Download Computarised Accounting Practices

S. Y. B. Com.
Computarised Accounting Practices
The First Computing Machine
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The first computing machine ever created was used for accounting. Countess Ada Lovelace
worked on a general purpose computing engine. Along with the mathematicians Charles
Babbage and Louis Menebria, Ada's writings describe how the computing engine operates and
what it can calculate. As the first description of how to build a computer, this is the basis of
computerized accounting.
IBM 9Pac
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After World War II, large-scale computerized accounting systems were available in the United
States. The IBM 9Pac was one of the first programming systems used by business employees
that did not require large amounts of specialized programming knowledge. A 9Pac manual from
1961 explains that this system could be used to add up the amounts of sales recorded by each
salesman at a company. Many modern accounting systems are derivatives of IBM's
computerized accounting software.
Accountants measure a business entity's income, expenses and changes resources. Back in
the day, prior to the widespread use of spread sheet and computer applications, Accountants
used journals and ledgers in which they recorded business transactions. Hence the term
keeping the books. As computer applications became main stream, this keeping of the books
Accountants do, has gradually migrated into computerized spreadsheets. Gradually, Accounting
systems dedicated to this function were developed and the term Computerized Accounting was
born.
Computerized accounting is the practice of bookkeeping and managing other accounting tasks
with the aid of computers. It is extremely common in modern organizations of any size.
Computerized accounting typically uses dedicated accounting software, spreadsheet programs
or a combination of the two.Computerized accounting has many advantages for a business or
an organization. If implemented properly, it vastly increases the speed and ease of both
recording and retrieving accounting information. It also allows accounting information to be
shared almost instantly via the Internet or local networks. Modern spreadsheet programs are
capable of automating many aspects of accounting, such as calculations and double entries. No
modern accountant operates successfully without skill in computerized accounting.
Computerized accounting vastly increases the efficiency of many accounting tasks, but it does
have a few downsides. Computers add programming errors and malfunctions to human error as
a source of inaccuracy in accounting. Such systems are also vulnerable to outside attacks such
as theft, viruses and hacking, particularly in systems connected to the Internet. However, the
compact nature of electronic data also leaves sensitive financial information more vulnerable to
theft from within. Computerized accounting is also more vulnerable to fraud, since electronic
data can be altered undetectable after entering data.
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The Advantages of Using Computerised Accounting Software
1. Larger businesses will often have customized programs made for their business.
The accounting programs carry out functions such as invoicing, dealing with
payments, paying wages and providing regular accounting reports such as trading
and profit and loss accounts and balance sheets.
The introduction of computerized accounting systems provide major advantages
such as speed and accuracy of operation, and, perhaps most importantly, the ability
to see the real-time state of the company’s financial position.
A typical computerized accounting package will offer a number of different
facilities. These include:
1. On-screen input and printout of sales invoices
2. Automatic updating of customer accounts in the sales ledger
3. Recording of suppliers’ invoices
4. Automatic updating of suppliers' accounts in the purchases ledger Recording of
bank receipts
5. Making payments to suppliers and for expenses
6. Automatic updating of the general ledger
7. Automatic adjustment of stock records
8.Integration of a business database with the accounting program
9. Automatic calculation of payroll and associated entries
Computerized accounting programs can provide instant reports for
management, for example:
1. Aged debtors’ summary – a summary of customer accounts showing overdue
amounts
2. Trial balance, trading and profit and loss account and balance sheet
3. Stock valuation
4. Sales analysis
5. Budget analysis and variance analysis
6. GST/VAT returns
7. Payroll analysis
When using a computerized accounting system the on computer, input screens have
been designed for ease of use. The main advantage is that each transaction needs
only to be inputed once, unlike a manual double entry system where two or three
entries are required. The computerized ledger system is fully integrated. This means
that when a business transaction is inputed on the computer it is recorded in a
number of different accounting records at the same time.
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The main advantages of a computerized accounting system are listed below:
1.Speed – data entry onto the computer with its formatted screens and built-in databases of
customers and supplier details and stock records can be carried out far more quickly than
any manual processing.
2. Automatic document production – fast and accurate invoices, credit notes, purchase
orders, printing statements and payroll documents are all done automatically.
