Definition: Computerized accounting refers to carrying out accounting functions or processes using computers. It involves recording and analyzing financial transactions electronically over accounting software.
The accounting software serves as a framework for data recording and processing. Companies may use readymade software available or get customized accounting software.
It provides vital information in the form of reports according to user requirements. These users can be:
Computerized accounting is an information system that uses artificial intelligence. It also involves the integration and automation of accounting systems. The input of data and preparation of reports are as per GAAP.
Note: GAAP is an abbreviation for Generally Accepted Accounting Principles.
Human intervention is relatively less in computerized accounting. It results in generating financial statements that are:
Manual accounting is necessary to input the correct information in the accounting framework.
In the current scenario, all organizations use computerized accounting except small ones. Small organizations may continue to use manual accounting to save costs.
Content: Computerized Accounting
- Basic requirements
- Types Computerized Accounting Software
- Grouping of Accounts
- Difference between Computerized and Manual Accounting
The computerized accounting system provides several benefits as follows:
- Error-Free Accounting
A computerized accounting system uses artificial intelligence. The reports generated consider every minute detail of the transactions.
- Less Manpower
Preparing accounts over software requires less human resources. The requirement of personnel is only for data entry and analysis.
Rest every processing takes place automatically on the software.
- Consistency in Records
This accounting system has consistency in record maintenance. The system has a systematic pre-defined structure to store and display data.
The organizations have to feed the data inside the software. The software automatically creates Ledger, Trial Balance, Income Statements and Balance Sheet, etc.
- Time Efficient
The software’s are easy to use and consume less time in record maintenance.
The design and development of the software are, especially for accounting purposes. Hence, save time and costs for the organizations.
- Management and Control
Compared with manual accounting, managing and controlling financial data is easy.
We can access and retrieve information saved with a single click. This accounting system also provides security to the data.
Only authorized persons can access the companies accounts.
- Improved Efficiency
Automation of accounting systems helps in improving efficiency.
It enables optimization of time and resources along with accuracy in account maintenance.
- Attractive and Quality Reports
Report generation is automatic in this system. It utilizes the information saved by the user.
These reports analyze information. And depict it in a consolidated form using visual tools as per user requirements.
A computerized accounting system facilitates protection to the companies accounts.
The accounting software is password protected. And only allows authorized users to access the data.
Along with some advantages, computerized accounting has certain disadvantages too. Following are the disadvantages of computerized accounting.
- Data Corruption
The data stored in the software may get corrupted. The internal and external users can hamper the data in the software.
It also has a threat from the hackers who may access and leak companies crucial information.
The installation of the computerized accounting system leads to unemployment. Because of the automation, there is less need for personnel.
- System Failure
A computer is a machine and may have system failures. Consequently, the accounting process will stop until it is fixed. In the meantime, the accounts are manually managed or re-entered if required.
- Technology Obsolescence
There is continuous technological advancement in the current scenario. The accounting system will get outdated after a while.
Thus, one needs to reinvest to get the updated version. It unnecessarily consumes companies precious time and resources.
- Incorrect Data Input
In a computerized accounting system, the data entry is manual. Hence, there can be errors at the time of data entry. It will result in inaccurate data and unidentifiable errors.
- Skilled Staff
This system demands specified skills for software operation. The organization needs to hire skilled personnel for operating the accounting software.
- Addition to Cost
Acquiring, installing and maintaining software is an expensive affair. Small firms may not afford these costs. And hence, continue to use manual accounting.
- Programme Based
This accounting system is programme based and follows pre-defined instructions. It may not foresee unknown errors in the statements.
- It facilitates the availability of data to internal and external users.
- This system helps in performing speedy and accurate accounting processes.
- Helpful for large organizations that contains bulk transactions.
- It enables performing payroll, creditors and debitors accounting.
- An organized way of maintaining accounts and report generation.
- Digital Storage of Data: The recording of data is in a digital form in this system. It provides convenience in data modification, retrieval and removal.
- Quick Updation: The changes in stock are reflected simultaneously with data entry.
- Integrated System: It is an integrated system that is faster and simple to use.
- Avoids Monotony of Work: The accountants usually get bored by monotonous work.
Computerized accounting is programming based. Thus, one only has to track the accounts after recording.
