SEC_Understanding Computerised Accounting.pdf

SEC: UNDERSTANDING COMPUTERIZED ACCOUNTING Unit I: Introduction to Computerised Accounting Meaning and concept: A computerized accounting system is a software application that automates financial records and reporting processes to make them faster, more...

SEC: UNDERSTANDING COMPUTERIZED ACCOUNTING Unit I: Introduction to Computerised Accounting Meaning and concept: A computerized accounting system is a software application that automates financial records and reporting processes to make them faster, more accurate, and easier to manage. A company’s accounting system is the core of its financial management, as it processes all transactions within the organization. It reduces the manual entry of data, eliminates redundant operations, and reduces accounting error risk with built-in controls. An accounting system is a set of procedures and record-keeping systems for managing the financial and operational activities of an organization. Basically, it’s a method for tracking and managing the business’s finances. What Accounting Software Does?  Accounting software automates and streamlines the accounting processes by using computers to record and track a business’s financial transactions.  It is software for financial record-keeping and analysis.  It records the purchase of goods and services, sales value and other financial transactions.  Accounting Software saves time, money and resources.  It is a business tool for bookkeeping and other financial operations. Accountants use this software in recording and tracking financial transactions.  The software is designed to make accounting tasks easier and more accurate. Features of a Computerized Accounting System 1. Data Security: A computerized accounting system allows users to store their data in a central location. In this way, if any piece of paper that contains valuable information is lost, no one is at risk of having their information stolen. All the data is hence stored at a central location. 2. Improved Reporting: In Accounting software, various things are automated, and very less things are recorded manually. This helps in improving reporting of transactions and statements. 3. Accuracy and Speed: The automation of accounting processes with the help of various accounting software ensures that accounting work is done fast and accurately. 4. Scalability:  Computerized Accounting system is so flexible as to accommodate the changing business volume. 5. Quick Decision Making: Since a computerized accounting system generates real-time information, managers are quick to come up with instant decisions or solutions to a particular problem. 6. Advanced Features: While some accounting software is designed for sole proprietors and small business owners, others are tailored for larger enterprises. If the business is operated at a large scale, you may want to consider a computerized accounting system that comes with features like inventory management and multiple user access. 7. Reliability: A computerized Accounting system produces standard and accurate accounting information consistently. Advantages of Computerized Accounting System 1. Accuracy: Accounting errors are one of the biggest problems that businesses face in their accounting process. Accounting software is designed to anticipate common errors and correct them before they are added to the company’s records. It is more accurate than most manual systems. 2. Simplicity: Regardless of the size of a company, accounting software is designed to be straightforward and easy to use. This means that even new employees can quickly understand how to use the system and record their financial activities. 3. Financial Report Accuracy: Accounting software is designed to be completely accurate. Companies can be assured that their financial reports have no errors. This means that managers can quickly make decisions based on the accounting data. 4. Standardized Financial Reporting: The use of accounting software in a business ensures the production of standard financial statements over the years. These reports are very vital when comparing a company’s financial performance over the years, or when comparing different businesses that are similar in operation. 5. Greater Control:  A computerized Accounting system helps the management of a company to have greater control over its operations. This is more suitable for a company which is large in size and has multiple departments. All vital information is easily available with one click. 6. Integration: Most Accounting systems are usually integrated with other vital accounting systems, such as online banking. This means that important business processes are performed together and with speed. Disadvantages of Computerized Accounting System 1. Cost: Although accounting software is designed to simplify bookkeeping and reduce the cost of accounting services, it can also be costly to set up and maintain. Many businesses decide to use computerized accounting systems once they have reached a certain level of growth. 2. Lack of Expertise: Many business owners like to keep their accounting in-house. This means that they may not want to rely on an outside service to handle their bookkeeping. In this case, they may choose to use manual systems until they have the resources to implement computerized accounting tools. 3. Heavy Installation and Training Costs: The cost of Accounting software depends on its use. Some software goes at very high prices that are unaffordable to the business. Besides acquisition costs, installation and training costs can also be so high and beyond the company’s reach. 4. Disruption of Work: As newer versions of both the hardware and the software are introduced in the market, there is a need for businesses to update them regularly. Employees must be retrained for efficient use of such new tools. Re-installation and retraining result in a disruption of work. 5. Loss of Employment Security: The adoption of computerized accounting software means a lot of work is done by fewer employees. Such a move at times leads to lay-offs. Where lay-offs have not been done, employees live in fear of anticipated job loss. 6. Compromised Accuracy: The accuracy of financial records is as good as the data fed to the accounting software, thus the saying,’garbage-in, garbage-out.’ If the accuracy of the data entered is compromised, the software is bound to produce faulty or misleading accounting information. 7. Potential Fraud:  Since most of the financial/accounting data is stored in the cloud, professional hackers may gain access to a company’s records. Such actions may expose the assets of a business to greater risks. 8. Technical Failures: The accounting software may be rendered useless, when the premises where a business is housing are affected by technical glitches, such as regular power outages and computer virus attacks. Implementation of Accounting Cycle in Computerized Accounting The primary objectives of the accounting function in an organization are to process financial information and to prepare financial statements at the end of the accounting period. Companies must systematically process financial information and must have staff who prepare financial statements on a monthly, quarterly, and/or annual basis. To meet these primary objectives, a series of steps is required. Collectively these steps are known as the accounting cycle. The steps, applicable to a manual accounting system, are described below. The Steps of the Cycle 1. Collect and analyze data from transactions and events: As transactions and events related to financial resources occur, they are analyzed with respect to their effect on the financial position of the company. As an example, consider the sales for a day in a retail establishment that are collected on a cash register tape. These sales become inputs into the accounting system. Every organization establishes a chart of accounts that identifies the categories for recording transactions and events. The chart of accounts for the retail establishment mentioned earlier in this paragraph will include Cash and Sales. 