3. Accuracy – there is less room for errors as only one accounting entry is needed for each
transaction rather than two (or three) for a manual system.
4. Up-to-date information – the accounting records are automatically updated and so
account balances (e.g. customer accounts) will always be up-to-date.
5. Availability of information – the data is instantly available and can be made available to
different users in different locations at the same time.
6. Management information – reports can be produced which will help management
monitor and control the business, for example the aged debtors analysis will show which
customer accounts are overdue, trial balance, trading and profit and loss account and
balance sheet.
7. GST/VAT return – the automatic creation of figures for the regular GST/VAT returns.
8. Legibility – the onscreen and printed data should always be legible and so will avoid
errors caused by poor figures.
9. Efficiency – better use is made of resources and time; cash flow should improve through
better debt collection and inventory control.
10. Staff motivation – the system will require staff to be trained to use new skills, which
can make them feel more motivated. Further to this with many ‘off-the-shelf’ packages like
MYOB the training can be outsourced and thus making a particular staff member less
critical of business operations.
11. Cost savings – computerized accounting programs reduce staff time doing accounts
and reduce audit expenses as records are neat, up-to-date and accurate.
12. Reduce frustration – management can be on top of their accounts and thus reduce
stress levels associated with what is not known.
13. The ability to deal in multiple currencies easily – many computerized accounting
packages now allow a business to trade in multiple currencies with ease. Problems
associated with exchange rate changes are minimized.
Computerized Accounting System Components
A good computerized accounting system or CAS will have a clean, easy-to-use interface.
From this interface, you should be able to enter data, export data into other formats, and
perform data validation operations. On the back end, databases will drive your CAS,
responding to queries about the information stored therein. Your consultant should be able
to install the CAS. While you don't need a large IT staff to install your computerized
accounting system and get started, it helps if you need to troubleshoot operations or need
help performing a specific function. Your CAS should have elements including:
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Accounts Payable: Allows you to manage invoices and bills that you must pay.
Accounts Receivable: Allows you to manage payments, billing, and income.
Payroll: Handles employee payroll within the accounting system.
Benefits Management: Allows for employee budget management, accrued vacation time
reporting, and other budget reporting.
Budgeting: Lets you create and manage a budget.
Assets: Lets you manage fixed and fluid assets, calculate depreciation, and perform other
asset management.
Reporting: Integrates your data with existing reporting standards, so that you can comply
with regulations that affect your business.
Project Reporting: Lets you manage the assets and workflow for multiple projects at one
time.
Supply Chain Management: Allows you to track inventory, suppliers, goods pricing, and
other supply side services.
Switching to a CAS
Switching to a CAS can feel overwhelming. To get started on the right foot, review your
finances before the migration and reconcile any errors. You may wish to hire an accountant
or financial manager to review your documents for you. Once you have everything in order,
install your chosen CAS or purchase a web-based system. Upload your existing data, or
enter data by hand if you need to. As you add the data, reconcile it with the existing
accounting to make sure that you don't introduce mistakes into the work. Transition to the
new system, but continue to use the old system for a while until you feel comfortable with
the new system.
Salient Features of Computerized accounting
1. Fast, Powerful, Simple and Integrated
Computerized accounting is designed to automate and integrate all the
business operations, such as sales, finance, purchase, inventory and
manufacturing. With Computerized accounting, accurate, up-to-date business
information is literally at the fingertips. The Computerized accounting combine
with enhanced MIS, Multi-lingual and Data organization capabilities to help
the company simplify all the business processes easily and cost-effectively.
2. Complete Visibility
Computerized accountings giving the company sufficient time to plan,
increase the customer base, and enhance customer satisfaction. With
Computerized accounting the company will have greater visibility into the dayto-day business operations and access to vital information.
3. Enhanced User Experience
Computerized accounting allows the company to enter data in a variety of
ways which makes work a pleasure. Adapting to the specific business needs
is possible.
4. Accuracy, Speed
Computerized accounting has User-definable templates which provides fast,
accurate data entry of the transactions; thereafter all documents and reports
can be generated automatically, at the press of a button.
5. Scalability
Computerized accounting adapts to the current and future needs of the
business, irrespective of its size or style.
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6. Power
Computerized accounting has the ability to handle huge volumes of
transactions without compromising on speed or efficiency.
