Introduction To Computerized Accounting Notes

Introduction to Computerized Accounting Notes
We are living in a digital world in which our lives are largely dependent on information
technology. From the moment we wake up , to when we go to sleep we are utilizing
technology through out.
Information technology enables individuals and organizations achieve greater heights

of productivity and efficiency through digital solutions developed in various segments :
communication , finance, health care e.t.c.
These digital solutions simplify tasks that are so complex and time consuming if done
traditionally (manually) i.e sending a message to a distant audience, calculation of
financial transactions.
With this at play, many organizations have adopted use of IT in the day to day running
of their business operations. One significant area that organizations have adopted use
of IT is the area of accounting.
Computerized accounting refers to the use of computers and computer based systems
to record, organize and analyze accounting transactions as well as communicate
financial position/performance of an entity.
To easily understand how computerized accounting work, we have to talk about

transactions processing. A transaction is an elementary activity conducted during
business operations. A transaction processing system (TPS) processes an entity’s
business transactions and thus support the operations of the enterprise. A TPS records,
processes, validates and stores transactions in various functional areas of a business
for subsequent retrieval and usage.
A TPS involves the following:

⚫ Data Entry
⚫ Data Validation
⚫ Processing
⚫ Storage
⚫ Information retrieval and reporting
One specialized TPS that handles accounting transactions is called a computerized

accounting system. Formally, A computerized accounting system is an accounting
information system that processes financial transactions and events as per GAAP to
produce reports as per user requirements. GAAP means generally accepted accounting
principles hence the specialization of the system. A computerized accounting system
(CAS) provides automation for the accounting tasks such as recording and report
generation.
A CAS allows an entity to keep track of accounting information such as
⚫ Purchases
⚫ Sales
⚫ Inventory
⚫ Liabilities
A CAS , like any TPS, is able to handle large volumes of data with speed and
higher accuracy which are significant challenges in manual accounting.
Why GAAP
Any accounting system , whether manual or computerized has two aspects:
1. Accounting principles : well defined concepts under which it must operate.

2. User defined framework : which dictates the maintenance of records and
generation of reports.
The operating environment
This is the user-defined framework in a computerized environment. It consists of the

computer hardware/infrastructure and the software.
The type of CAS determines the operating environment. Some factors that may affect
the operating environment include :
⚫ Number of users
⚫ Level of secrecy
⚫ Nature of activities in functional department units.
For examples a small-medium business with one shop, a small personal computer with
standardized software may be sufficient. On the other hand a large corporation with
multiple branches spread across different geographical locations may need more
powerful computers supported with complex networks.
Basic Requirements of a CAS
1. Accounting Framework - This refers to a set of principles, coding and grouping

structure of accounting.
2. Operating Procedure - This refers to well defined operating procedures blended

together with the operating environment of the entity.
The software
An information system has several components, including people, data, procedures,

infrastructure and software applications. Our focus will be on the software.
The accounting software is at the heart of every computerized accounting system. The
accounting software is what people interact with to enter data and produce reports.
The accounting software is also sometimes refereed to as an accounting package.
At the heart of these accounting software is the concept of a database. A database is

any collection of data that is specially organized for rapid retrieval. On top of the
database is a database management system which controls access to the underlying
database.
There are many accounting packages available today on the market. Some of these
include Sage Accounting , Intuit QuickBooks ,Easy Books, Fresh Books, Wave and Xero.
Each has its specific strengths that make it suitable for a specific type of entity.
Advantages of CAS
A CAS has many benefits and the salient ones are as below:
Efficiency
A CAS enables faster processing of financial transactions than can be achieved

manually. This is because computers require far less time to perform a task than a
human being. This eliminates time wastage and leaves so much time for other
productive tasks.
Accuracy
Manual accounting is prone to error, normally, because of repeated posting the same
set of primary data to different accounts while preparing several types of reports.
A CAS greatly minimizes the possibility of error since primary accounting data is
entered once for all subsequent usage and processing.
Scalability
Manual accounting systems fail when there is an increase in a business’ transactions.

