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Ranker’s Academy, (A Leading Institute of Accountancy, Business Studies and Economics for XI & XII), Chapter – 13, , COMPUTERIZED ACCOUNTING SYSTEM, A computerized accounting system is an accounting information system that processes the, financial transactions and events as per accounting principles (GAAP) to produce reports as, per user requirements. In a computerized accounting system, the framework of storage and, processing of data is called operating environment which consists of hardware and software, in which the accounting system works., Modern computerized accounting system is based on the concept of database. A database is, implemented using a database management system, which is defined by a set of computer, programs (software) that manage and organize data effectively., Data Base Concepts, Data – Data are facts and figures about any phenomenon like people, places, objects, entities, or events. It is usually expressed in monetary units like number of units produced, number of, hours worked, quantity of materials consumed etc., Database – The data collected is to be stored so that they can be used by different people., This requires the creation of database. Thus database is a collection of data that is shared and, used for multiple purposes. Telephone directory is an example for database., Basic requirements of a database, 1. Front-end interface – It is an interactive link between the user and database, through, which the user communicates to the back-end database. E.g. a purchase transaction is, entered through “purchase voucher” which appears on the monitor., 2. Back-end database – It is the data storage system which is hidden from the user and, responds to the requirements of the user to the extent the user is authorized to access., 3. Data Processing – It is a series of actions that are taken to transform the data into, useful information which is meant for decision making., 4. Reporting system – Reporting is an integrated set of objects, which provides, meaningful information to the users., Comparison between Manual Accounting and Computerised Accounting, Basis, , Manual Accounting, , Computerised Accounting, , 1. Identifying, transactions, , Based on Accounting Principles, , Based on Accounting Principles, , 2. Recording, , In the books of original entries, , In an accounting database, (software), , 3. Classification, 4. Summarising, , By posting into ledger accounts, – results in duplication of, accounting data, By balancing all the ledger, accounts, , Add. 14-A, Anupam Nagar, Govindpuri-Gwl., , Automatic by the software – no, duplication of data, No need to balance the ledger, accounts, but it is automatic, , ACCOUNTING-11, , CHAPTER-13, , Page 1

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Ranker’s Academy, (A Leading Institute of Accountancy, Business Studies and Economics for XI & XII), 5. Financial Statements, , 6. Closing the Books, , Preparation of Final Accounts, presupposes the availability of, trial balance, After the preparation of financial, reports, accountants make, preparation for the next, accounting period. It is by, passing opening journal entries, , Not necessary to prepare the, trial balance for the preparation, of final accounts, There is year-end processing for, closing the books of accounts of, current year and to open new, accounts for the next accounting, period., , Advantages of computerized accounting system, 1. Speed – Accounting data is processed in a lightning speed when it is compared with, the manual effort., 2. Accuracy – The possibility of error is eliminated because the primary accounting data, is entered only once., 3. Reliability – Computers are highly reliable compared to human beings as they are free, from tiredness, boredom or fatigue., 4. Up-to-date information – The accounting records in a computerized accounting, system are updated automatically as and when the data is entered and stored and it will, be reflected in all the reports within no time. Therefore, latest information is available, without any additional effort., 5. Real time user interface – Most of the automated accounting system are inter-linked, through network of computers, so that the information is available to various users at, the same time on a real time basis., 6. Automated Document Production – The accounting reports such as cash book, trial, balance, balance sheet etc. are obtained just by a mouse click., 7. Legibility – The reports and data displayed on a monitor or printout is more legible than, handwritten words. So that the chances errors are minimized., 8. Efficiency – Computer accounting system ensures better use of resource and time., 9. Quality reports – The reports generated by this system are error free and highly, objective and can be relied upon., 10. MIS reports – Computerized accounting system facilitates the real time production of, management information reports, which will help the management to monitor and, control the business effectively. E.g. Credit limit to a particular customer can be set., 11. Storage and Retrieval – Computer accounting system allows the users to store data in, a manner that does not require a larger amount of physical space as in the case of, manual accounting., 12. Motivation and employee interest – The computer system requires specialized, training for staff which makes them feel highly motivated and develops interest on the, job., Limitations of computerized accounting system, 1. Cost of training – A huge amount may be spent for the training of employees in order, to adjust with this system of accounting., 2. Staff opposition – It is quite common, because the employees having a fear that they, shall be less important to the organization., Add. 14-A, Anupam Nagar, Govindpuri-Gwl., , ACCOUNTING-11, , CHAPTER-13, , Page 2

