Computerized Accounting System Overview

Overview of Computerised Accounting System

• Business accounting transactions are processed through computers.
• Computer and IT usage provides businesses with quick, accurate, and timely access to information, sharpening their competitive edge and enhancing profitability.
• Data is processed by the hardware, commanded by the user through software.

Components of Computerised Accounting System (CAS)

• Procedure: A logical sequence of actions to perform a task.
• Data: Raw facts (input) for any business application.
• People: Users.
• Hardware: Computer, associated peripherals, and their network.
• Software: System software and Application software.
• CAS involves processing accounting transactions using hardware and software to produce accounting records and reports.
• Accounting software processes inputs for the generation of day books/journals, ledger, trial balance, position statement (balance sheet), and statement of profit and loss.
• Data acts as a raw element that accounting software processes to generate information in the form of accounting reports like journals and ledgers.
• The smallest named unit of data in an information system is a data item.
• Accounting transactions consist of four data elements: name of account, accounting code, date, and amount.
• A transaction records the inflow and outflow of resources.

Components of CAS

• The manual system is a traditionally popular method of recording financial transactions.
• Financial statements are end products of the accounting process following Generally Accepted Accounting Principles (GAAP).
• The accounting cycle involves identifying, measuring, and communicating financial information.
• The basic phases of the cycle include:
  • Analyzing transactions
  • Recording transactions in the journal
  • Posting journal entries to ledger accounts
  • Preparing a trial balance
  • Reviewing and adjusting accounts
  • Posting adjustments to prepare an adjusted trial balance
  • Using the adjusted trial balance to prepare financial statements.
  • Preparing the final adjusted ledger, balance sheet, and accounts.

Salient Features of CAS

• CAS is designed to automate and integrate business operations like sales, finance, purchase, inventory, and manufacturing.
• It provides accurate, up-to-date information and can be integrated with MIS, multi-lingual, and data organization capabilities for simplification and cost-effectiveness.
• CAS provides sufficient time for planning and increases data accessibility and user satisfaction, enhancing transparency for business operations and access to information.
• CAS provides user-definable templates for fast, accurate data entry and helps in generalizing documents and reports.
• CAS enables changing the volume of data processing in tune with the change in the business size.
• CAS ensures that generalized critical financial information is accurate, controlled, and secured.

Grouping of Accounts

• An increase in the number of transactions necessitates proper data classification, employing an accounting equation.
• The modern accounting system is based on the double-entry system where assets equal equities (liabilities and capital): A = E, where E = L + C.
• Assets = Liabilities + Capital
  • Liabilities are claims on the firm by creditors.
  • Capital is the claims of owners.
  • Assets = Liabilities + Capital + (Revenues – Expenses).
  • Can be divided into groups of accounts.
• Revenue means inflow of resources, which results from the sale of goods or services in the normal course of business and increase in capital
• Expenses imply consumption of resources in generating revenues.

Equity and Liabilities

• Shareholder's Funds
  • Share Capital
  • Reserves and Surplus
  • Money Received against Share Warrants
  • Share Application Money Pending Allotment
• Non-Current Liabilities
  • Long Term Borrowings
  • Deferred Tax Liabilities (net)
  • Other Long Term Liabilities
  • Long Term Provisions
• Current liabilities
  • Short Term Borrowings
  • Trade Payables
  • Other Current Liabilities
  • Short Term Provisions

Assets

• Non-Current Assets
  • Fixed Assets
    • Tangible Assets
    • Intangible Assets
    • Capital Work-in-Progress
    • Intangible Assets Under Development
    • Fixed Assets held for Sales
  • Non Current Investments
  • Deferred Tax Assets (net)
  • Long Term Loans and Advances
  • Other Non-Current Assets
• Current Assets
  • Current Investments
  • Inventories
  • Trade Receivables
  • Cash and Cash Equivalents
  • Short Term Loans and Advances
  • Other Current Assets

Revenues & Expenses

• Revenues
  • Sales
  • Other Income
• Expenses
  • Material Consumed
  • Salary and Wages
  • Manufacturing Expenses
  • Depreciation
  • Administrative Expenses
  • Interest
  • Selling and Distribution Expenses
• Hierarchical relationships require proper codification to ensure neatness of classification.
• Code: A system of letters or figures with arbitrary meaning for brevity and machine processing, serving as an identification mark.

Codification of Accounts

• The coding scheme of account-heads should lead to grouping of accounts at various levels to generate financial statements.
• Code examples
  • 1: Equity and Liabilities
  • 2: Assets
  • 3: Revenues
  • 4: Expenses
  • 11: Shareholder's Funds
  • 13: Non-Current Liabilities
  • 14: Current Liabilities
  • 21: Non-Current Assets
  • 23: Current Assets
• The above codification scheme utilizes the hierarchy present (used) in grouping of accounts.
• The gap in code in the 2nd digit (e.g. after 1, 3 instead of 2) is used to provide flexibility.
• Account codes listed in ascending (i.e. increasing) order are automatically listed as per the desired hierarchy.