2. Journalize transactions: After collecting and analyzing the information obtained in the first step, the information is entered in the general journal, which is called the book of original entry. Journalizing transactions may be done continually, but this step can de done in a batch at the end of the day if data from similar transactions are being sorted and collected, on a cash register tape, for example. At the end of the day, the sales of $4,000 for cash would be recorded in the general journal in this form: Cash 4000 Sales 4000 3. Post to general ledger: The general journal entries are posted to the, which is organized by account. All transactions for the same account are collected and summarized; for example, the account entitled "Sales" will accumulate the total value of the sales for the period. If posting were done daily, the "Sales" account in the would show the total sales for each day as well as the sales for the period to date. Posting to ledger accounts may be less frequent, perhaps at the end of each day, at the end of the week, or possibly even at the end of the month.  4. Prepare an unadjusted trial balance: At the end of the period, double-entry accounting requires that debits and credits recorded in the general ledger be equal. Debit and credit merely balances (e.g., assets and expenses) and other accounts have credit balances (e.g., liabilities, owners' equity and revenues). As transactions are recorded in the general journal and subsequently posted to the ledger, all amounts recorded on the debit side of accounts (i.e., recorded on the left side) must equal all amounts recorded on the credit side of accounts (i.e., recorded on the right side). Preparing an tests the equality of debits and credits as recorded in the general ledger. If unequal amounts of debits and credits are found in this step, the reason for the is investigated and corrected before proceeding to the next step. Additionally, this trial balance provides the balances of all the accounts that may require adjustment in the next step. 5. Prepare adjustments: Period-end adjustments are required to bring accounts to their proper balances after considering transactions and/or events not yet recorded. Under accrual accounting, revenue is recorded when earned and expenses when incurred. Thus, an entry may be required at the end of the period to record revenue that has been earned but not yet recorded on the books. Similarly, an adjustment may be required to record an expense that may have been incurred but not yet recorded. 6. Prepare an adjusted trial balance: As with an unadjusted trial balance, this step tests the equality of debits and credits. However, assets, liabilities, owners' equity, revenues, and expenses will now reflect the adjustments that have been made in the previous step. If there should be amounts of debits and credits or if an account appears to be incorrect, or error is investigated and corrected. 7. Prepare financial statements: Financial statements are prepared using the corrected balances from the adjusted trial balance. These are one of the primary outputs of the financial accounting system. 8. Close the accounts: Revenues and expenses are accumulated and reported by period, either a monthly, quarterly, or yearly. To prevent their not being added to or comingled with revenues and expenses of another period, they need to be closed out—that is, given zero balances—at the end of each period. Their net balances, which represent the income or loss for the period, are transferred into owners' equity. Once revenue and expense accounts are closed, the only accounts that have balances are the asset, liability, and owners' equity accounts. Their balances are carried forward to the next period.  9. Prepare a post-closing trial balance: The purpose of this final step is two-fold: to determine that all revenue and expense accounts have been closed properly and to test the equality of debit and credit balances of all the balance sheet accounts, that is, assets, liabilities and owners' equity. Old methods and machines used in accounting: The most common method of keeping the financial records of a company was manually. A bookkeeper kept the journals, the accounts receivable, the accounts payable and the ledgers in his best possible penmanship. In later years, an accounting machine, which was capable of performing normal bookkeeping functions, such as tabulating in vertical columns, performing arithmetic functions, and typing horizontal rows was used. The billing machine, which was designed to typewrite names, addresses, and descriptions, to multiply and extend, to compute discounts, and to add net total, posting the requisite data to the proper accounts, and so to prepare a customer’s bill automatically once the operator has entered the necessary information, was used. Early accounting machines were marvels of mechanical complexity, often combining a typewriter and various kinds of calculator elements. The refinements in speed and capacity made possible by advances in electronics and operating complexity of these machines. Many of the newer “generations” of accounting machines are operated by a computer to which they are permanently connected. Basics of computerized accounting Because of the minute by minute change in finances, accurate record keeping is critical. Computerizing a business’s general ledger, payroll, and other accounting tasks increases office efficiency. With a computer, you can request and receive an in house balance sheet, an income statement, or other accounting reports at a moment’s notice. While keeping your checkbook on a computer may not be practical, computers are great for handling complex home financial records. You can get statements on net worth and year’s tax deductible expenses within minutes. 1. Spreadsheets: Electronic spreadsheets allow you to do anything that you would normally do with a calculator, pencil and columnar scratch pad. Spreadsheets were primarily designed for managers who in the process of planning must do “what if” calculations. Due to their flexibility, electronic spreadsheets have found their way into small businesses and, to a lesser extent to homes. A typical integrated double entry accounting system will contain some or all of the following components: accounts receivable, accounts payable, general ledger, inventory, order entry, payroll, time, and billing. 2. General Ledger General Ledger is a labor saving device for the preparation of financial statements and for establishing multiple income and cost entries. 3. Accounts Receivable Accounts receivable, when computerized, can get your bills out the same day you’ve performed a service. An accounts receivable module prepares invoices and customer accounts, adds credit charges where appropriate, handles incoming payments, flags your attention to customers that are delinquent, and produces dunning notices. It allows you to have daily cash control. You get out the bills on time, yet you avoid errors such as billing a customer twice for the same item. The further advantage is that debits and credits are posted automatically to the general ledger, order entry, and in some instances inventory, once they are entered in accounts receivable. 