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Ranker’s Academy, (A Leading Institute of Accountancy, Business Studies and Economics for XI & XII), 3. Disruption – In the beginning stage of implementing this system in an organization, it, will suffer a significant loss of work time., 4. System failure – The danger of system failure is very serious limitation of this system, such as software damage, data loss, virus attacks etc., 5. Inability to check unanticipated errors – Since the computers lack capability to judge,, they cannot detect unanticipated errors as human beings commit., 6. Breaches of security – Alterations in records by unauthorized persons (hacking) will, mislead the accounting information., 7. Ill-effects on Health – The extensive use of computers may lead to various health, problems such as back pain, eyestrain, muscular pain etc., Accounting Packages – Variety of accounting software are available in the market. The most, popular software used in India are Tally and Tata Ex. Other popular software are Sage, Wings, 2000, Best Books, Cash manager, Ace Pays etc. They are also known as accounting, packages., The accounting packages are classified into three:, 1. Ready to Use – These types of accounting packages are suitable to small scale, business where the frequency or volume of transactions are very low., 2. Customized – Customized means altered for individual requirements. Standardized, accounting software available in the market may not suit or fulfill the user requirements,, in such a case it must be customized as per the requirement of the customer., 3. Tailored – These packages are specially designed to meet the specific requirements of, the users. Usually they are applicable to large scale organizations., Differences between accounting packages, Basis, 1. Nature of, Business, 2. Cost of, Installation and, maintenance, , Customized, Medium and Large, scale, , Tailored, Large scale and, typical business, , Low, , Medium, , High, , Low, , Medium, , High, , Limited, , As per specifications, , Unlimited, , Restricted, , Possible, , Possible, , 6. Adaptability, , High, , Relatively high, , Specific, , 7. Training, , Low, , Medium, , High, , 3. Secrecy, 4. Number of, users and their, interface, 5. Linkage to, other, information, system, , Ready to Use, Small scale, , Add. 14-A, Anupam Nagar, Govindpuri-Gwl., , ACCOUNTING-11, , CHAPTER-13, , Page 3

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Ranker’s Academy, (A Leading Institute of Accountancy, Business Studies and Economics for XI & XII), Factors to be considered before sourcing accounting software, 1. Flexibility – It must be suitable to the organization, its users (accountants), operating, system like Windows 98/2000/Professional/XP/2007, Ubuntu etc., 2. Cost of Installation and maintenance – A cost benefit analysis must be done before, sourcing accounting software. Some software is available very cheap to buy, involve, heavy maintenance and alterations costs such as cost of adding extra requirements,, training to staff, updating new versions etc., 3. Size of organization – It is an important factor for the choice of accounting package., Small organizations and non-profit organizations may opt for simple, single user, operated software. While a large organization may require customized or tailored, software to meet the multi-user requirements, geographically scattered and connected, through complex networks., 4. Ease of adaptation and training needs – Some accounting software is user friendly, requiring a simple training to users, while some others are complex in nature., 5. Utilities / MIS reports – The MIS reports and the degree to which they are used in the, organization also determine the acquisition of software. If we want to generate only the, final accounts may depend on a ready to use software., 6. Expected level of secrecy (Software and Data) – Another consideration before, buying accounting software is the security features which prevent unauthorized, personnel from accessing or manipulating data in the accounting system. Therefore it, must be capable to protect by passwords., 7. Exporting/Importing data facility – The transfer of database to other systems or, software like MS Word, MS Excel or to some other MIS reporting system, is sometimes, expected from accounting software in order to make reporting more flexible., 8. Vendors reputation and capability – It should also be considered before sourcing an, accounting software. This depends upon how long he has been in this business of, software development, and tries to ensure their capability to extend services in future., **************, , Add. 14-A, Anupam Nagar, Govindpuri-Gwl., , ACCOUNTING-11, , CHAPTER-13, , Page 4