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Chapter 12: Applications of Computers in Accounting — Study Notes

Comprehensive theory, key formulas, diagrams, and memory aids for Chapter 12: Applications of Computers in Accounting.

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1. Introduction

With the growing scale of business operations, traditional manual accounting has become slow, tedious, and prone to human error. The introduction of computers has revolutionized accounting. A Computerised Accounting System (CAS) helps in storing, processing, and generating accounting data efficiently, accurately, and rapidly.

2. Elements of a Computer System

A computer system consists of two main elements: 1. Hardware: The physical components of a computer (e.g., Keyboard, Monitor, CPU, Hard Drive, Printer). 2. Software: A set of instructions or programs that tell the hardware what to do. Software can be classified into: - System Software: Manages the computer hardware (e.g., Operating Systems like Windows, macOS). - Application Software: Designed to perform a specific task (e.g., MS Word, Tally, SAP, Excel).

3. Features of a Computerised Accounting System

  1. Speed: Data processing and report generation are almost instantaneous.
  2. Accuracy: Eliminates mathematical and clerical errors common in manual accounting (assuming correct data entry).
  3. Reliability: Computers can perform repetitive tasks continuously without fatigue or loss of focus.
  4. Up-to-date Information: The moment a transaction is entered, all relevant ledgers and reports (like Trial Balance) are updated automatically.
  5. Legibility: Reports generated are neat, typed, and easy to read, unlike manual handwriting.
  6. Storage: Vast amounts of data can be stored in a very small physical space (hard drives/cloud).

4. Manual Accounting vs. Computerised Accounting

Feature Manual Accounting Computerised Accounting
Data Entry Transactions are entered manually in journals. Entered directly into the system through customized screens.
Calculations Done manually, high chance of error. Done automatically by the software, 100% accurate.
Posting Done manually from journal to ledger. Automatically posted to respective ledgers instantly.
Trial Balance Prepared manually at period end. Can be generated instantly at any given point in time.
Speed Slow and time-consuming. Very fast and efficient.

5. Limitations of Computerised Accounting

  1. Cost of Installation: Hardware and software can be expensive to purchase and implement.
  2. Training Costs: Staff must be trained to use the new software.
  3. System Failure: Hardware crashes, software bugs, or power failures can halt work completely.
  4. Security Risks: Data is vulnerable to hacking, viruses, and unauthorized access.
  5. Health Issues: Prolonged computer use can lead to eyestrain, backaches, and other health problems for operators.
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