4. Accounts Payable Accounts payable, when computerized, will provide for purchase order control, invoice processing, payment selection and handling, check writing and control, cash-requirements, forecasting, and Form 1099 preparation. It will also double-check the accuracy of the vendor’s invoice, and some software systems will cross-check it against the purchase order and the inventory module. 5. Inventory Control Inventory Control module has multiple functions, including tracking inventory for both costing and tax purposes, controlling purchasing (and the overall level of expenditure) and minimizing the investment in inventory (and subsequent loss of cash flow). The payroll module prepares and prints payroll checks, including all itemized deductions. It is integrated with the general ledger so you automatically set aside the correct amount for FICA and withholding. 6. Point of Sale Point of sale module captures all sales information at (or in place of) the cash register, including salesperson, date, customer, credit information, items, and quantity sold. It can produce sales slips or sales invoices, plus it reports on items, customer, and salesperson activity. 7. Purchasing and Receiving Purchasing and receiving module can represent an invaluable addition. It can generate purchase orders and track their fulfillment. You can find out which vendors are delivering on time and saving you the expense of having to follow up on partial and incomplete orders. 8. Time and Billing Module Time and billing module reduces manual and clerical work, simplifies the billing process, prompts you and your partners to bill on time, reduces unbilled work-in progress, minimizes unreported time, reduces unbilled time, measures and analyzes nonchargeable time and provides criteria to analyze staff performance. Because a computerized accounting system is basically a computerized data management system, the disposition of labor is almost the same. One staff member must serve as a data-base manager and be in charge of setting up the chart of accounts, establishing the interrelationships among the files and establishing and maintaining an audit trail. Concept of Accounting Groups: What is Group? : The conceptual underpinning for answering this question is an important issue in understanding the principles of a group. Basically there are some basic concepts for accounting groups which are described below : 1. The Parent Company Concept: It emphasizes legal control and assumes that it is for the equity investors of the parent company that the Group accounts are prepared and to whom a true and fair view must be disclosed. This concept makes no attempt to disclose a true an fair view to any minority shareholders in the subsidiary companies or to other interested parties. It assumes that a group consists of a parent company which dominates a number of dependent or subsidiary companies by the exercise of the voting power vested in the ordinary shareholders. In other words, dominance or control, is established by the existence of the power to exercise control, rather than actual exercise of control. This legal form is given precedence over the commercial substance. 2. The Entity Concept : The entity concept emphaises ‘de facto control’ and is based on the economic unit. It is founded on the principle that Group comprises a number of entities drawn together usually by unified management or the actual exercise of control into an economic unit. It gives equal importance to all shareholders, whether majority or minority. This way of looking the group is probably more appropriate for such users as employees and managers. This concept can also cover the case of unified management where there are directors in common to a nmber of companies who act in the interest of other companies of which they are directors. Methods of accounting for a “group” have evolved and include the following:  Cost method  Equity method  Acquisition method  Proportional accounting  Aggregate accounting  Merger accounting Accounting groups may comprise accounting, management accounting, financial reporting, auditing and taxation. Management accounting group cluster around five themes:  Management by accounting   Performance management  Costing systems  Financial modeling  Accounting profession and accounting education. Financial reporting group has a strong public policy dimension, focusing on auditing and the regulation of corporate reporting and taxation, from contemporary, historical and international perspectives. It includes:  Audit sampling  The conceptual framework of financial reporting  The history of accounting from feudalism to financial reporting in 19th-century Britain  The identification and measurement of marketing assets  Short-termism  Creative accounting and financial services markets  Comparative international accounting. Accounting packages There are various kind of accounting packages available in the market. These softwares are designed and developed as per the requirement of the business / corporate. Few of these softwares cater to particular industry and few of these software are generic like Tally etc. Depending on the size of the business and nature of the business these accounting packages can have several types of classification. Let’s study these classifications in detail: Custom Tailored vs. Standardized package Many of the small business require basic level of accounting which involves ledger, profit and loss account, cash book, vouchers etc. This type of need is catered by the generic software which is called as Standardized packages. These packages are easy to use and can be easily implemented for SMEs as they share common set of functionalities of accounting. Packages like Tally are an excellent example of Standardized packages. But for big companies or business that have specific requirement of accounting deals require an accounting package that could cater their specific needs. So to cater that group software companies develop customized accounting packages or tailor their existing accounting package (ERP module) as per business requirement. Custom / Tailored packages are more flexible than standardized packages. Usually custom / tailored package cost more than standardized packages Single vs. Multiple user For the companies which are small in operations and require only basis level of accounting, usually desktop based application based software serve their purpose which have single user. Single user accounting packages have only basic set of functionalities of accounts and less scalable. Packages like busy are single user based accounting package. Big companies which operate at multi locations require accounting package which could be installed at multiple locations and could be operated by multiple users at the same and all the accounting data could be stored in one location. These multi user packages are web based application and always require internet connectivity. These are highly scalable and require huge infrastructure. Overview of Standard Accounting Software Package: An accounting software package is the general and multipurpose accounting and data management software helping large and small organizations to manage day to day transactions. Nowadays accounting software packages are integrated to all business operations providing all in one solution to management for database management to report generations. Depending upon scale of operations organizations can opt for general purpose to standard or customized software’s. Codification in accounting: The Codification includes all accounting standards issued by a standard-setter within levels A through D of the current U.S. GAAP hierarchy, including FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF), and related literature. The Codification does not change GAAP; instead it reorganizes the thousands of U.S. GAAP pronouncements into roughly 90 accounting topics, and displays all topics using a consistent structure. The SEC guidance will follow a similar topical structure in separate SEC sections. The FASB expects that the new structure and new system will:  Reduce the amount of time and effort required to solve an accounting research issue.  