Accounting in Computerised Environment

CA A. Rafeq, FCA

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Learning objectives

1. Significance and salient features of accounting  in computerised environment.

2. Understand the classification and grouping  of accounts

3. Familiarize with the hierarchy of ledgers

4. Significance of accounting  packages and consideration for their selection.

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Reference Material

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Study material Revision Test paper

Suggested answer and compilation

Questions from IPCC exam

1.SIGNIFICANCE AND SALIENT FEATURES OF CIS

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Salient Features of CIS* - 11. The processing of financial information will be  by one or more 

computers.

2. The computer or computers may be  operated by  entity or by a third party.

3. The processing of financial information by the computers is done with the help of one or more computers software e.g. tally.

4. A computer Software includes any program or routine  that performs a desired function or set of functions and the documentation required to describe  and maintain that program or routine.

*CIS: Computerised Information Systems

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Salient Features of CIS -2

5. The computer software used for the  accounting  system may be  acquired software or may be developed for the business.

6. Acquired software may consist  of a spread sheet package or may be prepackaged accounting system.

– Larger organisation may use an Enterprise Resource Planning  (ERP) package. 6

Role of computers in accounting

Controlling operations

Deciding sequence of operations

Accounting  operations

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Accounting in larger organisations

1. Use an ERP software and configure it as per their requirements.

2. Develop a customised accounting  packageto suit the peculiarities of their business functions.

3. Outsource the accounting  system: Financial accounting  is processed from a third party.

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Question: Significance of CIS

“In business today, the accounts which were earlier maintained in a manual form, are replaced with computerized accounts”. 

Explain the significance of computerized accounting systems in modern time.

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Answer: Significance of CIS

1. Increase speed, accuracy and security

2. Reduce errors

3. Immediate information

4. Avoid duplication of work

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Key aspects of CIS

• Create head of accounts under standard chart of accounts.

• Configure the software for various options such as invoicing, display, reporting, etc.

• Data entry of transactions once and at source 

• No postings required in many packages.

• Automatic tallying and presentation of final accounts on an online basis.

• Implement appropriate security and controls considering the new types of risks of CIS.

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2. UNDERSTAND THE CLASSIFICATION AND

GROUPING OF ACCOUNTS

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Codification and Grouping of Accounts – 1

Detailed heads

Sub‐heads 

Minor Heads

Major Heads

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Classification structure of Accounts

i. Major heads:Major heads of account falling  within the  Receipt Heads(Revenue Account) may correspond to different activities or line of business of the company such as car manufacture, servicing  of cars, repairs and maintenance of cars

ii. Minor heads: Created under major head and subordinate to them. These may identify the specific manufacturing activity like manufacture of car body, components and spare parts, etc. 

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Classification structure of Accounts

iii. Sub‐heads: A manufacture of car body, may consist of  a number of activities like the manufacture of the  chassis, the door, the front panel, the rear panel, etc.  These will then correspond to ‘sub‐heads’  below the  minor  head  represented  by the main activity‐car manufacture. 

iv. Detailed Heads: In the  expenditure account, the main purpose of the detailed head is to control expenditure on an item to item basis at the same time group  the objects according to the nature.  

– Examples:  ‘Salaries’, ‘Offices’ Expenses’, Salaries Expenses’ ‘Workshop Overhead’, etc.

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Classification of account heads

• The detailed classification of account heads and the order in which the  Major and Minor  heads shall appear in all account records should be approved by the top management  of the organisation

• Reviewed by the auditor before they  are introduced in the computerised accounting environment

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3. FAMILIARIZE WITH THE HIERARCHY OF LEDGERS

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Maintaining Hierarchy of Ledgers

• Create chart of accounts as per the hierarchy:  ledgers, sub ledgers and sub subsidiary ledgers.

• Automatic selection of corresponding account head by CIS. – Example: debtors when credit sales is selected.

• Configuration of package is critical. – Example: inventory valuation: FIFO, LIFO, Weighted average, etc.

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4. ACCOUNTING PACKAGES AND CONSIDERATION FOR

THEIR SELECTION

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Key considerations in selecting right option for CIS

1. Size of business operation

2. Complexity  of operation

3. Business requirement

4. Budgetary  constraints

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Generating Reports from Software

Spreadsheetsoftware can be 

used for generating reports.

Pre‐packaged accounting 

software have standard 

reports and adhoc reports 

User defined reports based on period and other options

Reports can be viewed, printed 

or saved.

