations:
• As there is only one Trust, no provision is required in the coding
structure to accommodate for Trust. Had there been multiple trusts
under one organisation running a number of schools, the provision
of Trust code would have been necessary in the coding structure.
• Assuming that the maximum number of Schools is not likely to
exceed 99, we can allocate 2 digits for School.
• Two digits can be allocated for the Entry-year. Entry-year is
necessary to maintain records of old students.
• For Stream, 1 digit is sufficient. If Stream is not relevant
(applicable) as is the case for primary and secondary classes, the
value 0 will be considered for Stream.
8 • To accommodate Classes, 2 digits are sufficient.

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• Number of Sections in a class will not exceed 9. Hence, 1 digit is

sufficient for Section.
• Two digits will be sufficient for number of Students within a section
of a class, assuming that not more than 99 Students will ever be
put in a section of a class.
The coding structure for Students will be as follows based on the
above considerations:
School 2 Digits
Entry-year 2 Digits
Stream 1 Digit
Class 2 Digits
Section 1 Digit
Student 2 Digits
Thus, if we allocate 10 digits codes to a student, we shall be able to
get the following details of a student right from the code itself :
• Which stream in which school the student is studying (had studied)?
• What were the class and its section and in which year the student
had entered this class?
• List of all students who has entered a school in a given year, etc.
Once the coding structure is decided as described above, allotting
of code becomes easy. For example, if a student with a Roll No. 54 had
entered Section-B of Class XII in Year 2008 opting for Science Stream
(Non-Biology Group) (Stream Code: 1) in the 6th School run by the
Trust. Its code would be as follows:

06 08 1 12 2 54

Roll No of the Student in the Section of Class XII

Section Code (2 for Section-B)

Current Class (XII)

Stream (i.e. Science – Non-Bio)

Entry-year to Current Class (i.e. XII)

School Code 9

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1.5 USING SOFTWARE OF CAS

There are two basic activities in using software of CAS – One time activities
and recurring activites. One time activities include creation of
Organisation details, accounting year, type of ledger (also called “creation
of master files” ), etc. While reccuring activities include entry of
transactions and generation of reports. The transactions are recorded on
the basis of Cash Vouchers, Bank Vouchers, Purchase Vouchers, Sales
Vouchers, Journal Vouchers, etc. Reports include generation of Day books,
Ledgers, Trial Balance, Statement of Profit and Loss, Position Statement
and Cash Flow Statement. (Please refer to Chapter 5 for details)
SECURITY FEATURES OF CAS SOFTWARE
Every accounting software ensures data security, safety and
confidentiality. Therefore every, software provides the following:
• Password Security
• Data Audit
• Data Vault
Password Security: Password is a mechanism, which enables a user
to access a system including data. The system facilitates defining the
user rights according to organisation policy. Consequently, a person
in an organisation may be given access to a particular set of a data
while he may be denied access to another set of data.

Password is the key (code) to allow the access to the system.

Data Audit: This feature enables one to know as to who and what
changes have been made in the original data thereby helping and fixing
the responsibility of the person who has manipulated the data and also
ensures data integrity. Basically, this feature is similar to Audit Trail.
Data Vault: Software provides additional security through data
encryption.

Encryptio
Encrypti o n essentially scrambles the information so as to make
its interpretation extremely difficult (almost impossible). Thus,
Encryption ensures security of data even if it lands in wrong
hands, because the receiver of data will not be able to decode
and interpret it.

1.6 ADVANTAGES OF CAS

Following are the advantages of Computerised Accounting System (CAS):
1. Timely generation of reports and information in desired format.
10 2. Efficient record keeping.
3. Ensures effective control over the system.

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4. Economy in the processing of accounting data.

5. Confidentiality of data is maintained.

1.7 LIMITATIONS OF CAS

Following are the limitation of CAS software:
1. Faster obsolescence of technology necessitates investment in
shorter period of time.
2. Data may be lost or corrupted due to power interruptions.
3. Data are prone to hacking.
4. Un-programmed and un-specified reports cannot be generated.

