To understand what computerized accounting is, it’s essential to know how accounting systems can be represented. So, let’s examine the figure below.
The purpose of accounting is to provide financial information that is useful for decision-making. Accounting can be viewed as a system (or a process) that converts data into useful information. The information processes include recording, maintaining, and reporting.
Numerous processes are involved in every business. Some are simple, while others are complex or cumbersome.
As a business grows, acquires new customers, enters new markets, and keeps pace with constant changes in statutory regulations, it needs to maintain accurate and up-to-date accounting, inventory, and statutory records.
This is where computerized accounting helps. Computerized accounting simplifies, integrates, and streamlines all business processes both easily and cost-effectively.
Need for Computerized Accounting
Accounting for the financial transactions of a business is an important function in daily operations.
Developing and using a proper accounting system ensures that all transactions are recorded correctly and accurately on the enterprise’s general ledger. Technological advances ease the accounting process for many businesses.
Many accountants and auditors describe accounting as a language of business that is accepted in all countries.
Every company applies accounting because it is generally accepted. Companies must disclose specific financial and management information to the government, public, and other users.
In fact, accounting is an indispensable tool in the business decision-making process. With the development of information technologies, many computer products (software) have emerged that make accounting straightforward for users.
To stay competitive, large enterprises analyze the performance of all organizational cells (starting from unskilled workers and operating personnel, and finishing with top managers and other key personnel). They seek out all the deviations from the plan and their impact.
It is the responsibility of an enterprise’s management team to implement measures and procedures to avoid deviations of this kind in the future. These procedures are known as internal controls, and they include the following five elements:
- Control environment
- Risk assessment
Each element, after being assessed separately, is brought together with the others to derive a holistic rating of organizational performance.
Manual vs Computerized Accounting
Manual accounting implies that employees perform the whole accounting cycle manually on a periodic basis; they calculate, journalize transactions, prepare ledgers, cast trial balances, and prepare financial statement reports and other routines.
Of course, in large organizations, manual accounting tasks of this kind take substantial time, resources, and effort.
On the other hand, computerized accounting implies that the only thing that employees do is record transactions in a computer, which then completes the other steps involved in the accounting cycle automatically or by a request.
However, this view of computerized accounting is very simplified. This is because transactions are a complex category consisting of not only sales or acquisitions but also depreciation, premiums, dividends, and the calculation of wages.
So, despite the fact that computers provide accurate calculations and generate smart reports, computerized accounting also consumes substantial time, resources, and effort. For this reason, it is difficult to assess which type of accounting is faster and more economical.
If manual accounting requires qualified accountants to keep a record of business transactions, computerized accounting requires accountants who can use specific software and, thus, who command a higher wage.
Software can run calculations faster than humans, but computers don’t know what’s needed until a human provides clear instructions. In addition, depending on the complexity and size of an organization, a suitable computerized accounting system can cost an enormous sum.
Also, compared to manual accounting, computerized accounting provides a better internal control report system for any given period of time.
This is because computers can control thousands of indicators simultaneously and deliver notifications to the relevant party when specific indicators are abnormal. By contrast, manual control takes more time.
Advantages and Disadvantages of Manual and Computerized Accounting
Advantages of Manual Accounting
The advantages of manual accounting include:
- Comparatively cheap workforce and resources
- Independence from machines
- Availability of skilled workers
Disadvantages of Manual Accounting
The disadvantages of manual accounting include:
- Slower speed
- More effort required from accountants
- Comparatively slow internal control reporting
- Routine work plus some other work
- More personnel required
Advantages of Computerized Accounting
The advantages of computerized accounting include:
- Quick and mobile reporting
- Reliability and no routine work
- Higher accuracy
- Internal control system of increased productivity
- Easy backup and restoration of records
Disadvantages of Computerized Accounting
The disadvantages of computerized accounting include:
- Extremely high costs to develop, implement, and use the system
- Specialized training required for personnel
- Increased personnel costs
- Dependence on machines
Both computerized accounting and manual accounting have advantages and disadvantages, but they perform the same task and the final result is the same. The main differences between these types of accounting boil down to cost, speed, and mobility.
In small and medium-sized businesses, manual accounting is usually preferred and can be used without undermining quality. By contrast, large corporations apply complex accounting systems that cost a lot, but the effects of these applications exceed all expectations.
Limitations of Computerized Accounting
Apart from the disadvantages, computerized accounting suffers from certain limitations relating to its operation. These are as follows:
- Power failures, computer viruses, and hackers are the notable Achilles’ heels of computerized accounting systems.
- Once data have been inputted into the system, the output is automatically obtained. Hence, the inputted data must be validated for accuracy and completeness. We should not forget the concept of GIGO (Garbage In [input], Garbage Out [output]).
- Computerized accounting systems that are improperly set up to meet business requirements (e.g., due to programming errors, unsuitable software, or hardware or personnel problems) can cause more harm than good.
- Unless an adequate level of control and security (whether internal or external) is established, computer fraud is a persistent threat to computerized accounting systems.
These limitations cited can be set right by establishing UPS, using trained accounting personnel, and implementing robust control and security measures. Although computerized accounting is considered to be fairly costly, it is preferred by modern enterprises due to its speed, mobility, and accuracy.
Note: The methodology relating to computerized accounting is not discussed here in detail.