A computerised accounting system (CAS) is a system of recording, processing, and presenting accounting information using computer hardware and software. It is based on the same principles, concepts, and conventions of accounting as the manual system, but the data processing is automated. The main components of a computerised accounting system are hardware, software, data, procedures, and people.
The computerised system replaces the traditional manual recording in journals, ledgers, and registers with data entry screens and automated posting. Once the transactions are entered, the system automatically posts them to the relevant accounts, balances the books, and generates reports such as the trial balance, the Profit and Loss Account, the Balance Sheet, and the cash flow statement. This reduces clerical effort, improves accuracy, and speeds up the production of financial reports.
Computerised accounting systems may be based on the Transaction Processing System (TPS) approach or the Management Information System (MIS) approach. While both help in recording transactions, the MIS approach also produces information for managerial decision-making. The chapter discusses the features, advantages, limitations, and the accounting process in a computerised environment.
2. Components of a Computerised Accounting System
The components of a CAS are:
Hardware: Physical components such as the computer, monitor, keyboard, printer, and storage devices.
Software: Accounting software such as Tally, which contains the coded instructions for processing data.
Data: The input transactions and master data such as the chart of accounts and opening balances.
Procedures: The set of rules and guidelines for operating the system, entering data, and generating reports.
People: The users who enter the data, operate the system, and use the outputs.
3. Basic Terms and Concepts
3.1 Data and Information
Data are raw facts and figures, such as a list of purchases or sales, that have no meaning by themselves. When data is processed and organised, it becomes information, which is meaningful and useful for decision-making. In a CAS, transactions are the data and the reports produced are the information.
3.2 Entity and Attribute
In a database, an entity is a real-world object about which data is stored, such as a customer or an item of stock. An attribute is a characteristic of the entity, such as the customer's name or the stock quantity.
3.3 Grouping of Accounts
In a CAS, accounts are organised in a hierarchical structure known as groups. For example, the group "Current Assets" may contain the subgroups "Inventories", "Trade Receivables", and "Cash and Cash Equivalents". This grouping enables the automatic preparation of classified financial statements.
4. Accounting Process in a Computerised System
The accounting process in a CAS involves the following stages:
Capture of data: Transactions are entered through the accounting software using vouchers.
Validation of data: The system checks the correctness of the data, such as the account code and the amount.
Processing of data: The system posts the transactions to the relevant accounts and updates the balances.
Output generation: Reports such as the trial balance, ledgers, and financial statements are generated.
Storage and retrieval: The data is stored in databases for retrieval and further analysis.
5. Transaction Processing System (TPS) vs Management Information System (MIS)
The TPS is concerned primarily with the recording of the day-to-day transactions and generating reports for external reporting. The MIS goes a step further and processes the data to generate information for planning and control, such as reports on cash flow, receivables ageing, and profitability analysis.
$$\text{MIS: Data Processing} \rightarrow \text{Information for Decision-making}$$
6. Advantages and Limitations of Computerised Accounting
6.1 Advantages
High speed and accuracy in processing.
Automatic posting and balancing of accounts.
Instant generation of financial statements.
Easy storage, retrieval, and backup of data.
Greater ability to handle large volumes of transactions.
Timely management information for decision-making.
Reduction in the cost of record-keeping in the long run.
6.2 Limitations
High initial cost of hardware and software.
Need for trained staff.
Risk of data loss due to hardware failure, viruses, or hacking.
The system is only as good as the data entered (garbage in, garbage out).
Dependence on electricity and technical support.
Lack of a permanent audit trail unless properly designed.
Potential for fraud if controls are weak.
7. Backup and Security of Data
Data backup is the process of copying data so that it can be restored in the event of loss or corruption. Backups may be full, incremental, or differential. Security measures include password protection, user access controls, encryption, and anti-virus software. The concept of data security ensures that only authorised persons can access, modify, or delete data.
Quick Revision Tables
Table 1: Components of a Computerised Accounting System
Component
Description
Hardware
Computer, printer, storage devices
Software
Accounting programs such as Tally
Data
Transactions and master data
Procedures
Rules and guidelines for operation
People
Users and operators
Table 2: Advantages and Limitations
Advantages
Limitations
High speed and accuracy
High initial cost
Automatic posting
Need for trained staff
Instant reports
Risk of data loss
Easy storage and backup
Garbage in, garbage out
Handles large volumes
Dependence on power supply
Table 3: TPS vs MIS
Basis
TPS
MIS
Focus
Recording transactions
Decision-making information
Output
Routine reports
Analytical reports
Users
Operational staff
Management
Mind Map
graph TD
A["Computerised Accounting System"] --> B["Components"]
A --> C["Accounting Process"]
A --> D["TPS vs MIS"]
A --> E["Advantages & Limitations"]
A --> F["Data Backup & Security"]
B --> G["Hardware, Software, Data, Procedures, People"]
C --> H["Capture -> Validate -> Process -> Output -> Store"]
F --> I["Full, Incremental, Differential backup"]
A --> J["Grouping of Accounts"]
Important Diagrams (SVG)
Diagram 1: Components of a Computerised Accounting System
Diagram 2: The Computerised Accounting Process Flow
Common Mistakes
Assuming that computerised accounting changes the basic accounting principles; it only automates the processing.
Forgetting that the output is only as accurate as the input, i.e., garbage in, garbage out.
Neglecting the importance of data backup and relying on a single copy of the data.
Ignoring user access controls and passwords, which increases the risk of fraud and unauthorised changes.
Confusing data with information; data becomes information only after processing.
Not understanding the grouping of accounts, which is essential for automatic report generation.
Believing that the MIS approach and TPS approach are identical; they differ in the depth of analysis.
Exam Tips
Memorise the five components of a computerised accounting system and their functions.
Distinguish clearly between the TPS and MIS approaches in descriptive answers.
Give practical examples of hardware and software, such as Tally, in your answers.
Explain the advantages and limitations in points to score full marks.
Link the accounting process in a CAS to the manual accounting cycle.
Write about backup and security measures such as passwords, encryption, and antivirus software.
Remember that the same double-entry system underlies both manual and computerised accounting.
Conclusion
The computerised accounting system has transformed the way accounting records are maintained and reports are produced. While it retains the fundamental principles of accounting, it replaces manual effort with automated processing, bringing speed, accuracy, and the ability to handle large volumes of transactions. The five components of hardware, software, data, procedures, and people work together in a process of capture, validation, processing, output, and storage. The advantages of computerisation are balanced by limitations such as cost, the need for trained staff, and the risk of data loss, which makes backup and security essential. A sound understanding of the computerised accounting system is indispensable for the modern accountant.