7. For Improved Business Performance
Computerized accounting is a highly integrated application that transforms
the business processes with its performance enhancing features which
encompass accounting, inventory, reporting and statutory processes. This
helps the company access information faster, and takes quicker decisions.
Computerized accounting also guarantees real-time optimization of
operations and enhanced communication.
8. Quick Decision Making
Generates real-time, comprehensive MIS reports and ensures access to
complete and critical information, instantly.
9. Complete Reliability
Computerized accounting makes sure that the critical financial information is
accurate, controlled and safe from data corruption.
Data Processing Cycle
Important Stages in the Data Processing Cycle
What is Data Processing?
Data processing is simply the conversion of raw data to meaningful information through a
process. Data is manipulated to produce results that lead to a resolution of a problem or
improvement of an existing situation. Similar to a production process, it follows a cycle where
inputs (raw data) are fed to a process (computer systems, software, etc.) to produce output
(information and insights).
Generally, organizations employ computer systems to carry out a series of operations on the
data in order to present, interpret, or obtain information. The process includes activities like data
entry, summary, calculation, storage, etc. Useful and informative output is presented in various
appropriate forms such as diagrams, reports, graphics, etc.
Stages of the Data Processing Cycle
1) Collection is the first stage of the cycle, and is very crucial, since the quality of data collected
will impact heavily on the output. The collection process needs to ensure that the data gathered
are both defined and accurate, so that subsequent decisions based on the findings are
valid. This stage provides both the baseline from which to measure, and a target on what to
improve.
Some types of data collection include census (data collection about everything in a group
or statistical population), sample survey (collection method that includes only part of the total
population), and administrative by-product (data collection is a byproduct of an organization’s
day-to-day operations).
2) Preparation is the manipulation of data into a form suitable for further analysis and
processing. Raw data cannot be processed and must be checked for accuracy. Preparation is
about constructing a dataset from one or more data sources to be used for further exploration
and processing. Analyzing data that has not been carefully screened for problems can produce
highly misleading results that are heavily dependent on the quality of data prepared.
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3) Input is the task where verified data is coded or converted into machine readable form so
that it can be processed through a computer. Data entry is done through the use of a keyboard,
digitizer, scanner, or data entry from an existing source. This time-consuming process requires
speed and accuracy. Most data need to follow a formal and strict syntax since a great deal of
processing power is required to breakdown the complex data at this stage. Due to the costs,
many businesses are resorting to outsource this stage.
4) Processing is when the data is subjected to various means and methods of manipulation,
the point where a computer program is being executed, and it contains the program code and its
current activity. The process may be made up of multiple threads of execution that
simultaneously execute instructions, depending on the operating system. While a computer
program is a passive collection of instructions, a process is the actual execution of those
instructions. Many software programs are available for processing large volumes of data within
very short periods.
5) Output and interpretation is the stage where processed information is now transmitted to
the user. Output is presented to users in various report formats like printed report, audio, video,
or on monitor. Output need to be interpreted so that it can provide meaningful information that
will guide future decisions of the company.
6) Storage is the last stage in the data processing cycle, where data, instruction and information
are held for future use. The importance of this cycle is that it allows quick access and retrieval of
the processed information, allowing it to be passed on to the next stage directly, when needed.
Every computer uses storage to hold system and application software.
The Data Processing Cycle is a series of steps carried out to extract information from raw data.
Although each step must be taken in order, the order is cyclic. The output and storage stage
can lead to the repeat of the data collection stage, resulting in another cycle of data processing.
The cycle provides a view on how the data travels and transforms from collection to
interpretation, and ultimately, used in effective business decisions.
Significance of Computarised Accounting System
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No annual ritual of booka closure
High efficiency of Computarised Accounting
Easy corrections of Errors
No delay in generation of accounts and reports
Quick generation of customized reports
Facility to analyse performance of departments
Querying facility for real time information
Companywide availability of accounting information
Uniformity of accounting policies can be ensured
Better security data.
Inventory Accounting
Definition of 'Inventory Accounting'
The body of accounting that deals with valuing and accounting for changes in inventoried
assets. Changes in value can occur for a number of reasons including depreciation,
deterioration, obsolescence, change in customer taste, increased demand, decreased market
supply and so on.