1.8 ACCOUNTING INFORMATION SYSTEM (AIS)

Accounting Information System (AIS) and its various sub-systems may
be implemented through Computerised Accounting System. The
subsystems of AIS are briefly described below (Fig. 1.4)

Figure 1.4 : The sub-systems of Accounting Information System

1.8.1 CASH AND BANK SUB-SYSTEM

It deals with the receipt and payment of cash both physical cash and
electronic fund transfer. Electronic fund transfer takes place without
having the physical entry or exit of cash by using the credit cards or
electronic banking.
1.8.2 SALES AND ACCOUNTS RECEIVABLE SUB-SYSTEM
It deals with recording of sales, maintaining of sales ledger and 11
receivables. It generates periodic reports about sales, collections made,

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overdue accounts and receivables position as also ageing schedule of

receivables/debtors.
1.8.3 INVENTORY SUB-SYSTEM
It deals with the recording of different items purchased and issued
specifying the price, quantity and date. It generates the inventory
position and valuation report.
1.8.4 PURCHASE AND ACCOUNTS PAYABLE SUB-SYSTEM
It deals with the purchase and payments to creditors. It provides for
ordering of goods, sorting of purchase expenses and payment to the
creditors. It also generates periodic reports about the performance of
suppliers, payment schedule and position of the creditors.
1.8.5 PAYROLL ACCOUNTING SUB-SYSTEM
It deals with payment of wages and salary to employees. A typical wage
report details information about basic pay, dearness allowance, and
other allowances and deductions from salary and wages on account of
provident fund, taxes, loans, advances and other charges. The system
generates reports about wage bill, overtime payment and payment on
account of leave encashment, etc.
1.8.6 FIXED ASSETS ACCOUNTING SUB-SYSTEM
It deals with the recording of purchases, additions, deletions, usage of
fixed assets such as land and buildings, machinery and equipments,
etc. it also generates reports about the cost, depreciation, and book
value of different assets.
1.8.7 EXPENSE ACCOUNTING SUB-SYSTEM
This sub-system records expenses under broad groups such as
manufacturing administrative, financial, selling and distributions and
others.
1.8.8 TAX ACCOUNTING SUB-SYSTEM
This sub-system deals with compliance requirement value-added tax
(VAT), excise, customs and income tax. This sub-system used in large
size organisation.
1.8.9 FINAL ACCOUNTS SUB-SYSTEM
This subsystem deals with the preparation of Profit and Loss accounts,
Balance Sheet and cash flow statements for reporting purposes.
1.8.10 COSTING SUB-SYSTEM
It deals with the ascertainment of cost of goods produced. It has linkages
with other accounting sub-systems for obtaining the necessary
information about cost of material, labour, and other expenses. This
12 system generates information about changes in the cost that takes
place during the period under review.

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1.8.11 BUDGET SUB-SYSTEM

It deals with the preparation of budget for the coming financial year as
well as comparison with the current budget of the actual performances.
1.8.12 MANAGEMENT INFORMATION SYSTEM
Management Information System (MIS) deals with generation and
processing of reports that are vital for management decision-making.
The Information system should be so flexible as to provide customised
reports to support various managerial functions such as planning,
organising, staffing, oversight, control and decision-making including
operational, functional and strategic nature.

