Question

Define a computerised accounting system. Distinguish between a manual and computerised accounting system.

Answer 1

Accounting, by definition, is the process of identifying, recording, classifying and summarising financial transactions to product the financial reports for their ultimate analysis. Let us understand these activities in the context of manual and computerised accounting system.
(i) Identifying: The identification of transactions, based on application of accounting principles is common to both, manual and computerised accounting system.
(ii) Recording: The recording of financial transactions, in manual accounting system is through books of original entries while the data content of such transactions is stored in a well-designed accounting database in computerised accounting system.
(iii) Classification: In a manual accounting system, transactions recorded in the books of original entry are further classified by posting into ledger accounts. This results in transaction data duplicity. In computerised accounting, no such data duplication is made to cause classification of transactions.
In order to produce ledger accounts, the stored transaction data is processed to appear as classified so that the same is presented in the form of a report. Different forms of the same transaction data are made available for being presented in various reports.
(iv) Summarising: The transactions are summarised to produce trial balance in manual accounting system by ascertaining the balances of various accounts.
As a result, preparation of ledger accounts becomes a prerequisite for preparing the trial balance. However, in computerised accounting, the originally stored transactions data are processed to churn out the list of balances of various accounts to be finally shown in the trail balance report. The generation of ledger accounts is not a necessary condition for producing trial balance in a computerised accounting system.
(v) Adjusting Entries: In a manual accounting system, these entries are made to adhere to the principle of cost matching revenue. These entries are recorded to match the expenses of the accounting period with the revenues generated by them.
Some other adjusting entries may be made as part of errors and rectification. However, in computerised accounting, journal vouchers are prepared and stored to follow the principle of cost matching revenue, but there is nothing like passing adjusting entries for errors and rectification, except for rectifying an error of principle by having recorded a wrong voucher such as using payment voucher for a receipt transaction.
(vi) Financial Statements: In a manual system of accounting, the preparation of financial statements pre-supposes the availability of trial balance. However, in computerised accounting, there is no such requirement.
The generation of financial statements is independent of producing the trial balance because such statements can be prepared by direct processing of originally stored transaction data.
(vii) Closing the Books: After the preparation of financial reports, the accountants make preparations for the next accounting period. This is achieved by posting of closing and reversing journal entries. In computerised accounting, there is year-end processing to create and store opening balances of accounts in database. It may be observed that conceptually, the accounting process is identical regardless of the technology used.