We know that accounting in a normal sense is a process of identifying, analyzing, and recording business transactions. Traditionally, this process of accounting was carried manually i.e. by maintaining proper books of accounts such as journals, ledgers, etc. But with the passage of time as technology advanced and business transactions increased, it became difficult to maintain the accounts manually. Therefore, the process of accounting is now carried through a computerized system i.e. computers with the help of various accounting software. This process of accounting, with the help of computers, is termed a Computerized Accounting System. Records maintained in the computerized accounting system are exactly the same as maintained in the manual system i.e. Journal, Ledgers, Trial Balance, Trading Account, Profit and Loss Account, and Balance Sheet. The only difference is that, in the case of a computerized accounting system, all these records are maintained electronically with the help of accounting software.
Features of Computerised Accounting System
The various distinctive features of computerized accounting system areas are listed below:
- It helps in the online recording and storing of accounting data.
- It helps in generating computerized purchase and sale invoices.
- All accounts and transactions are codified logically which means each transaction or account contains a specific code.
- It helps in the grouping of accounts from the very beginning.
- It provides reports quickly and instantly such as Stock Summary, Trial Balance, Trading and Profit and Loss Account, Balance Sheet, VAT Returns, etc.
Advantages of Computerised Accounting System
The following are the various advantages of the computerized accounting system.
Speed: The speed of a computer system is incredible. Therefore, it is less time-consuming in performing various difficult operations. The accounting data is processed comparatively faster through computerized accounting systems than it can be done through manual efforts.
Accuracy: In computerized accounting systems, the possibility of errors is minimized or reduced as the primary accounting data is entered only once, for preparing various accounting reports and for subsequent usage and processes.
Reliability: As the computerized accounting system is well-equipped in performing repetitive operations, so it is comparatively more reliable than the manual system. Also, computerized accounting systems overcome the limitation of manual accounting systems such as tiredness, boredom or fatigue, etc., thereby enhancing the degree of reliability.
Up-to-Date Information: In computerized accounting systems, whenever some new accounting data is entered and stored, the existing accounting records automatically get updated. For example, when a transaction related to purchasing of machinery is entered in the computerized accounting systems, then automatically the cash balance and machinery balance on the Assets side of the Balance Sheet gets updated immediately. This ensures that the latest information is reflected in the accounting reports at any particular point in time.
Real-Time User Interface: Most of the automated accounting systems are interlinked through a network of computers. The availability of information to various users at the same time on a real-time basis is facilitated under the computerized system of accounting. It is very difficult to avail such a facility under a manual system as this calls for the availability of multiple copies of the accounting records that can be accessed by many users at the same time.
Automated Document Production: Under a computerized accounting system, accounting reports such as Cash Book, Trial Balance, Statement of Accounts, etc. are easily available. This is because most computerized systems have the standardized and user-defined format of accounting reports that are generated automatically. On the other hand, such ease cannot be enjoyed under the manual system. This is because the books of accounts are prepared by different employees, thereby subject to variations from person to person.
Scalability: The computerized system of accounting is highly scalable as the requirement of additional manpower is mainly confined to data entry for recording and storing the additional vouchers in the computer. Thus, the additional cost of
processing additional transactions are meager as compared to the cost associated with hiring new accountants to handle additional transactions.
Legibility: In a computerized accounting system, the accounting records are typed and presented in standard fonts. The various characters especially numbers, alphabets, graphics, etc. are more clear and can be read without any difficulty and ambiguity. But, in the manual system, the writing of different personnel varies; consequently, reading and interpreting the written material might cause errors due to misinterpretation.
Disadvantages of Computerised Accounting System
Given below are the various disadvantages of a computerized accounting system.
Huge Cost: The establishment of a computerized accounting system and the regular updating of various hardware and software from time to time involves substantial costs.
Requires Proper Control: Huge amount of important data is stored in a computerized accounting system. Therefore, proper control needs to be maintained at all times so as to avoid loss of data.
Training Cost: For efficient and effective working with the computerized accounting system, the organization requires specialized personnel. This requires regular training of the staff with the implementation of newer versions of hardware and software. Training of staff involves huge cost.
Destruction of Data: In a computerized accounting system, there are higher chances of the destruction of stored data due to viruses or some other technical failures. Therefore, proper backup of the data is required to be maintained at regular intervals.
Resistance: An organization may face resistance or opposition from its existing staff for the introduction of the computerized accounting system. It may happen because of their insecurity or fear that the introduction of such a system might reduce their individual importance in the organization.
Interruption: Considerable time is involved in switching over from an existing accounting system to a computerized accounting system. It is likely that the staff might take additional time to adapt to the new working environment which may lead to loss of work time.
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.
What are Adjusting Entries?
In order to incorporate adjustments in the financial statements, we pass the required Journal entries, which are termed as adjusting entries.