Accounting is called the language of business. It communicates financial information to a variety of users by preparing financial reports. It is considered as a system that collects and processes financial information of an enterprise and reports that information to users to enable them to make appropriate decisions.
Accounting helps to summarise a lot of financial transactions and events and enables accountants to convey economic information to their users. According to AiCPA, American Institute of Certified Public Accounts, accounting is ‘‘the art of recording, classifying and summarizing in a significant manner and its terms of money, transactions, and events, which are. in part at least. of a financial character and interpreting the results thereof”
Accounting, as an information system is a process of identifying, measuring, and communicating the economic information of an organization to its user who needs the information for decision-making. It is based on the following:
It is very important that accounts of different enterprises are prepared on a uniform basis and an enterprise maintains consistency in the preparation of financial accounts over a period of time. To have uniformity and consistency in the preparation and presentation of financial accounts, accounting operates within a framework of ‘Generally Accepted Accounting Principles (GAAP).
The term GAAP is used to describe rules developed for preparations of financial statements and are variously called concepts, conventions, axioms, postulates, principles modifying principles, etc. Accounting standards are the policy documents issued by the regulatory accountancy body, relating to various aspects of measurements, treatment, and disclosure of accounting transactions and events with a view to harmonize and standardize accounting policies.
So, accounting is a systematic but flexible exercise. It includes entering the transactions, preparation of vouchers, preparing books of accounts, drawing trial balances, and thereafter, preparing the trading account, profit and loss account, and balance sheet. It includes calculations relating to multiplication, addition, and subtraction. It is quite a monotonous job as transactions in the business are quite repetitive in nature.
On the basis of the record, the profit has to be ascertained based on some principles. The first part is monotonous and at times boring, whereas, the second part is more challenging and at times very interesting, when the records are kept manually, it is referred to as manual accounting.
When accounts are maintained with the help of computers, it is called computerized accounting. Most of the computer programs help in the proper basic recording of business transactions. Nowadays computer is being widely used in the field of accounting. It itself can do the calculation, collects and process accounting data and presents the results in the form of proper reports to the management for decision-making purpose. It also performs the function of recording, posting, classification, summarization, and interpretation of the results.
A computerized accounting system is an accounting information system that records and processes the accounting transactions and events and produced the reports as per the requirement of the user, according to Generally Accepted Accounting Principles (GAAP). Every accounting system whether manual or computerized works under a framework of well-defined principles i.e. accounting principles and in a user-defined network for maintenance of records and generation of reports.
Operating Environment: The framework of storage and processing of data in a computerized accounting system is called the operating environment.
The operating environment of a computerized accounting system consists of hardware and software of the computer system. Hardware and software are both dependent on each other. The type of software determines the structure of hardware whereas the selection of hardware depends upon the type and number of users, size of the organization, network and working of the organization, extent of working, etc.
In a small business where the number and variety of transactions are small, the number of customers and suppliers are less, a personal computer with the standard software may be perfect. But in an organization, whose business is spread over large area i.e., in different parts of city or country or world, a number of transactions are very large with variety, some powerful computer system with sophisticated software needed to maintain the voluminous data. For this purpose multi-user systems such as Unix, Linux, etc. are used.
Modern accounting systems use the concept of database. It is implemented using a DBMS i.e. Database Management System. Every’ computerized accounting system need two things:
- Accounting Framework
- Operating Procedure.
Requirements of database-oriented application of computer system:
- Front-end Interface
- Back-end Database
- Data Processing
- Reporting System.
Thus, a computerized accounting system based on database applications is a system where data is collected, stored, processed, and interpreted to generate reports for the decision-making purpose of management.
Comparison between Manual and Computerised Accounting
As we know that the accounting is the art of identifying, recording, classifying, and summarising financial transactions to produce the financial statements, so we can also compare the working of manual accounting and computerized accounting on the basis of the following heads:
- Identifying financial transactions
- Recording of these transactions
- Classification of the recorded transactions
- Adjusting Entries
- Preparation of Financial Statement
- Closing of books of accounts.
All the above functions, under the manual accounting system done according to the principle of accounting and by preparing vouchers, journal, ledger, trial balance, etc., manually and in a computerized system, all this work is done by some standard database software automatically. In both systems the accounting process is identical but the technology used is different.
Advantages of Computerised Accounting System
- Record and process a large volume of transactions
- Timely reporting
- Lower cost
- Less paperwork.
- Provide flexible reports
- Scalable to handle the growing transactions
- Up-to-date information
- VIIS reporting
- Storage and retrieval at ease
- Motivate the employees.
Limitations of Computerised Accounting System
- Huge training cost
- Opposition from staff
- Loss of work time
- The danger of system failure
- Ill effect on health
- Inability to check unanticipated errors
- Breaches of security.
Sourcing of Accounting Software:
Today there is a number of readymade software packages that are available in the market. Since the applications in the area of accounting are standard, the difference is in the number of features provided by an individual package. The most popular software used in India is Tally and Ex. Accounting software is an integral part of the computerized accounting system. It is the people, who are responsible for accounting, not the computer, so before acquiring the accounting software it is very important to analyze the expertise level of the people who would use it.
The need of acquiring software arises in two following situations:
- When the organization replaces the manual system of accounting with the computerized system of accounting.
- When the organization replaces the current accounting software with the new accounting software according to the recent changes.
Accounting Packages and Their Types
Since the application in the area of accounting is standard, every computerized accounting system is implemented to perform recording, classifying, storing, and summarizing of accounting data and generates reports according to the requirements of the user. So there is a difference in the number of features provided by an individual package.
The accounting packages are classified into the following categories:
- Ready to use
Considerations before Sourcing an Accounting Software
- Cost of installation and maintenance
- Size of organization
- Adaptation and training needs
- Level of utilities/MIS reports
- Level of secrecy
- Vendor reputation and capability
- Exporting/Importing data facility.