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ALTERNATIVES FOR CIS

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Alternatives for CIS

Spread sheet packages

Pre‐packaged accounting software

Customised accounting  package

ERP package   Outsourcing

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SPREADSHEET SOFTWARE AS ACCOUNTING TOOL

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Using Spreadsheet software for Accounts

• Accounts can be maintained  in a computerised environment even by using  a spread sheet package.

• User will have  to use his knowledge and skills of spread sheets controls like spreadhseets locked on a protected shared drive  with restricted  access and  read or write  access controls and  password‐protected cells and  formulas with passwords should be  used. 25

Limitations of using Spreadsheet software for accounts

• Double  entry is not  automatically  completed thereby requiring  the users  to set formulas  or others means to complete the double  entry. 

• Where large  number  of data  is involved spread sheet software may not  work.  

• May not work in a LAN environment  where users may require simultaneously  access to spread sheet 26

Advantages of using spread sheet software as an accounting tool

1. Simple to use and easy to understand

2. Most of the  common functions like doing calculations, setting  formulas, macros replication of cell contents , etc., can be easily done in a  spread sheet.

3. Grouping  and regrouping  of accounts  can be done

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Disadvantages of using spread sheet as an accounting tool

1. Data  limitations:  Data only up to a  specified limit.

2. Simultaneous access  on a network may  not be  possible. Many of the  modern software's allow locking  of the table when updations is taking place. This is  not possible in a spread sheet.

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KEY FEATURES OF ACCOUNTING SOFTWARE

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Features of Accounting software

Master files Data entry

Printing of documents

Printing of Reports

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Types of Master files

• Company master file

• Accounts master file

• Sub ledger master file

• Customer master file

• Vendor master file

• Product master file

• Division master file

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Basic data entry screens

• Cash receipts and Payment 

• Bank Receipts and Payment

• Petty Cash Voucher

• Journal Entry

• Purchase Order,  

• GRN, 

• Purchase returns

• Sales Order, Challan, Invoice, Sales Return

• Debit Notes and  Credit Notes

• Cash Sales & Purchase Memos

• Production

• Consumption

• Stock Transfer

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Printing of documents

Purchase orders 

Challans and bills 

Sales order challans

Invoices, declaration 

forms

Return forms

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Reports: Books of Accounts

• Cash Book

• Bank Book

• Petty Cash Book

• Purchase Book

• Sales Book

• Cash Sales Book

• Cash Purchase Book

• Sales Return register

• Purchase Return register

• Journal  Book

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Reports: Ledgers and Registers

• General Ledger

• Subsidiary  Ledger

• Debtors  Ledgers

• Creditors  Ledger

• Debit Note Register

• Credit Note Register

• Stock Ledger

• Stock movement register

• Production resister

• Consumption  register

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Reports: Final Accounts

Trial Balance

Profit and Loss

Account

Balance Sheet

Funds Flow Statements

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PRE-PACKAGED ACCOUNTING SOFTWARE

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Pre-packaged Accounting software

• Readily available and relatively inexpensive

• Used extensively by small/medium and even large organisations

• Easy to install and use.

• Key features:– Creation of company, – Creation of accounts as per hierarchy– Configuration of key parameters– Enter opening balances– Enter transactions– Generate Reports any time– Query any information for any period.– Regular updates available.

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Consideration for Selected of Pre-Packaged Accounting Software

Accounting software selection criteria

Meets Business

requirements

Completeness of reports

Ease of use

Cost

Reputation of the vendor

Regular updates

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Consideration in Selection of Pre-packaged Accounting Software

• Diverse variety of  software with various features available in market.

• Requires understanding of organisation’s requirements and whether these are met by the accounting software.

• Consider not only current but future requirements.

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Advantages of Pre-packaged Accounting Software

Easy to install

Relatively inexpensive

Easy to use

Backup procedure is simple

Flexibility of Reports

Very effective for SME

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Disadvantage of Pre-packaged Accounting Software

Dis‐advantagesof pre‐

package SW

Peculiarities of specific  business not covered

Functional areas not fully 

covered

Customisation not feasible

Insufficient Reports

Lack of security

Bugs in software

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Question: Pre-packaged accounting software

Explain the factors to be considered before selecting the pre‐packaged accounting software.

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Answer: Selecting Pre-packaged accounting software

1. Fulfilment of business requirements: Some  packages have few functionalities more than the others. The purchaser may try to match his requirement with the  available  solutions.

2. Completeness of reports: Some packages might provide extra reports or the  reports match the requirements more than the others.

