Accounting software is an integral part of the computerized accounting system. The accounting software should be selected after considering the level of skill and proficiency of the accounting professionals.
This is one of the important aspects that should be taken care of before introducing a computerized accounting system, as accounting professionals are responsible for accounting, not computers. The following are the two situations in which accounting software is required.
- When a manual accounting system is replaced with a computerized accounting system.
- When the existing or old computerized accounting system is replaced with the new computerized accounting system (with the change in technology).
Classification of Accounting Software
In a computerized accounting system, accounting software helps in recording and processing the accounting data to generate the accounting reports. Keeping in view this need and requirement, the accounting software can be classified into the following three categories.
- Ready-Made or Ready-to-Use
- Tailor-Made or Tailored
Ready-Made or Ready-to-use Software
This type of software is readily available in the market with prescribed and standard features. This accounting software is basically used by small-scale business enterprises, where the number of transactions is not so large. The cost of its installation and maintenance is also low. It has a limited number of users. Its adaptability is very high as it is relatively easier to learn and operate. It does not have a wide scope to link it with other information systems.
Advantages of Ready-made Accounting Software
The advantages of Ready-made Accounting Software are enlisted below:
- This software is easily available in the market.
- It is less expensive, as it comes with basic and standard features.
- It involves a lesser need for training.
- It is less sophisticated.
- Its adaptability is very high as it is relatively easier to learn and operate.
- It is suitable for small-scale business enterprises.
Disadvantages of Ready-made Accounting Software
The disadvantages of Ready-made Accounting Software are enlisted below:
- It has a limited number of users.
- It is not suitable for medium and large business organizations, where the number of transactions is very large.
- It fails to cater to the specific needs of the users.
- It suffers from a low level of data secrecy.
- It does not have a wide scope to link it with other information systems.
Customized software is software that has standardized features to meet the special requirements of the users. It provides the scope of changing the features of accounting software. The functions of this software can be programmed as per the needs and requirements of the users. This type of software best suits the needs of medium and large businesses. Its cost of installation and maintenance is comparatively higher. It can be easily linked to other information systems.
Tailor-Made or Tailored Software
Tailored or Tailor-made accounting software is the software that is developed as per the specifications and requirements of the users. This accounting software is generally used in large business organizations with multi-users and geographically scattered locations. It is designed to meet the specific needs of the users and forms an integral part of the organizational MIS. It has an infinite number of users.
Advantages of Customised and Tailor-made Accounting Software
The following are the advantages of Customised and Tailor-made Accounting Software.
- This software is suitable for medium and large business organizations.
- It caters to the specific requirements and needs of the users.
- It can be modified as per the needs of the organization.
- It has a high level of security and minimizes the risk of loss of data and unauthorized access to data.
- It cannot be easily imitated or duplicated in the market due to differences in the needs and requirements of different users.
- It does not involve a high cost of training as the training can be imparted within the organization by experienced personnel.
- It can be easily linked to other information systems.
- It forms an integral part of the organizational MIS.
Disadvantages of Customised and Tailor-made Accounting Software
The following are the disadvantages of Customised and Tailor-made Accounting Software.
- It involves the high cost of installation and maintenance.
- Developing customized software is a time-consuming process and involves a high cost of development.
- Maintenance of this software is difficult as there exists limited availability of knowledge with the developers.
- It lacks a standard training module.
Generic Considerations before Sourcing an Accounting Software
The following are some of the important points that should be taken into consideration before introducing accounting software in an organization.
Flexibility: This is the most important factor that should be considered before sourcing accounting software. The accounting software should be flexible in terms of data entry, retrieval of data, and generating the design of reports. The software should be able to run on different computers having different operating systems and different configurations. It should provide some flexibility to its users. It should also provide easy switch over between users, operating system, and hardware.
Cost of Installation and Maintenance: The selection of accounting software largely depends upon its cost to the organization. The cost of accounting software includes the cost of installing the related components and hardware, maintenance and alteration costs, cost of training the staff, and cost involved in recovering data in case of software failure. An organization needs to evaluate the benefits of the software against its costs. Based on its evaluation, an organization will introduce the software if the benefits are more than the cost and if it is in the affordable range of the organization.
Size of Organisation: The size of an organization also influences the selection of accounting software. Small-sized organizations, where the volume of business transactions is not so large, usually opt for simple and single user-oriented software. On the other hand, large-scale organizations, where the volume of business transactions is very large choose the latest and sophisticated software for meeting the multi-user requirements.
Training Needs: Another factor that affects the choice of software is the training needs. There is some accounting software that requires comparatively lesser training and is more user-friendly. Also, there is complicated software that requires continuous and thorough training.
Level of Secrecy: The level of expected security is one of the important factors that an organization bears in mind before sourcing accounting software. Software should be competent enough to prevent unauthorized access and manipulation of data. It should have in-built features of security. For example, in tailored software, the user rights may be restricted according to their work or responsibility criteria.
Exchanging Data Facility: The ability of accounting software to transfer data is another important factor to be considered in its selection. The accounting software must provide an easy and safe transfer of data from one system to another during the migration of the database.
Utilities/MIS Reports: Another factor that helps in software selection is the MIS reports and the extent to which they are used in the organization.
Vendor Reputation and Capability: The selection of software is also affected by the competence of the vendor. It depends upon the reputation of the vendor in the market, the user-reviews of the similar software, the extent of post-sales support services from the vendors, etc
Interest on Capital
Any interest paid on capital is considered as an expense and is shown in the Profit and Loss Account. Treatment of interest on capital in the final accounts is as follows.
Interest on Drawings
Treatment of interest on drawings in the final accounts is as follows. Firstly, interest in drawings is shown on the credit side of the Profit and Loss Account.
What is Operating Profit?
Operating Profit can be defined as the profit earned by carrying the normal business activities. It is computed by subtracting the operating expenses from the gross profit.
The balance sheet is the last financial statement that is prepared by any organization. This statement helps to ascertain the true financial position of an enterprise at the end of an accounting period
Profit and Loss Account
A profit and Loss Account is the second financial statement prepared by an organization. This account is prepared to ascertain the net results of a firm in form of net profit earned or net loss incurred during an accounting period.