13 Computerized Accounting

Systems

Contents:
1. Learning Outcomes

2. Definitions

3. Introduction to Computerised Accounting

4. Points to Note

Candidates should be able to:

Explain the advantages and disadvantages of switching to a computerised
accounting system.

Explain the process of switching to computerised accounting system and the

steps taken to ensure the integrity of the data and results.

Definitions
It refers to the process of using computer
software to carry out the book keeping
Computerised Accounting functions of a business such as recording
business transactions and preparing the
final accounts.

It refers to the process of protecting data

Encryption with a secure password or key so that only
authorized personnel can access the data.

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 13.1 Introduction to Computerised
Accounting
13.1.1 What is computerised accounting and its
benefits?
Computerized accounting refers to the use of computer software to prepare
books of accounts. It acts as an alternative to manual book keeping.
There are certain benefits to shifting to computerized accounting. These include:

Time is saved since less time is spent on manual input. This allows a business
to focus on other areas of interest since a transaction only has to be entered
once and all the related accounts and ratios are updated instantly.

Computerized accounting also provides business with other facilities such as

improved inventory control, payroll services and better credit control.

It allows a business to save on salary expense since there is a reduction of

staff since few workers are needed to make entries into the computer.

Computerized Accounting systems lead to a greater accuracy of data since

there is less manual input.

It aids management reporting since it is very easy to generate reports and it

leads to better informed decisions being made. For example managers can
quickly generate an aged trade receivables report showing the length of time
for which the amounts owed by customers have been outstanding.

Up to date information is available due to the instantaneous updating of the

information.

It can motivate staff if they are given training on how to use the software.

It also frees up space since less paper needs to be stored. It increases the
storage space available.

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 These advantages can be easily memorised by using the mnemonic “Speed
Accuracy Space Labor costs Accuracy Up-to-date” (SASLAU)

13.1.2 What are the drawbacks of computerised

accounting?
The drawbacks of computerized accounting include:

The initial investment (capital expenditure) required for computerized

accounting is very high. The short term expenses are very high which can
adversely affect liquidity or profitability in the short term.

Staff training costs are likely to be incurred resulting in increased expenses

and reduced profitability in the short term.

There might be resistance to change from the staff because it could lead to
job security concerns for them. This can result in a demotivated workforce
which is more likely to make errors and be unproductive.

Care must be taken to ensure that data is entered correctly since input errors
can reduce the accuracy of financial data.

There is a risk of computer system crashing or failing resulting in data loss.

There is a constant need to keep regular backups.

Additional costs have to be incurred in the form of antivirus software

subscriptions and computer maintenance costs.

Greater security is needed to protect the computer from unwanted access and
to reduce the risk of data loss.

The transition period can lead to great stress on staff since both the manual
and computerized accounting system will be maintained simultaneously.

These disadvantages can be memorized by the mnemonic: Capital expenditure

Training costs Data loss risk Maintenance costs Transition period stress.
(CTDMT)

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 13.1.3 What are the steps to be taken to transfer to
computerised accounting from a manual accounting
system?
Assessing the needs of the business. The business needs to assess the main
reason why it is making a switch from manual to a computerized accounting
system.

The management should decide which package they should go for. Large
companies usually buy specialized software that is customized and tailored to
suit their individual requirements. On the other hand small businesses usually
buy off-the-shelf software (ready-made non customized).

The management should buy the relevant computers and their accompanying
equipment.

They should prepare and set up a chart of accounts.

The management should decide the date on which the switch should be made
from manual to computerized accounting.

Control accounts should be prepared before the data is transferred to ensure

accurate figures are transferred from manual accounting records to the
computer software.

Prepare computerized trial balance to ensure that the balances have been
transferred correctly.

For a period of time run both manual and computerized accounting systems
simultaneously. This is called parallel running. Once the trial balance balances
from both manual and computerised system match consistently multiple times,
the manual system will be discontinued.

13.1.4 What are the steps to be taken to ensure the

integrity of data when switching to computerised
accounting system?

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 These steps also refer to the internal control procedures to be taken to ensure
smooth transition from manual to computerized accounting. The control steps are
a form of internal audit. The steps are:

Provide adequate training to the staff.

Prepare a chart of accounts.

Open the books of accounts on the system.

Enter the data in the accounts and code the entries.

Reconcile all the control accounts.

Carry out bank reconciliation (reconcile computerized bank balance with the
bank statements.)

Prepare computerized trial balance.

Prepare computerized financial statements.

Run a parallel system of both manual and computerised accounting.

13.1.5 Why should managers keep backup of data?

Managers should backup data to prevent data loss which can occur because of:

Hardware or software faults such as computer system failure or corruption of

software.

Computer virus infection causing data to be lost.

Hacking of computer data.

Power failure.

13.1.6 How can the data be protected once a company

has introduced computerized accounting system?
Encrypting the accounting data so that it cannot be accessed by everyone.

Using antivirus software to protect accounting data and system from viruses.

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 By controlling who has access to the computer system that stores the
accounting data.

By password protecting the accounting data.

By using UPS and backup generator systems to reduce the risk of power
failures.

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 Skill Check 1
Q1) H Limited operates a manual accounting system. The directors are keen
to introduce a computerized accounting system.

Identify four control procedures which must be carried out when changing
from a manual accounting system to a computerised accounting system.

Q2) State four precautions that should be taken to ensure the security of
computerised accounting data.

Solution

Answer 1)

Open the books of account on the system.

Enter the data and code the entries.

Carry out bank reconciliation.

Reconcile all the control accounts.

Prepare computerised trial balance.

Answer 2)

In order to ensure that the data is kept secure it should be password

protected with the computers being placed in rooms with restricted
access.

The data should be constantly backed up and good anti-virus

software should be used.

Points to Note
Remember the mnemonic SASLAU for the advantages.

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 Remember the mnemonic CTDMT for the disadvantages.

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