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Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or in the
rendering of services.
Introduction
Advances in Information Technology (IT) have enabled companies to use computers to carry
out their activities that were previously performed manually. The ongoing revolution in IT has
had a significant influence on accounting information system. Today, almost all organizations
are using computers in their daily business. As computers become smaller, faster, easier to use,
and less expensive, the computerization of account ting work will continue.
Accounting activities that were previously performed manually can now be performed with the
use of computers. That is, accountants are now able to perform their activities more effectively
and efficiently than before. On the other hand, every organization constantly strives to maintain
optimum inventory to be able to meet its requirements and avoid over or under inventory that
can have an impact on the financial figures. Because inventory is always dynamic, its
management requires constant and careful evaluations of external and internal factors and
control through planning and review. Inventory management is a very important function that
determines the health of the supply chain as well as the impacts on the balance sheet. Effective
inventory management is all about knowing what is on hand, where it is in use, and how much
finished products result. According to Donald Reimer, CMC & Ravi Nayar, CMC, industry
averages suggest that a 20 percent reduction in inventory is achievable with computerized
inventory control system.
12.7 Management Information System and AccountingInformation System
In order to remain competitive, organisations depend heavily on InformationSystems.
Management Information System (MIS) is used the most commonform of information system. A
management information system (MIS) is a system that provides the information necessary to
take decisions and managean organisation effectively. MIS is supportive of the institution’s longtermstrategic goals and objectives. MIS is viewed and used at many levels
by management: Operational, Tactical and Strategic. Accounting InformationSystem (AIS)
identifies, collects, processes, and communicates economic information about an entity
to a wide variety of users. Such information isorganised in a manner that correct decisions can
be based on it. Every accounting system is essentially a part of the Accounting Information System (AIS)
w h i c h , i n t u r n i s a p a r t o f t h e b r o a d e r s y s t e m , v i z . t h e organisation’s
Management Information System.
Relationship of the accounting system with other functional management information
system
The diagram shown above entails the four widely recognised functionalareas of
management. An organisation operates in a given environment s u r r o u n d e d b y t h e
s u p p l i e r s a n d c u s t o m e r s . T h e i n f o r m a t i o n a l n e e d s emerge from the business
processes stratified into functional areas whereaccounting is one of them. The
accounting information system (AIS) receives a n d p r o v i d e s i n f o r m a t i o n t o
the various sub-systems of the institutional/integrated MIS.
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Accounting Information System (AIS) is a collection of resources (peoplea n d e q u i p m e n t ) ,
d e s i g n e d t o t r a n s f o r m f i n a n c i a l a n d o t h e r d a t a i n t o information. This
information is communicated to a wide variety of decision-makers. Accepting information
systems performs this transformation whether they are essentially manual systems or
thoroughly computerised.Conventionally, MIS was also perceived as day-to-day financial
accountingsystems that are used to ensure basic control is maintained over financialrecord
keeping activities, but now it is widely recognised as a broader concept and accounting system
is a sub component. T h e r e p o r t s generated by the accounting system are disseminated
tothe various users – internal and external to the organisation. The externalparties include the
proprietors, investors, creditors, financiers, government suppliers and vendors and the society
at large. The reports used by theseparties are more of routine nature. However, the internal
parties – theemployees, managers, etc. use the accounting information for decision-making and
control.
Accounting Inventory Methods
Inventory includes the raw materials, work-in-process, and finished goods that a company has on hand
for its own production processes or for sale to customers. Inventory is considered an asset, so the
accountant must consistently use a valid method for assigning costs to inventory in order to record it as
an asset.
The valuation of inventory is not a minor issue, because the accounting method used to create a
valuation has a direct bearing on the amount of expense charged to the cost of goods sold in an
accounting period, and therefore on the amount of income earned. The basic formula for determining
the cost of goods sold in an accounting period is:
Beginning inventory + Purchases - Ending inventory = Cost of goods sold
Thus, the cost of goods sold is largely based on the cost assigned to ending inventory, which brings us
back to the accounting method used to do so.