Sequential Codes

• Numbers and letters are assigned consecutively, commonly used for source documents like checks and invoices, facilitating document searches and identification of missing codes.
• Examples
  • CL001: GCERT LTD
  • CL002: XYZ LTD
  • CL003: ARIL CORPORATION OF INDIA

Block Codes

• A range of numbers is partitioned into sub-ranges allotted to specific groups, with numbers within a sub-range following a sequential coding scheme.

Mnemonic Codes

• Alphabets or abbreviations used as coding symbols.
• Examples include SJ (Sales Journals) and HQ (Head Quarters).
• The first step is to develop a coding structure (scheme).
• Should be used to develop individual codes for each student.
• Coding structure requires identification (finalization) of hierarchy of schooling system and that of various attributes (parameters) associated with a student.

Methodology to Develop Coding Structure and Coding

• Coding structure:
  • Trust → School → Entry-year → Stream → Class → Section → Student
  • The above coding structure is just an example. In real life you would need to design the structure that makes the most sense for the task
• Stream could be science, commerce, or general.
• A class may be divided into sections.
• Assumptions when deciding on a coding structure
  • Only one trust exists so skip
  • Maximum of 99 schools: allocate 2 digits
  • Allocate two digits for the entry year.
  • Stream is one digit
  • Class, allocate 2 digits.
  • Class sections, 1 digit allocated
  • 2 Digits for the number of students.

Coding Structure for Students Example

• The following code structure is just an example and depends on the variables listed above
• Digits code:
  • 06 School Code
  • 08 Entry-year to Current Class (i.e. XII)
  • 1 Stream (i.e., Science – Non-Bio)
  • 12 Current Class (XII)
  • 2 Section Code (2 for Section-B)
  • 54 Roll No of the Student in the Section of Class XII

Using Software of CAS

• Activities in using CAS software.
  • One-time: Creation of organization details, accounting year, and type of ledger.
  • Recurring: Entry of transactions and generation of reports.
• Transactions are recorded on cash, bank, purchase, sales, and journal vouchers.
• Reports include day books, ledgers, trial balance, profit and loss statement, position statement, and cash flow statement.

Security Features of CAS Software

• Accounting software ensures data security, safety, and confidentiality through:
  • Password Security.
    • Enables user access by system-defined rights.
  • Data Audit.
    • Enables one to know as to who and what changes have been made in the original data thereby helping and fixing the responsibility of the person who has manipulated the data and also ensures data integrity.
  • Data Vault.
    • Additional security through data encryption, scrambling the information to make interpretation extremely difficult, ensuring data security even if it lands in wrong hands.
  • Can be used to implement various sub-systems through a computerised system.

Advantages of CAS

• Timely generation of reports and information in desired format.
• Efficient record keeping.
• Ensures effective control over the system.
• Economy in the processing of accounting data.
• Confidentiality of data is maintained.

Limitations of CAS

• Faster obsolescence of technology necessitates investment in shorter periods.
• Data may be lost or corrupted due to power interruptions.
• Data are prone to hacking.
• Un-programmed and un-specified reports cannot be generated.

Accounting Information System (AIS)

• AIS and its sub-systems may be implemented through a computerised system.
• Subsystems:
  • Cash and Bank Sub-system: Deals with receipt and payment of cash, including electronic fund transfer.
  • Sales and Accounts Receivable Sub-system: Records sales, maintains sales ledger and receivables, and generates periodic sales and collection reports.
  • Inventory Sub-system: Records different items purchased and issued, specifying price, quantity, and date, and generates inventory position and valuation reports.
  • Purchase and Accounts Payable Sub-system: Manages purchase and payments to creditors, sorting purchase expenses, and generating supplier performance and payment schedule reports.
  • Payroll Accounting Sub-system: Handles payment of wages and salaries, providing wage reports with details on pay, allowances, and deductions.
  • Fixed Assets Accounting Sub-system: Records purchases, additions, deletions, and usage of fixed assets, generating reports on cost, depreciation, and book value of assets.
  • Expense Accounting Sub-system: Records expenses under broad groups like manufacturing, administrative, financial, selling, and distributions.
  • Tax Accounting Sub-system: Deals with compliance requirements for VAT, excise, customs, and income tax, mainly used in large organizations.
  • Final Accounts Sub-system: Deals with the preparation of profit and loss accounts, balance sheets, and cash flow statements.
  • Costing Sub-system: Determines the cost of goods produced, linking with other sub-systems for information on material, labor, and other expenses.
  • Budget Sub-system: Prepares budgets for the coming financial year and compares them with current actual performances.
  • Management Information System (MIS): Generates and processes vital reports for management decision-making, supporting functions like planning, organizing, and control.