Improve usability of the literature thereby mitigating the risk of noncompliance withstandards.  Provide real-time updates as new standards are released.  Assist the FASB with the research and convergence efforts required during the standard setting process.  Become the authoritative source of literature for the completed XBRL taxonomy.  The home page of the Codification Research System includes various items that users should be aware of, including:  A suggested approach for verifying the Codification content.  A Notice to Constituents that describes Codification-related matters, including content matters for constituent feedback. For example, the Notice addresses the standards and elevated guidance used to populate the Codification, the use of December 31, 2008, as the authoring effective date, and conflicts resolved by Board decision for which the Board is requesting feedback.  Content excluded from the Codification Research System on the verification launch date. The   FASB expects to release such content shortly after the initial launch. The Codification Research System also includes general information about how to use the online research system and special features such as Cross Reference Reports (to locate where standards reside), Join Sections (to join similar Sections from multiple Topics and Subtopics into a single document), and Go To (to jump directly to a specific Topic, Subtopic, Section, or paragraph). The Accounting Standards Codification excludes governmental accounting standards. Consideration for Selection of a good Accounting package There are many different types of accounting software packages and applications currently available today. To select the best accounting product you will first need to decide your individual and corporate needs. Small business accounting software functions much differently in many respects that accounting software manufactured as an enterprise resources planning solution for example. If you are a large enterprise or firm you will want to investigate a comprehensive enterprise solution that offers multi-user capability. Some examples of popular software programs in this field include Oracle People Soft Enterprise One and mySAP All-in-One. If you are looking for a basic accounting software package you may opt for SAP Business One or Microsoft Great Plains software. Small Business Software and Personal Accounting Software Small businesses can usually get away with a more basic program like QuickBooks Enterprise or Professional or MS Small Business Financials. If you are looking for an accounting software application for personal use, a basic accounting software program like quicken or QuickBooks or even Peachtree should easily accommodate your every need. Most of these software programs come equipped with accounts payables, account receivables, payroll and general ledger features. Most will also generate basic reports, invoices and keep track of other expenses, assets and small financial items you may want to keep track of from day to day. The primary difference between these smaller software applications and larger enterprise solutions is the smaller applications won't necessarily integrate to serve multiple operations like manufacturing, marketing and engineering. Most ordinary people or small businesses however will not need this capability in a software accounting package. In business, it is important to know from where the funds will come and go. Doing this accounting work manually is certainly going to be cumbersome and will take a hell lot of time. Broadly speaking the benefits of accounting software can be outlined as: 1. It helps you do your accounting tasks quickly. It assists you to run your business without any hiccups. 2. It provides you with 100 % correct reports and tools that makes your business accounting simple and help you manage financial data effectively. 3. You are able to manage the flow of cash in little time.  4. It is also possible for you to predict future bills, revenues and reports generating. But before buying accounting software for your business, certain things like what are the functionalities you want in your software must be considered for sure. You should look for user-friendly software. Your accounting software should resemble its traditional paper counterparts as it will help to run your software smoothly. You can explore the functionalities of the software if you are familiar with the layout. E-commerce and Internet are also important for your small business. Look for software which combines all these features. There are many benefits of accounting software and there are many accounting software in the market as well. And choosing the best software and learning about its benefits is tantamount to learning the benefits of a small business accounting software. Consider Microsoft Office Small Business Accounting 2006, for instance. It is a brand in itself in the field of small business accounting software. It is a full-featured financial management program designed for companies with 25 or fewer employees. Small business software analyzes financial data with customizable reports including Profit and Loss, Customer Transaction History, Reconciliation Detail, Check Detail, and more. You can easily judge the financial status of your business with it. Built-in features of a small business software such as cash flow forecasting tools, payroll services help to control costs and manage risks. Most of the small businesses accounting software are exceptionally good. It is very hard to choose one or to choose the best. Microsoft Office Small Business Accounting 2006 and QuickBooks Accounting software are two really good software. For, they can easily synchronize with MAC OS without any difficulty. The different categories or types of accounting software are as follows: a) Small business/personal accounting software which are mainly meant for home users. They are simple and inexpensive with simple functioning such as management of budgets. b) Low end accounting software are for small business markets that are capable of serving a single national market. Such software are characterized by 'single entry' products. c) Mid market accounting software are for companies with large businesses. These software are capable of serving the needs of multiple national accountancy standards and facilitate accounting in multiple currencies. d) High end accounting software are complex and expensive business accounting software that are also known as Enterprise Resource Planning or ERP software. Questions / Answers a) What do you mean by computerized accounting? Discuss the implementation of Accounting cycle in computerized accounting. b) Discuss the modern methods and machines used in accounting. Also explain the advantages of these methods over traditional methods. c) Explain the concept of General ledger. d) Explain various advantages of using the computer in accounting. e) Discuss different types of accounting group in brief. f) Explain the concept of hierarchy of accounts g) Differentiate between Custom packages vs. Standardized packages h) Differentiate between Single user vs. Multi user packages. i) Briefly explain any of the accounting package. Enumerate all its features j) Explain codification in accounting k) What are the factors to be considered for selecting a good accounting package l) List some top accounting softwares available in the market.  