With a CAS , the cost of handling increase in transactions is almost negligible. In a CAS
the cost is mostly confined to acquiring additional manpower for data entry.
Instant and Quality Reports
With a CAS , you can generate reports as quickly as needed at a click of a button. The
inbuilt checks also ensure that data adheres to true accounting principles and hence
can be relied upon.
Flexible Reporting
Reporting in a manual accounting system is confined to periods. In a CAS, you can

generate reports at any time for any duration within the accounting period.
Security
A CAS has strict controls that ensure that only authorized users have access to financial
data and/or are permitted to conduct transactions.
Limitations of a CAS
CASs have their limitations as well. The salient ones being :
Costly
CASs can be costly. These come as cost of installation, maintenance and training.
The cost of acquiring the hardware infrastructure and software can be significant.
Over time the computer equipment and softwares have to be maintained in form of
upgrades.
In order to ensure effective use of the system , employees have to be trained. This
brings its own significant costs as well.
Inability to check for unanticipated errors:
Computers lack the capability to judge. The checks put in place are only limited to
known and anticipated errors since these are programmed. CASs are may not be so
useful when it comes to detecting unanticipated errors that humans may commit.
Security breaches
CASs are more prone to fraud since computer related crimes may be difficult to detect
and alteration of records may go unnoticed. This is different for a manual accounting
system where alteration can be easily noticed at first sight.
Computer hacking may also disrupt a business’s operations.

Ill Health
Heavy usage of computers may to various health problems i.e eye strain, wrist strain,
muscular pain and bad backs. This adversely affects the working efficiency of
accounting staff.
System Failure
Computers are prone to failure if not properly maintained. This failure may result in
loss of data. This is a very serious limitation with CASs. This may come about with
computer viruses and particularly relevant to accounting systems that make use of
internet facilities for their operation.It can be minimized with regular backups.
Note: These limitations can be mitigated/minimized by doing proper planning and

establishing good working standards.
Comparing a Manual Accounting System and a Computerized Accounting System.
The following are some key areas which can be looked at when comparing the two
systems:
Area MAN CAS
Recording Transactions recorded in Transactions recorded in

books of original entries. a well designed database.
Classification Transactions in books of Stored data processed to

original entry, further make data appear
classified by posting to classified.
ledger accounts.
No duplicity.
This results in data
duplicity
Summarizing Transactions are The generation of ledger

summarized to produce accounts is not necessary
trial balance by condition for trial
ascertaining the balances balance.
of various accounts.
Adjusting Entries Adjusting entries are There is nothing like

made to adhere to the making adjusting entries
principle of matching. for errors and
rectifications.
Financial Statements The preparation of The preparation of

financial statements financial statements is
assumes the availability independent of producing
of trial balance the trial balance
Links to Supporting Resources for further reading
⚫ https://ncert.nic.in/textbook/pdf/leca101.pdf
⚫ https://ncert.nic.in/ncerts/l/keac213.pdf
⚫ https://nios.ac.in/media/documents/SrSec320NEW/320_Accountancy_Eng/320
_Accountancy_Eng_Lesson13.pdf
⚫ https://edurev.in/studytube/Chapter-Notes-Computers-in-Accounting-
Accountancy-/b2950ced-0b1a-49c1-8ba5-81107d011d75_t

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Introduction to Computerized Accounting Notes

Information technology enables individuals and organizations achieve greater heights

To easily understand how computerized accounting work, we have to talk about

A TPS involves the following:

⚫ Information retrieval and reporting

One specialized TPS that handles accounting transactions is called a computerized

A CAS allows an entity to keep track of accounting information such as

higher accuracy which are significant challenges in manual accounting.

Any accounting system , whether manual or computerized has two aspects:

1. Accounting principles : well defined concepts under which it must operate.

The operating environment

This is the user-defined framework in a computerized environment. It consists of the

⚫ Nature of activities in functional department units.

Basic Requirements of a CAS

1. Accounting Framework - This refers to a set of principles, coding and grouping

2. Operating Procedure - This refers to well defined operating procedures blended

An information system has several components, including people, data, procedures,

At the heart of these accounting software is the concept of a database. A database is

A CAS enables faster processing of financial transactions than can be achieved

Manual accounting systems fail when there is an increase in a business’ transactions.

Instant and Quality Reports

Reporting in a manual accounting system is confined to periods. In a CAS, you can

Inability to check for unanticipated errors:

Computer hacking may also disrupt a business’s operations.

Note: These limitations can be mitigated/minimized by doing proper planning and

Comparing a Manual Accounting System and a Computerized Accounting System.

Area MAN CAS

Recording Transactions recorded in Transactions recorded in

Classification Transactions in books of Stored data processed to

Summarizing Transactions are The generation of ledger

Adjusting Entries Adjusting entries are There is nothing like

Financial Statements The preparation of The preparation of

Links to Supporting Resources for further reading

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