Computerised accounting is the new age method of gathering, recording and maintaining the financial information of a business or an organisation. This system made its entry in the world of accounting following the advent of computers in the 1980s.
With its arrival, computing and maintaining financial information became a child’s play for the organisations and businesses.
No wonder, it is now the predominant system of accounting in most companies and organisations.
Constituents of Computer Accounting
A Computerised Accounting System consists of the following three components:
- Hardware: It refers to the parts that can be felt or touched, such as monitors, printers, disk drives and the wired networks that connect them.
- Software: It is a set of instructions and programmes based on which the computer responds and operates.
- Humanware: It refers to a selected group of people accessing and running the hardware and software.
How does Computerised Accounting work?
Computerised accounting entails the utilisation of a set of accounting computer programmes or software that tracks, organises and manages transaction data and enables the user to get access to the data stored in the accounting database.
Every computerised accounting system has two fundamental requirements.
- Accounting Framework: It comprises of a set of codes, principles and grouping structure of maintaining accounts.
- Operating Procedure: It involves a well-defined method of operations aligned to an organisation’s operating environment for effective processing and storage of the transaction data.
As Computerised accounting is one of the database-oriented applications, it requires the following additional implements to maintain the financial records of an organisation.
- Front-end Interface: It is an interactive link that enables the user to communicate with the back-end database. For example, the accounting system may deal with a transaction related to the purchase of products through a purchase receipt that appears on the screen of the data entry operator. When the required data is entered, it is stored in the back-end database.
- Back-end Database: It is where the entered data is stored. It remains invisible to the user and responds according to the commands entered by them but within the user’s scope of access.
- Data Processing: It is a series of actions taken to convert an entered data into information useful for making decisions.
- Reporting System: It is a coordinated set of objects that form the report.
The transaction data maintained by a Computerised system is used for the following purposes.
- Generating monthly financial statements.
- Filing tax returns.
- Producing annual financial statements.
- Furnishing other financial information to verify the concerned organisation’s profitability, operations and efficiency.
With the advent of cloud storage and systems, storage and retrieval of financial accounts have become far more straightforward. Gone are the days when data needed to be stored in floppies, CD-ROMs and hard disks. Organisations are now just a few clicks away to download their backups stored in the cloud.
Advantages of Computerised Accounting
Today, Computerised accounting has emerged as the predominant method of accounting in large organisations and multi-national corporations, and that is certainly not for no reason.
The following are some principal advantages of computerised accounting:
- Fast: Accounting, in general, is a tedious job. However, with the advent of accounting software, it is no longer characterised as time-consuming.
- Accurate and Reliable: The probability of computation error is less in computerised accounting as unlike in manual accounting, the bulk of data need to be entered only once for subsequent accounting-related actions.
- Secured: Compared to physical accounting copies like ledgers and journals, transactions-related information remains safer in computers with the advantages to retrieve them anytime and anywhere.
- Scalable: Unlike manual accounting, computerised accounting can handle large-scale transactions. The only thing that is required is some additional operators.
- Enables standardisation: Computerised accounting generates accurate, neat and uniform data. It prevents the chaos and monotony of recurring jobs. All these factors contribute to a standardisation of the accounting process.
- Automation: The primary reason why computerised accounting has become so popular is that it comprises of a user-defined accounting format which enables automatic generation of financial documents with just a few clicks.
Disadvantages of Computerised Accounting
Despite its various benefits, computerised accounting is not without its share of limitations. However, such limitations arise mainly from the operating environment of this kind of accounting.
The following are some significant disadvantages of computerised accounting.
- High cost: Computerised accounting requires sophisticated hardware and accounting software. Besides that, it requires tech-savvy personnel. All these factors raise the overall expenditure of the concerned organisation substantially.
- Personnel Opposition: When everything is automated, organisations consider it prudent to do away with redundant employees. This kind of mentality generates fear and distress among existing employees who tend to oppose such steps of automation.
- System failure: The probability of a system crash due to software corruption or hardware failures is one of the most prominent limitations of computerised accounting.
- Security breaches: There is no dearth of hackers in today’s digital world. Therefore, a breach of security and information leak is considered an essential limitation of computerised accounting.
- Incompetence to check unexpected errors: Computers can anticipate and amend only those mistakes that have been defined by the accounting format of the user. It cannot detect random mistakes.