Unit II: Organization of Accounting Data Organizing accounting data, Concept of Data processing To organize the accounting data properly, data should be rightly obtained and should be properly formatted and from the right resources. Once data is obtained next step is to process this data which is called as Data processing. Lets discuss data processing in detail. Data processing Data processing is any computer process that converts data into information or knowledge. The processing is usually assumed to be automated and running on a computer. Because data are most useful when well-presented and actually informative, data-processing systems are often referred to as information systems to emphasize their practicality. Nevertheless, both terms are roughly synonymous, performing similar conversions; data-processing systems typically manipulate raw data into information, and likewise information systems typically take raw data as input to produce information as output. To better market their profession, a computer programmer or a systems analyst that might once have referred, such as during the 1970s, to the computer systems that they produce as data processing systems more often than not nowadays refers to the computer systems that they produce by some other term that includes the word information, such as information systems, information technology systems, or management information systems. In the context of data processing, data are defined as numbers or characters that represent measurements from observable phenomena. A single datum is a single measurement from observable phenomena. Measured information is then algorithmically derived and/or logically deduced and/or statistically calculated from multiple data. (evidence). Information is defined as either a meaningful answer to a query or a meaningful stimulus that can cascade into further queries. More generally, the term data processing can apply to any process that converts data from one format to another, although data conversion would be the more logical and correct term. From this perspective, data processing becomes the process of converting information into data and also the converting of data back into information. The distinction is that conversion doesn't require a question (query) to be answered. For example, information in the form of a string of characters forming a sentence in English is converted or encoded from a keyboard's key-presses as represented by hardware-oriented codes into ASCII codes after which it may be more easily processed by a computer—not as merely raw, amorphous data, but as a meaningful character in a natural language's set of graphemes—and finally converted or decoded to be displayed as characters, represented by a font on the computer display. In that example we can see the stage by-stage conversion of the presence of and then absence of electrical conductivity in the keypress and subsequent release at the keyboard from raw substantially-meaningless hardware oriented data to evermore-meaningful information as the processing proceeds toward the human being. Techniques of Storage of Data For storing the accounting data, one may use the following techniques: Two pass verification, also called double data entry, is a data entry quality control method that was originally employed when data records were entered onto sequential 80 column Hollerith cards with a keypunch. In the first pass through a set of records, the data keystrokes were entered onto each card as the data entry operator typed them. On the second pass through the batch, an operator at a separate machine, called a verifier, entered the same data. The verifier compared the second operator's keystrokes with the contents of the original card. If there were none, a verification notch was punched on the right edge of the card. The later IBM 129 keypunch also could operate as a verifier. In that mode, it read a completed card (record) and loaded the 80 keystrokes into a buffer. A data entry operator reentered the record and the keypunch compared the new keystrokes with those loaded into the buffer. If a discrepancy occurred the operator was given a chance to reenter that keystroke and ultimately overwrite the entry in the buffer. If all keystrokes matched the original card, it was passed through and received a verification punch. If corrections were required then the operator was prompted to discard the original card and insert a fresh card on which corrected keystrokes were typed. The corrected record (card) was passed through and received a corrected verification punch. Modern use While this method of quality control clearly is not proof against systematic errors or operator misread entries from a source document, it is very useful in catching and correcting random miskeyed strokes which occur even with experienced data entry operators. This method has survived the keypunch and is available in some currently available data entry programs (e.g. SPSS Data Entry for Windows). At least one study suggests that single pass data entry with range checks and skip rules approaches the reliability of two-pass data entry (see Controlled Clinical Trials from sometime in the 1990s - however it is desirable to implement both systems in a data entry application. Capitalizing the Data Warehouse An asset is something that will have value in future periods, and the data warehouse (if it is any good) certainly fits into that definition. Companies capitalize their enterprise resource planning (ERP) systems and the guys with the green eyeshades don't object. Why not do the same for the data warehouse? A number of us have long maintained that the data warehouse (DW) is a real asset that has significant value to an organization -- some of us even believe that the DW will make the difference between a company living and dying. Because the DW provides value in future periods, it represents an intangible asset that should be capitalized on a company's balance sheet along with the tangible assets of cash, accounts receivable, inventory plant and machinery. Current and Future Accounting Rules The current financial accounting rules are heavily criticized as not reflecting the true value of IT assets such as those of the ERP systems and data warehouses. Under the current rules of the Financial Accounting Standards number 141 and 142, a data warehouse, as an intangible asset, could be capitalized at its fair value only when a company with an internally built data warehouse is acquired by another corporation. Thus, the CIO would be rewarded for managing a high value asset only when the data warehouse has been purchased. Today, a company with an internally created data warehouse would be shown as an intangible only at its capitalized historical cost. This historical cost probably does not capture the fair value of the completed project, nor does it capture all the costs associated with the datawarehouse. The current accounting system in the United States allows one company to show a high value on the data warehouse that was purchased and a second company to have a lower value on a data warehouse that was internally developed. Thus, the company is not able to reflect the fair value created by the successful implementation of an internally developed data warehouse. The Financial Accounting Standards Board (FASB) is working on a new standard to address the comparability issue between companies that have purchased data warehouses and companies that have built a data warehouse internally. The first step is a proposal to disclose in the footnotes of the financial statements the quantitative value of the substantially built up intangibles in a business. The eventual goal is to book the