Computers in Accounting — Study Notes

1. Introduction

Computers have revolutionised the field of accounting. Manual accounting, with its journals, ledgers and worksheets, is being replaced by computerised accounting systems that are faster, more accurate and capable of handling large volumes of transactions. A computerised accounting system uses software to record, classify, summarise and report financial information. It combines the basic principles of accounting with the processing power, speed and storage capacity of computers to produce timely and reliable financial statements.

Computerised accounting is not a new system of accounting but a new medium of performing the same accounting functions. The concepts, conventions and rules of accounting remain unchanged; what changes is the method of processing. Data is entered once and is automatically posted to the ledger, and the trial balance and final accounts are generated with a few clicks. This chapter explains the components of a computerised accounting system, its advantages and limitations, and the features of various types of accounting software.

2. Components of a Computerised Accounting System

A computerised accounting system has the following components:

1. Hardware: the physical components of the computer such as the central processing unit, monitor, keyboard, mouse and printer.
2. Software: the programs that process the data, including the operating system and the accounting application software.
3. Data: the raw facts such as transaction details, account balances, names of customers and suppliers, which are stored in databases.
4. People: the users of the system, including data entry operators, accountants and managers who interact with the system.

3. Features of a Computerised Accounting System

The main features are:

1. It is simple and user-friendly.
2. It provides fast and accurate processing of transactions.
3. It maintains automatic updating of ledgers and accounts.
4. It generates the trial balance, Profit and Loss Account and Balance Sheet automatically.
5. It provides various reports on demand, such as cash flow statements and ageing schedules.
6. It allows the use of multiple currencies, tax calculations and invoice printing.
7. It provides security through passwords and user authorisation levels.

4. Advantages of Computerised Accounting

1. Speed and accuracy: transactions are processed quickly and arithmetic errors are eliminated.
2. Reliability: the system gives consistent results and follows the same rules every time.
3. Real-time information: updated balances and reports are available immediately.
4. Storage and retrieval: large volumes of data can be stored and retrieved easily.
5. Automated document production: invoices, bills and vouchers can be generated automatically.
6. Reduced cost and time: less paper work and lower clerical costs.
7. Better internal control: audit trails and user authorisations reduce the scope of fraud.

5. Limitations of Computerised Accounting

1. High initial cost of hardware and software.
2. The system may fail or stop due to power failure or hardware problems.
3. Data may be lost or corrupted if proper backups are not taken.
4. Trained personnel are required to operate the system.
5. Software and hardware become outdated and need regular upgrades.
6. The system is vulnerable to virus attacks and unauthorised access.
7. Errors in the input data will produce wrong output, since the system follows the principle of "garbage in, garbage out".

6. Accounting Software

Accounting software can be classified into three types:

1. Ready-made or off-the-shelf software: general purpose software available in the market, suitable for small businesses with common needs.
2. Customised software: ready-made software that is modified to suit the specific requirements of a business.
3. Tailor-made or custom software: software developed specially for a particular organisation, such as the banking software of a bank.

7. Selecting an Accounting Software

While selecting accounting software, the following factors should be considered:

1. The size and nature of the business.
2. The requirements of the management for reports and analysis.
3. The ease of use and the availability of trained staff.
4. The cost of the software and its maintenance.
5. The scalability, that is, the ability to handle growth.
6. The provision for data security and backup.
7. The availability of vendor support and updates.

8. Computerised Accounting vs Manual Accounting

In manual accounting, the journals and ledgers are maintained by hand, and the trial balance and final accounts are prepared manually. Errors are common and the work is slow. In computerised accounting, all the processing is automatic, reports are generated instantly, and the risk of arithmetic errors is eliminated. The grouping of accounts and the classification of assets and liabilities are also handled automatically through the software.

9. Security of Computerised Accounting

Security is essential in a computerised accounting system. Data can be protected through passwords, user access rights, encryption, firewalls and regular backups. An audit trail records every transaction with the name of the user and the time, so that any manipulation can be traced. The principle of separation of duties ensures that no single person controls all the functions.

Quick Revision Tables

Table 1: Components of a Computerised Accounting System

Table 2: Types of Accounting Software

Table 3: Manual vs Computerised Accounting

Mind Map

Important Diagrams (SVG)

Diagram 1: Components of a Computerised Accounting System

Diagram 2: Data Flow in a Computerised Accounting System

Common Mistakes

1. Students believe that computerised accounting changes the accounting principles, while only the medium of processing changes and the concepts remain the same.
2. The components of the system are confused; hardware is physical equipment while software is the program, and the two are often interchanged.
3. It is assumed that the computer cannot make any errors, while wrong input produces wrong output.
4. Ready-made, customised and tailor-made software are confused with each other; tailor-made software is built for a specific organisation.
5. Data security is ignored; passwords, backups and audit trails are essential in a computerised system.
6. Students forget that trained personnel are required to operate a computerised accounting system.
7. The limitation of high initial cost is overlooked while discussing the advantages of computerisation.

Exam Tips

1. List the four components of a computerised accounting system in order: hardware, software, data and people.
2. Present the advantages and limitations in two separate point lists.
3. Give a comparison table of manual and computerised accounting to score full marks.
4. Mention the types of accounting software and give one example of the use of each.
5. State that the principles of accounting remain unchanged and only the method of processing changes.
6. Include the security features such as passwords, backups and audit trails in your answer.
7. Quote the phrase "garbage in, garbage out" to explain that wrong input gives wrong output.

Conclusion

Computers have made accounting faster, more accurate and more informative. A computerised accounting system uses hardware, software, data and people to record and process transactions and generate reliable reports. While it offers great advantages in speed, storage and internal control, it also has limitations such as high cost, the need for trained staff and the risk of data loss. The selection of appropriate accounting software and proper data security are essential for the success of the system. Ultimately, computers are tools that make accounting more efficient, but the principles of accountancy continue to guide every step.