- Prompt Decision Making: The representation of accounting information is in a simplified form. So, decisions making is prompt and efficient.
- Transparency: The record of day-to-day activities is systematic and organized. Leading to transparency and control over the business.
- Customization: The accounting software isn’t rigid. Organizations can go for customized software based on their requirements.
- Scalability: Computerized accounting can be updated according to the companies structure.
It is capable of managing even a large volume of transactions.
Basic requirements for a Computerized Accounting System
- The system must fulfil the basic requirement of the business.
- The software should be easy to access and understand.
- The accounting software must be as per the current operating system.
- The software must be flexible and able to run on other platforms as well.
- One must consider the related costs and maintenance charges while software selection.
- The User Interface of the accounting framework should be less complex.
- There must be ease in importing and exporting the data.
- The software must provide data security and resist unauthorized access.
- One must also consider the credibility of the vendor providing the software.
Types Computerized Accounting Software
The selection of accounting software depends on the requirements of the user. The companies can choose among the three types of software mentioned below:
- Readymade Software
- Customized Software
- Tailor-made Software
These are the accounting software already available in the market. It is developed to meet the requirements of the users in general. Companies can buy this software and do not require expertise to use it.
Example:- Tally, Professional Accountant and Busy, etc.
- It is feasible for small companies as it is less costly.
- There is no requirement for special skills to operate the software.
- Suitable for the organization will low volume transactions.
- The data is less secured and sensitive to accounting frauds.
- Inter-connectivity with other softwares is minimum.
- A limited number of users can work on the software simultaneously.
Here, the modifications are made to the existing software. These modifications are in accordance with the special requirements of the user. The companies have to pay additional charges for the modification.
- Suitable for medium and large-sized companies.
- It is comparably costly than the readymade software.
- Capable of managing a large number of financial transactions.
- Companies have to train employees to operate the software.
- The software can be linked to the companies Management Information System(MIS).
- Data is more secured in the customized software.
- Some specified number of users can get authorized access.
It refers to the software’s design and programming based on user-specific requirements. Large organizations with units at scattered geographical locations opt for this software.
- It focuses on high data security at the time of development.
- Software installation and maintenance is quite expensive.
- Many users can access it at different locations.
- Training of the users is a must at every unit.
- Softwares are tailor-made, so they are inter-linked to the company MIS.
- It is comparably more complex.
Grouping of Accounts
One of the important parts of computerized accounting is the grouping of accounts. The categorization of accounting transactions is as per standards. Because the preparation of an accounting report depends on these transactions.
The grouping of accounts is as per their nature at the time of recording. They are categorized under major, minor and subgroups. Specific codes are assigned to the groups to be understandable by the computer.
Difference between Computerized and Manual Accounting
|BASIS||COMPUTERIZED ACCOUNTING||MANUAL ACCOUNTING|
|Meaning||In this, the accounting function takes place in a computerized accounting system.||In this, the accountants manually perform accounting functions.|
|Speed||The speed is faster because the accounting is digital. Only data entry is manual, and the accounting software does the rest.||The speed of accounting is slow. As humans have a limited capacity to do a certain job.|
|Data Storage||In this, the recording of data is inside the software. It can keep a large volume of data.||In this, the recording of data is on the papers and files. It is challenging to keep a large volume of data.|
|Error Detection||The software display alerts right at the time of the wrong entry.||The accountant may overlook some errors.|
|Data Security||The data is highly secured.||The data is less secured.|
|Data Entry||The personnel dedicated to operating the software inputs the data.||The accountant enter manually in the books of accounts.|
|Knowledge||Basic knowledge for correctly recording financial transactions is required.||In-depth knowledge is required.|
|Adjustment Entries||No need to pass separate entries for rectification.||The accountant needs to pass entries for rectification of errors.|
|Backup||The software keeps a backup of the data and can recover it if lost.||Data once lost cannot be recovered.|
Computerized accounting is virtual bookkeeping. This accounting system uses hardware and software for data storage and maintenance.
Using computers in accounting enables accuracy, easy maintenance and error-free accounting. The firms can customize the available software as required by them.
Traditionally, the companies maintained accounts manually. It is still used by the small vendors having limited business transactions.
Learning manual accounting is a must before using a computerized accounting system.