Summary
• In Computerised Accounting System, accounting transactions are processed
using computer system. A computer system includes hardware and software.
Hardware includes Central Processing Unit (CPU), Random Access Memory
(RAM), Monitor (Screen), Keyboard, Mouse, Hard Disk and CD/DVD for mass
storage of data and Printer, etc. Software consists of set of instructions.
Software can either be a System Software (a part of Computer System) or an
Application Software. CAS uses Accounting Software. Accounting Software
(such as Tally) is an example of Application Software.
• Coding (for Account Head, Budget Head, Cost Centres, etc) is required in
CAS. Coding first requires development of its structure. Coding Structure
should be compatible with inherent structure of the element to be coded.
For example, Account Head coding requires a hierarchical structure to
progressively summarise the accounting information as per the requirements
of Balance Sheet and Profit and Loss Account.
• Advantages of CAS include speed, efficiency, arithmetic accuracy, cost saving,
confidentiality of data.
• Limitations of CAS include provision for (a) fast obsolescence of technology,
(b) data loss due to either power interruptions or damage to hard disk,
(c) virus and other security hazards.
• Accounting Information System is an integration of various sub-systems
such as: (i) cash sub-system, (ii) sales and accounts receivable sub-system,
(iii) inventory sub-system, (iv) purchase and accounts payable sub-system,
(v) payroll accounting sub-system, (vi) fixed asset accounting sub-system,
(vii) expense accounting sub-system, (viii) tax accounting sub-system,
(ix) final accounts sub-system, (x) costing sub-system, (xi) budget sub-system,
(xii) management information sub-system.
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EXERCISES
Q1. MULTIPLE CHOICE QUESTIONS
1. The components of Computerised Accounting System are :
(a) Data, Report, Ledger, Hardware, Software;
(b) Data, People, Procedure, Hardware, Software;
(c) People, Procedure, Ledger, Data, Chart of Accounts;
(d) Data, Coding, Procedure, Rules, Output.
2. The Computerised Accounting System refers to :
(a) Printing of Balance Sheet and Profit and Loss Accounts using computer;
(b) Processing of accounting transaction through computer and produce
records and reports;
(c) Processing of accounting related data and printing reports;
(d) None of the above.
3. The components of Computerised Accounting System refers to :
(a) Business transactions are analysed, transactions recorded, prepare trial
balance, preparation of balance sheet and profit and loss account;
(b) From data entry to preparation of final statements;
(c) Transformation of manual accounting system to CAS;
(d) None of the above.
4. The CAS should be
(a) Simple and integrated, transparent, accurate, scalability, reliability;
(b) Complex, Accurate, Transparent, Faster to work;
(c) Able to transform the manual accounting system to computerised
accounting system;
(d) None of the above.
5. The Grouping of Accounts means the classification of data from :
(a) Asset, liabilities and capital
(b) Asset, capital, liabilities, revenue and expenses
(c) Asset, owners equity, revenue and expenses
(d) None of the above.
6. Codification of Accounts required for the purpose of :
(a) Hierarchical relationship between groups and components
(b) Data processing faster and preparing of final accounts
(c) Keeping data and information secured
14 (d) None of the above.

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7. Method of Codification should be :

(a) Such that it leads to grouping of accounts
(b) An identification mark.
(c) Easy to understand, cryptic, and leads to grouping of accounts
(d) None of the above
8. The need of Codification is :
(a) The Encryption of data
(b) The Generation of mnemonic code
(c) To secure the accounts, reports, etc.
(d) Easy to process data, keeping proper records
9. What is the activity sequence of the basic information processing model?
(a) Organise data, process data, and collect data
(b) Collect data, organise and process data, and communicate information
(c) Process data, organise data, and collect data
(d) Organise data, collect data, and communicate information
10. What are internal controls designed to do?
(a) safeguard assets and optimise the use of resource
(b) only achieve maximum revenue
(c) only safeguard assets
(d) only ensure accurate accounting records
11. What is a firm’s payment to a supplier for merchandise inventory recorded in?
(a) Cash payment journal
(b) Purchases journal
(c) Sales journal
(d) Cash receipts journal
12. Where are amounts owed by customers for credit purchases found?
(a) accounts receivable journal
(b) general ledger
(c) sales journal
(d) accounts receivable subsidiary ledger

Q2. ANSWER THE FOLLOWING QUESTIONS

1. Why the computerisation of Financial Accounting is required and why is it
useful?
2. What is coding? Why codification is required for an Accounting System?
15
3. What are the salient features of Computerised Accounting Software?

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4. What are the phases in an accounting cycle?

5. Write differences between data and information with examples?
6. Explain various types of coding methods and the situations where each coding
method is best suited?
7. Define the term transaction and elaborate with the help of examples how the
transaction will be shown in chart of accounts by hierarchical grouping?
8. What is a chart of accounts? How is it arranged?
9. What is meant by Revenue and Expenses?
10. What are the limitations of CAS?
11. What are the advantages of CAS?
12. What is encryption and how is it helpful in CAS?

Q3. SKILL REVIEW

1. Topic of debate: “Intentional manipulation of accounting records is much
easier in computerised accounting system than in manual accounting system”.
Do this exercise in the class forming group of 4 students to form a team and
do the presentation in the class?
2. Develop a coding structure for inventory items based on the following
information: There are around 7000 items, which are grouped under 37 major
categories. Each major category is further sub-divided into 15-40
sub-categories. Within a sub-category, the number of items will never
exceed 1000.

ANSWERS
1. b 2. b 3. a 4. a 5. b 6. a
7. a 8. a 9. b 10. a 11. a 12. d

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