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There are several possible inventory costing methods, which are:
1. Specific identification method: Under this approach, you separately track the cost of each item
in inventory, and charge the specific cost of an item to the cost of goods sold when you sell the
specific item to which that cost has been assigned. This approach requires a massive amount of data
tracking, so it is only usable for very high-cost, unique items, such as automobiles or works of art. It
is not a viable method in most other situations.
When you buy inventory from suppliers, the price tends to change over time, so you end up with a
group of the same item in stock, but with some units costing more than others. As you sell items from
stock, you have to decide on a policy of whether to charge items to the cost of goods sold that were
presumably bought first, or bought last, or based on an average of the costs of all items in stock. Your
choice of a policy will result in using either the first in first out method (FIFO), the last in first out method
(LIFO), or the weighted average method.
The specific identification method refers to the tracking and costing of inventory based on the
movement of specific, identifiable inventory items in and out of stock. This method is applicable when
individual items can be clearly identified, such as with a serial number, stamped receipt date, or RFID
tag.
Specific Identification Method Requirements
The principle requirements of a specific identification tracking system are:
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Be able to track each inventory item individually. The easiest method is a durable metal or paper label
that contains a serial number. Alternatively, a radio frequency identification tag can contain a unique
number that identifies the product.
Be able to track the cost of each item individually. The accounting system should clearly identify the cost
of each purchased item, and associate it with a unique identification number.
Be able to relieve inventory for the specific cost associated with an inventory item when it is sold.
These requirements can be achieved with a simple accounting system, possibly just an electronic
spreadsheet, which makes the specific identification method applicable to smaller businesses.
Specific Identification Method Advantages and Disadvantages
The specific identification method introduces a high degree of accuracy to the cost of inventory, since
the exact cost at which something was purchased can be recorded in the inventory records, and charged
to the cost of goods sold when the related item is sold.
However, this method is rarely used, because there are few purchased products that are clearly
identified in a company's accounting records with a unique identification code. Thus, it is typically
restricted to unique, high-value items for which such differentiation is needed. Most organizations
instead sell products that are essentially interchangeable, and so are more likely to use a FIFO, LIFO,
weighted average, or similar system. It is also very time-consuming to track inventory on an individual
unit basis, which restricts its use to smaller inventory quantities.
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2. First in, first out method: Under the FIFO method, you are assuming that items bought first are
also used or sold first, which also means that the items still in stock are the newest ones. This policy
closely matches the actual movement of inventory in most companies, and so is preferable simply
from a theoretical perspective. In periods of rising prices (which is most of the time in most
economies), assuming that the earliest units bought are the first ones used also means that the least
expensive units are charged to the cost of goods sold first. This means that the cost of goods sold
tends to be lower, which therefore leads to a higher amount of operating earnings, and moreincome
taxes paid. Also, it means that there tend to be fewer inventory layers than under the LIFO method ,
since you will continually use up the oldest layers.
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The first in, first out (FIFO) method of inventory valuation is a cost flow assumption that the first
goods purchased are also the first goods sold. In most companies, this assumption closely
matches the actual flow of goods, and so is considered the most theoretically correct inventory
valuation method. The FIFO flow concept is a logical one for a business to follow, since selling off
the oldest goods first reduces the risk of obsolescence.
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Under the FIFO method, the earliest goods purchased are the first ones removed from the
inventory account. This results in the remaining items in inventory being accounted for at the
most recently incurred costs, so that the inventory asset recorded on the balance sheet contains
costs quite close to the most recent costs that could be obtained in the marketplace.
Conversely, this method also results in older historical costs being matched against current
revenues and recorded in the cost of goods sold; this means that the gross margin does not
necessarily reflect a proper matching of revenues and costs. For example, in an inflationary
environment, current-cost revenue dollars will be matched against older and lower-cost
inventory items, which yields the highest possible gross margin.
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The FIFO method is allowed under both Generally Accepted Accounting Principles and
International Financial Reporting Standards. The FIFO method provides the same results under
either the periodic or perpetual inventory system.
3. Last in, first out method: Under the LIFO method, you are assuming that items bought last are sold
first, which also means that the items still in stock are the oldest ones. This policy does not follow the
natural flow of inventory in most companies; in fact, the method is banned under International Financial
Reporting Standards. In periods of rising prices, assuming that the last units bought are the first ones
used also means that the cost of goods sold tends to be higher, which therefore leads to a lower amount
of operating earnings, and fewer income taxes paid. There tend to be more inventory layers than under
the FIFO method, since the oldest layers may not be flushed out for years.