3. Ease of Use: Some packages could be very detailed and cumbersome  compare to the others

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Answer: Selecting Pre-packaged accounting software

4. Cost: The budgetary constraints could be an important deciding  factor. A package  having more features cannot be  opted because of the  prohibitive  costs.

5. Reputation of vendor: Vendor support is essential for any software. A stable vendor with good reputation and track records will always be performed.

6. Regular update: Law is changing frequently. A vendor who is  prepared to give updates will be preferred to a vendor  unwilling to give updates.

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CUSTOMISED ACCOUNTING SOFTWARE

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Key Features

• Developed specifically for the organisation

• Provides all key requirements in an integrated manner.

• Feasibility study to be done.

• Systems development life cycle has to be gone through and validated at each stage.

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Factors to consider in selection of Customised accounting package

• Vendor proposal:– Suitability– Completeness– Cost– Vendor profiles: 

• Capability • Track record and • Service

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Question: Customised accounting packages

What are the advantages of  customised accounting  packages?

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Answer: Advantages of Customised Accounting Packages

1. All functional areas are covered.

2. Customised input screens  as per documentation.

3. MIS reports specific to enterprise.

4. Include additional input devices such as Bar‐code  scanners.

5. Map the organisational structure.

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Disadvantages of Customised Accounting Package -1

1. Requirement  specifications are incomplete or ambiguous  resulting in a  defective  or incomplete  systems.

2. Inadequate testing  results in bugs remaining  in the software.

3. Documentation is not complete.

4. Frequent changes  made to the system with inadequate  change  management  procedure resulting  in system compromise.

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Disadvantages of a Customised Accounting Package - 2

5. Vendors unwilling  to give support of the software due to other commitments.

6. Vendor not willing to part with the source code or enter into an  escrow agreement.

7. Control measures are inadequate.

8. Delay in completion of the software due to the problems with the  vendor or inadequate  project management.

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ERP SOFTWARE

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Key Features of ERP

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Replaces island of computing

Various applications

Absence of version controls

Absence of integration

Differing platforms

High level of redundancies

Benefits of ERP

• Extending BETTER and EFFICIENT customer service...’

• Enables management to take faster and better decisions…’

• ERP helps enhance:– productivity – performance– efficiency

• ERP implementation enables lower operating costs

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Key benefit of implementing ERP

• Integrates the Entire Enterprise from Supplier or Vendor to Customer covering–Financials –Logistics and –HRD and…

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Capabilities of ERP

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Scalable

Customization of Reports

On-line, Real time

Use of Parameters

Interface/ integration

tools

Implementation models

Question: ERP advantages and disadvantage

“ERP package is gaining popularity in big organisations. “

Briefly explain  the advantages and disadvantages of using an ERP package, in the  light  of above  statement.

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Answer: Advantages of ERP

Standardised processes and  procedures

Standardised reporting

Avoided Duplication of data entry

Availability of Greater information

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Disadvantages of an ERP

ERP Issues

ERP Issues

Lesser flexibility

Implementation

hurdles

Very expensive;

Complexity

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OUTSOURCING OF ACCOUNTING FUNCTIONS

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Criteria for selection of Outsourcing vendor

1. The amount of services provided and whether the same matches with the requirements.

2. The reputations  and background of the vendors

3. The comparative  costs  of the  various  propositions

4 The assurance of quality62

Question 4: Advantages and Dis-advantages of Outsourcing

accounting function

“Recently a growing trend has developed for outsourcing  the accounting  function  to a third party. Explain advantages and disadvantages of the outsourcing the accounting functions.

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Answer: Advantage of Outsourcing

Saving of time

Expertise of third party

Maintenance of data Economical

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Advantages of outsourcing of Accounting Functions

1. Organisation that  outsources is able  to save time to concentrate  on the  core area of business activity.

2. Organisation is able to utilise the expertise of the third party in undertaking  the accounting  work.

3. Storage  and  maintenance of the data in the hand  of professional people.

4. Organisation is not bothered about people  leaving the organisation in key accounting  positions.

5. Propositions  often  proves to be  economically more  sensible.

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Disadvantages of Outsourcing

1. Third party may be unable  to meet the  standards desirable.

2. Data of the organisation are handed over to the  third party. Issues of security and confidentiality.

3. Delays in obtaining  services.

4. Cost may ultimately  be higher

5. Inadequate  services provided66

Summary

1. Significance and salient features of accounting  in computerised environment.

2. Understand the classification and grouping  of accounts

3. Familiarize with the hierarchy of ledgers

4. Significance of accounting  packages and consideration for their selection.

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Thank you

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