intangible assets at their fair value to allow the financial statements of different entities to be comparable and, to address our interests, for companies to accurately reflect the asset value of a data warehouse. The FASB is also integrating the U.S. accounting rules to the International Accounting Standards (IAS). More than 90 countries have moved to the IAS standards in the past year, including all of Europe. The IAS standard No. 39 requires the company to currently book the data warehouse at the fair value of the assets, and now the data warehouse must be carried on the company's books. In most situations, this rewards management for successful efforts in creating and maintaining a data warehouse. What Did the DW Cost? The expenses for any DW will vary widely. The cost will be dependent on the size of thedatabase, the number of users, the complexity and quality of the source data, the software tools Clinical Trials from sometime in the 1990s - however it is desirable to implement both systems in a data entry application. Capitalizing the Data Warehouse An asset is something that will have value in future periods, and the data warehouse (if it is any good) certainly fits into that definition. Companies capitalize their enterprise resource planning (ERP) systems and the guys with the green eyeshades don't object. Why not do the same for the data warehouse? A number of us have long maintained that the data warehouse (DW) is a real asset that has significant value to an organization -- some of us even believe that the DW will make the difference between a company living and dying. Because the DW provides value in future periods, it represents an intangible asset that should be capitalized on a company's balance sheet along with the tangible assets of cash, accounts receivable, inventory plant and machinery. Current and Future Accounting Rules The current financial accounting rules are heavily criticized as not reflecting the true value of IT assets such as those of the ERP systems and data warehouses. Under the current rules of the Financial Accounting Standards number 141 and 142, a data warehouse, as an intangible asset, could be capitalized at its fair value only when a company with an internally built data warehouse is acquired by another corporation. Thus, the CIO would be rewarded for managing a high value asset only when the data warehouse has been purchased. Today, a company with an internally created data warehouse would be shown as an intangible asset only at its capitalized historical cost. This historical cost probably does not capture the fair value of the completed project, nor does it capture all the costs associated with the data warehouse. The current accounting system in the United States allows one company to show a high value on the data warehouse that was purchased and a second company to have a lower value on a data warehouse that was internally developed. Thus, the company is not able to reflect the fair value created by the successful implementation of an internally developed data warehouse. The Financial Accounting Standards Board (FASB) is working on a new standard to address the comparability issue between companies that have purchased data warehouses and companies that have built a data warehouse internally. The first step is a proposal to disclose in the footnotes of the financial statements the quantitative value of the substantially built up intangibles in a business. The eventual goal is to book the intangible assets at their fair value to allow the financial statements of different entities to be comparable and, to address our interests, for companies to accurately reflect the asset value of a data warehouse. The FASB is also integrating the U.S. accounting rules to the International Accounting Standards (IAS). More than 90 countries have moved to the IAS standards in the past year, including all of Europe. The IAS standard No. 39 requires the company to currently book the data warehouse at the fair value of the assets, and now the data warehouse must be carried on the company's books. In most situations, this rewards management for successful efforts in creating and maintaining a data warehouse. What Did the DW Cost? The expenses for any DW will vary widely. The cost will be dependent on the size of the database, the number of users, the complexity and quality of the source data, the software tools employed, the need for consultants and contractors, the capabilities of the team, and how well the system is supported and maintained. It's necessary to understand how costs will be accounted for. Some costs will be expensed immediately and others amortized over the expected life of the system. Costs will appear in different accounts, and all these factors will become important when the actual total costs are tabulated and the DW is capitalized. The accounting approach to classifying the costs as current expenses or capitalized as assets is a three characteristic definition. If the associated costs fail any of the characteristics, then the cost should be expensed under current accounting rules. The first characteristic is future benefits. The future benefits are defined as the capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflows. The second characteristic is whether the enterprise has control. Control is defined as the ability to both derive future benefits and to deny that ability to others. The third characteristic is that the cost accumulation is based on a past event or transaction that gives rise to the future benefit. Hardware: For the data warehouse, you will need CPUs, disks, networks and workstations. Some vendors, such as Teradata, usually bundle the hardware along with the relational database management system (RDBMS), and the DW appliances bundle the hardware, operating system and RDBMS. If existing desktops and laptops are adequate to support end users, no additional costs should be charged; however, if upgrades or new machines are required, the additional costs should be assigned and depreciated over the expected life of the system. Three years is often used as the expected life, even though the system will probably last longer. The calculation is the cost to purchase or upgrade times the number of anticipated users. The cost of the hardware should always be capitalized. Software: The data warehouse always needs an RDBMS. Most installations employ end-user access and analysis tools such as BusinessObjects, Cognos and MicroStrategy. Many installations choose an extract, transform and load (ETL) tool such as Informatica or DataStage rather than writing their own ETL code. Add-ons with the ETL tools could include additional costs for each different type of source file or target database. These tools are often priced based on the operating system and size of the machine. Additional tools are often needed for data cleansing and performance monitoring. Initial software costs should always be capitalized. Internal Staff: The fully burdened rate (salary plus taxes, benefits, support costs, etc.) for the IT folks associated with the project should be included in the project cost. Business personnel are usually not included in calculations for personnel costs, but any help desk staff in the business organization should be. Include the fully burdened costs of the people on your project and capitalize these costs. Consultants and Contractors: Consultants are engaged to help determine requirements, help plan the project, and create the scope agreement, cost justify the project, help select the software, and establish the initial and long-term architectures. Consultants are typically more expensive than contractors but usually don't remain on projects as long. Contractors are brought in