What is LIFO?
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The last in, first out (LIFO) method is used to place an accounting value on inventory. The LIFO
method operates under the assumption that the last item of inventory purchased is the first one
sold. Picture a store shelf where a clerk adds items from the front, and customers also take their
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selections from the front; the remaining items of inventory that are located further from the
front of the shelf are rarely picked, and so remain on the shelf – that is a LIFO scenario.
4. Weighted average method: Under the weighted average method, there is only one inventory
layer, since the cost of any new inventory purchases are rolled into the cost of any existing inventory to
derive a new weighted average cost, which in turn is adjusted again as more inventory is purchased.
Both the FIFO and LIFO methods require the use of inventory layers, under which you have a separate
cost for each cluster of inventory items that were purchased at a specific price. This requires a
considerable amount of tracking in a database, so both methods work best if inventory is tracked in a
computer system.
The weighted average method is used to assign the average cost of production to a product. Weighted
average costing is commonly used in situations where:
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Inventory items are so intermingled that it is impossible to assign a specific cost to an individual unit.
The accounting system is not sufficiently sophisticated to track FIFO or LIFO inventory layers.
Inventory items are so commoditized (i.e., identical to each other) that there is no way to assign a cost
to an individual unit.
When using the weighted average method, divide the cost of goods available for sale by the number of
units available for sale, which yields the weighted-average cost per unit. In this calculation, the cost of
goods available for sale is the sum of beginning inventory and net purchases. You then use this
weighted-average figure to assign a cost to both ending inventory and the cost of goods sold.
The net result of using weighted average costing is that the recorded amount of inventory on hand
represents a value somewhere between the oldest and newest units purchased into stock. Similarly, the
cost of goods sold will reflect a cost somewhere between that of the oldest and newest units that were
sold during the period.
The weighted average method is allowed under both generally accepted accounting principles and
international financial reporting standards.
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PAYROLL ACCOUNTIMG SYATEM
In a company, payroll is the sum of all financial records of salaries for an employee, wages, bonuses
and deductions. In accounting, payroll refers to the amount paid to employees for services they
provided during a certain period of time. Payroll plays a major role in a company for several reasons.
From an accounting perspective, payroll is crucial because payroll and payroll taxes considerably affect
the net income of most companies and they are subject to laws and regulations. From an ethics in
business viewpoint payroll is a critical department as employees are responsive to payroll errors and
irregularities. The primary mission of the payroll department is to ensure that all employees are paid
accurately and timely with the correct withholdings and deductions, and to ensure the withholdings and
deductions are remitted in a timely manner. This includes salary payments, tax withholdings, and
deductions from a paycheck.
Payroll taxes
Government agencies at various levels require employers to withhold income taxes from employees'
wages.
Services Offering
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Create and maintain employee personal details and salary masters
Investment declaration and proofs verification included in payroll processing
Monthly payroll processing
One time payments like performance bonus, ex-gratia, etc.
Customisable earnings and deduction codes
Provision for arrears computation
Full and Final Settlement, provisional Form 16
Recovery of company loans and employee welfare scheme deductions
Hosted employee self service application Portico to:
 Raise queries
 View payslips, IT Report, Form 3A, Form 16
 Submit/modify investment declarations.
 IT calculator to predict tax
 Flexible compensation structure definition
 Payroll reimbursements submitted online
Reporting:
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Salary register in MS Excel format customised by department, cost-centre or business area
Payslips in PDF for validation
Password protected payslips by email or on Portico
Income tax computation reports on Portico
Payroll Variation Reports
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Statutory reports – Form 16, 12BA, Q24, 27A
Monthly income-tax statement and challan
Provident Fund Forms 12-A, 3-A, 6-A, 5, 10
ESIC contribution statements
Bank upload / transfer files in the required format, payment advice by bank
Professional Tax statements
Reimbursement balances reporting on monthly basis
Annual Salary Statements
Quarterly e-TDS (Form 24)
Form 16 and Form 12BA at year-end
All annual reports
Managerial remuneration reports as required under the Companies Act
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