Before explaining computerized accounting, let us discuss how an accounting system can be represented:
The purpose of accounting is to provide information used in decision making. Accounting may be viewed as a system (a process) that converts data into useful information. The information processes include recording, maintaining and reporting.
Every business has numerous processes. Some are simple, others are complex and some other cumbersome. But as the business grows, acquires new customers, and new markets and keeps pace with constant changes in statutory regulations, the enterprise needs to maintain highly accurate and up-to-date accounting, inventory and statutory records. This is where computerized accounting helps, i.e., simplify, integrate, and streamline all the business processes, cost-effectively and easily.
Changes in Accounting
We observe a total transformation in the outlook of accounting – from traditional to modern and quantitative to qualitative information systems. Accounting as a profession has widened its perspective from stewardship accounting to managerial accounting, focusing on decision making.
Need for Computerized Accounting
Accounting for the financial transactions of a business is an important function of daily operations. Developing and using a proper accounting system will ensure that all transactions are recorded correctly and accurately on the enterprise’s general ledger. Technological advances ease the accounting process for many businesses.
Further, accounting is an important part of every enterprise. Businesses are required to keep books on their credits and debits. So, which is best for a business idea – people or software?
Many professional accountants and auditors state that accounting is a language of business which is accepted in all developed and developing countries. Every company applies accounting because it is generally accepted. Companies have to reveal certain financial and management information to the government, public and other users. In fact, accounting is an indispensable tool in the business decision-making process. With the development of information technologies, many computer products have been developed (software) that make accounting as easy as ABC for those who use them.
In order to stay on top, large enterprises have to analyze the performance of all organizational cells (starting from unskilled workers and operating personnel, and finishing with top managers and other key personnel) and discover all the deviations from the plan and their impact. Finally, an enterprise’s management has to take corresponding measures to avoid such deviations in the future. These procedures are called internal controls and include the following five elements: (1) control environment, (2) risk assessment, (3) monitoring, (4) information, and (5) communication, which are assessed separately and put together to rate organization’s performance.
Manual vs Computerized Accounting
Manual accounting implies that employees perform the whole accounting cycle manually on a periodic basis: they calculate, journalize transactions, prepare ledgers, cast trail balance, and prepare financial statement reports and other routines. Of course, it takes much time, resources, and effort in large organizations.
Computerized accounting implies that the only thing that employees do is recording transactions into the computer which processes the other steps of the accounting cycle automatically or by a request. But this is a very simplified view of computerized accounting because the transaction is a complex category that includes not only sales or acquisitions, but depreciation, premiums and wages calculation, dividends, etc. So computers provide accurate calculations and smart reports, but it takes much time, resources, and effort too and it is difficult to assess which accounting type is more fast and economic.
If manually accounting requires qualified accountants to keep a record of business transactions, computerized accounting requires accountants who can use specific software and, thus, cost more. Computer software calculates faster but it does not know what you need until you can clearly explain what exactly you need. In addition good computerized accounting system can cost thousands and even millions of rupees, depending on the complexity and the size of organizational need.
Computerized accounting provides a better internal control report system for any given period of time (a computer can control thousand of indicators simultaneously and create notifications to the appropriate departments or workers if some indicators do not correspond to the normal state), while manual control takes more time.
Advantages and Disadvantages of Manual and Computerized Accounting
Advantages of manual accounting
The advantages of manual accounting are as follows:
- Comparatively cheap workforce and resources
- Independence from machines
- Skilled workers availability
Disadvantages of manual accounting
Following are the disadvantages of manual accounting:
- Reduced speed
- Increase effort of accountants
- Relatively slower internal control reporting
- Routine work plus some other work
- More personal required
Advantages of computerized accounting
The advantages of computerized accounting are as follows:
- High speed and mobility of reporting
- Reliability, no routine work
- Increased accuracy
- Internal control system of increased productivity
- Easy backup and restoration of records
Disadvantages of computerized accounting
Below are the disadvantages of computerized accounting:
- Extremely high costs on developing, introducing and using the system
- Special training for personnel
- Increase personnel costs
- Dependence on machine
Obviously, both computerized accounting and manual accounting have advantages and disadvantages, but they perform the same task and the final result is the same. The main differences between them are costs, speed and mobility. Small and medium businesses usually prefer manual accounting without detriment to quality while large corporations apply complex accounting system which cost heavily but the effect from their application exceeds all the expectations.
Limitations of Computerized Accounting
Apart from the disadvantages, computerized accounting has certain limitations relating to its operation. Ther are as follows:
- Power failure, computer viruses and hackers are the inherent problems of using computerized systems.
- Once data have been put into the system, automatically the output is obtained. Hence the data being input to be validated for accuracy and completeness. We should not forget the concept of GIGO ( Garbage In (input) Garbage Out (output)).
- Accounting system that is not properly set up to meet the requirement of the business due to bad programming, inappropriate software, hardware or personnel problems can cause more havoc.
There is a danger of computer fraud, If a proper level of control and security measures (whether internal and external) are not properly instituted.
The limitations cited can be set right by establishing UPS, trained accounting personnel, a proper level of control and security measures. Though computerized accounting is considered to be fairly costly, it is preferred by modern business enterprises.m because of its speed, mobility, and accuracy.
How does a computer work?
The general format is:
Data → Process → Input
There are two types of data processing:
- Batch processing: Transactions data are accumulated until a large volume can be processed at one time, i.e. payroll, customer account, and general ledger.
- Online Processing: Processing transactions as they occur so that a user can obtain current information at ant time, i.e., accounts receivable, accounts payable, and inventories.
Note: Methodology relating to computerized accounting is not discussed here in detail.