to supplement technical skills, specifically for software such as the database management system (DBMS). The cost for contractors will be dependent on how deficient the organization is in the required skills, how fast the organization needs the system implemented and how long it will take to transfer skills once the implementation is complete. The costs of the consultants and contractors for the initial implementation and for any major enhancements (not maintenance) should be capitalized. Training: You could make a case for the value of training, the intellectual capital, the knowledge and the increased capability of those who went through the training becoming an asset that would have value in future periods; however, because of employee turnover and other factors, accountants are reticent to claim the value of training as an asset. Training costs should be expensed as they are incurred and should not be capitalized. Training fails the control test for being a capitalized asset. There are past expenditures for training and probable future benefits, but without enforceable work contracts, there is no entity control of specifically trained labor. Operations and System Administration: This is a grab bag of roles and costs including monitoring the system performance, executing backups, administering security, administering the Meta data repository, dealing with the vendors and assigning charge-backs. The initial costs for operations and systems administration should be capitalized. The ongoing costs of both operations and system administration should not be capitalized unless there are major enhancements (because this represents day-to-day operations and not probable future benefits). Data Quality Improvements: Every data warehouse implementation demands improvements in the quality of the data. The source files far too often contain data elements that are outside the valid values, data that is missing, incorrect data types and data that violate business rules (i.e., men getting hysterectomies, date of birth in the 22nd century, non-unique values for primary keys and incorrect data types). Most of this data must be cleansed before it's loaded into the data warehouse. Software is available to profile the data, which would provide information on most aspects of the quality of the data, and some software is specific to cleaning up names and addresses. Customer relationship management (CRM) data could now be de- duplicated, names and addresses would be corrected, deceased customers would be deleted and customers would have activity codes that are more correct. This is an expensive process, but the result is data that is much more valuable to the organization. The value comes from fewer wasted mailings, fewer customer interactions that cannot result in sales, more customized and more appropriate marketing, and a much better image of the organization to the customer. The improvements in data quality should result in more sales, more cross-selling, greater profitability per customer interaction, and lower mailing and printing costs. For the DW, the improvements in data quality will mean far less checking and rechecking of results. The improved data quality will mean that the organization's strategic and tactical decisions will be supported by better information, and those making the decisions will be more likely to take action on results they trust. The value of the improved CRM data will be realized in future periods and should therefore be considered as an asset, and the following costs should be capitalized: data quality software purchase, consulting and internal personnel costs. Meta Data: Capturing and maintaining Meta data is an expensive effort, but it is generally recognized as a critical success factor for a data warehouse. Business meta data should include data definitions, domains (valid values), business rules, uniqueness, data source, security, timeliness and the owner of the data. Some meta data can be generated automatically from the modeling tools, the ETL tools and the BI tools; however, architecting how the meta data will be captured and maintained is not simple. It will require smart internal people or perhaps consulting help. In addition, an organization may choose to purchase Meta data products. Meta data will be valuable to analysts, report developers and report recipients because the Meta data will reduce their efforts to research and gather the data. It will also be valuable in giving them a better understanding of the results. CRM meta data capture codes would indicate a customer's value, previous purchases (retailing) and average balances (banking). CRM for law enforcement would have codes for a person's violence level, an insurance company would have codes representing the likelihood of a customer discontinuing paying their premiums. Meta data will have value in future periods (as long as it's properly maintained) and should therefore be considered an asset, and the following costs should be capitalized: meta data software purchase, consulting and internal personnel costs. Data Modeling: The effort to develop the data models to support the DW should be capitalized, but not the ongoing maintenance of the models. Performance and Availability: Supporting the service level agreements (SLAs) for performance and availability will require new processes and procedures, possibly new monitoring software, possibly more hardware, and possibly some consulting and contracting effort. The costs for this area should be capitalized, but not any ongoing maintenance. The Life cycle of Data So how can we determine when data needs to be archived? In order to accurately answer that question we need to understand the different states of data as it progresses through its lifespan. There is delineation in various states of data over its useful life. Data is created at some point, usually by means of a transaction: a product is released, an order is processed, a deposit is made, etc. For a period of time after creation, the data enters it first state: it is operational. That is, the data is needed to complete on-going business transactions. This is where it serves it primary business purpose. Transactions are enacted upon data in this state. The operational state is followed by the reference state. This is the time during which the data is still needed for reporting and query purposes. It could be to produce internal reports, external statements, or simply exist in case a customer asks for it. Then, after some additional period of time, the data moves into an area where it is no longer needed for completing business transactions and the chance of it being needed for queryin and reporting is small to none. However, the data still needs to be saved for regulatory compliance and other legal purposes, particularly if it pertains to a financial transaction. This is the archive state. It is the requirements for data in this state which this white paper addresses. Finally, after a designated period of time in the archive, the data is no longer needed at all and it can be discarded. This actually should be emphasized much stronger: the data must be discarded. In most cases the only reason older data is being kept at all is to comply with regulations, many of which help to enable lawsuits. When there is no legal requirement to maintain such data, it is only right and proper for organizations to demand that it be destroyed - why enable anyone to sue you if it is not a legal requirement to do so? Don't think in terms of databases or technologies that you already know when considering these data states. The data could be in three separate databases, a single database, or any combination thereof. Furthermore, don't think about data warehousing in this context - here we are talking about the single, official store of data - and its production lifecycle. From here-on out we will use the terms introduced here for the various states of data throughout its lifecycle, with the emphasis being on archiving database data and the issues arising from doing so. What is Database Archiving? Database Archiving is part of a larger topic, namely Data Archiving. Data exists in many formats and for many purposes, and only a small percentage of it is actually in a database. Physical documents, electronic documents, computer files and data sets, e-mail, and multimedia files are all examples of data that may reasonably need to be archived at some point. Refer to Figure 2. Each of these "things" needs to be archived to fulfill regulatory, legal, and business requirements. But each type of data requires different archival processing requirements due to its form and nature. What works to archive e-mail is not sufficient for archiving database data, and so on. In other words, type of data may need to command its own technology. This is most certainly true for database data. Why? Well, data stored in a database is different than other types of data in many ways. The main advantage of using a DBMS is to impose a logical, structured organization on the data. A DBMS provides a layer of independence between the data and the applications that use the data. In other words, applications are insulated from how data is structured and stored. The interface to the data is through the DBMS data language, whether it is SQL for relational databases, DL/1 for IMS, or even XQuery for XML databases. So the archival of data from a database requires knowledge of, and operation in conjunction with, the mechanisms and interfaces of the DBMS. Functions of Accounting Traditional Views: o Record, Classify, Summarise & Interpret data affecting the organisation's finances. o Provide information useful for decision making Contemporary View: A system for capturing and storing an organization's data in one integrated repository. The Role of Accountant which events to capture data about, what data relating to each event should be captured, how that data is to be captured while preventing input errors, how the data should be stored to optimize its usability while maintaining its integrity, how meaningful reports can be generated on demand in real-time. The Accounting Process: Problems with the Traditional View "transactions" orientation as opposed to an "events" orientation: Events are very important. In fact, most interaction of users with the accounting system is via events. narrow focus on financial data, Non-financial information is crucial for decision-making. Accounting system needs to be integrated with the overall information system of the organisation. reporting is periodic and not real-time, Often, managers and other users need accounting information in real-time for decision- making. limited accessibility of information, Accessibility to accounting information should be on "need-to-know" basis. too high a level of aggregation, information should be provided at levels of aggregation appropriate to the decisions. limited flexibility which prevents answering queries that cross functional boundaries., o adaptable to changes in operations o adaptable to changes in technology 32 Traditional Computerized Accounting Systems: File-Oriented Systems Each application owns its own data -- duplication/redundancies in data. Lack of uniformity of meaning of data -- not possible for accounting applications to share data. Difficult to enforce uniform standards ---lack of integrity of data. Difficulties in accessing data -- need to know programs to access data. Designing simple accounting vouchers Accounting Vouchers may be classified into following six types: 1. Payment : For recording payment made to any party by cash or cheque. If the payment is made to the supplier then the voucher is prepared semi-automatically using command Make Payment to Supplier. 2. Receipt : For recording receipts from any party by cash or cheque. If the payment is received from the customer then the voucher is prepared semi automatically using command Receive Payment from customer. 3. Journal : Voucher where neither account head is cash or cheque can be called journal voucher. 4. Contra : To cater to concept of contra entries and for treatment of cheques received and issued by the business. 5. Sales : For regarding sales voucher means any product sale by supplier to customer or any dealing between cash or cheque. 6. Purchase : For regarding purchase voucher means any product purchase by customer to supplier or any dealing between cash or cheque. 33 In fact the different voucher types help in classifying the different types of transactions and they do no affect the way the voucher is posted in the ledger. All Standard Accounting Vouchers - with support for User Defined Vouchers. Tally works the way accountants do. It's comprehensive accounting and inventory control capabilities allow you to enter all types of transactions that you require to conduct your business efficiently. Vouchers types like Payments, Receipts, Sales, Purchases, Journals, Debit & Credit Notes, Delivery Challans, Goods Inward Notes, Stock Journals, Physical Stock Vouchers, Contras & Memos, Sales & Purchase Orders and Rejection Notes are available. Tally also allows for a flexible Voucher Numbering System. You can select between Automatic or Manual numbering of Vouchers (including Multiple Series). 34 In addition, you can also create your own voucher types like "Citibank Payment Voucher" or "Export Sales Invoice". With the powerful 'Voucher Class' facility you can can pre-configure each voucher type to accept only that ledgers that you specify - thereby eliminating data entry errors. Extracting desired accounting information from sources To extract the desired accounting information, accounting system need to interact with different sub systems of the organization like Invoicing sytem, BOM, Sales and marketing system, payroll system, HR management systems. All these systems use the modern database approach than traditional file based system. Lets discuss the database approach to accounting system in detail. 35 Database Approach to Accounting Systems: Advantages of the database approach: supports the capturing of financial and non-financial data support for real-time rather than periodic reporting better controlled accessibility of data storage of data in the most disaggregated form Uniformity of meaning of data -- supported by a rigorous data model Enforcement of access controls easier 36 Data Hierarchy: PHYSICAL LOGICAL -------- ------- Database Database Dataset (table) Relation Record Tuple (instance) Field Attribute Byte Character (digit, letter or special character) Bit 0 or 1 Alternative Field Formats: Numeric Text (alphanumeric) Currency Date/time Boolean Counter Blobs 37 Data Processing Cycle: INPUT ----> PROCESSING ----> OUTPUT Batch On-Line 38  On-Line Processing: Batch 39 On-line 40 On-line Real-Time (OLRT) General Systems Model of Recording a Sale on Account: Factoring (Decomposition) of an Accounting System: 41 Questions / Answers a) Explain the concept of data processing in detail b) Discuss various techniques of Data Storage c) How Data warehouse can help in storing the accounting data? d) What is meta data? e) Explain the life cycle of data in brief. f) What is database archiving g) Explain various functions of accounting that need to be implemented in any of the accounting package h) How can we design various accounting vouchers by any accounting package i) Explain the different approached for extracting desired accounting information from different sources 42