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12

Notes

COMPUTER AND COMPUTERISED

ACCOUNTING SYSTEM
With the expansion of business the number of transactions increased. The
manual method of keeping and maintaining records was found to be
unmanageable. With the introducton of computers in business, the manual
method of accounting is being gradually replaced. And finally, the database
technology has revolutionised the accounts department of the business.
organisations. In this lesson, we will study about characteristics of computer,
role of computers in accounting, need of computerised accounting, etc.

OBJECTIVES
After studying this lesson, you will be able to:
l

state the meaning and characteristics of computer;

describe the components of Computer:

explain the limitations of a Computer;

explain the role of computer in accounting;

differentiate between manual accounting and computerised accounting;

state the need for computerised accounting;

describe the basic requirements of computerised accounting.

12.1 COMPUTER AND ITS CHARACTERISTICS

Computer is an electronic device that can perform a variety of operations
in accordance with a set of instructions called programme. It is a fast data
processing electronic machine. It can provide solutions to all complicated
situations. It accepts data from the user, converts the data into information
and gives the desired result. Therefore, we may define computer as a device
that transforms data into information. Data can be anything like marks

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obtained in various subjects. It can also be name, age, sex, weight, height,
etc. of all the students, savings, investments, etc., of a country. Computer
is defined in terms of its functions.
Computer is a device that accepts data, stores data, processes data as
desired, retrieves the stored data as and when required and prints the
result in desired format.

Notes

Characteristics of computer
A Computer is better than human being. It possesses some characteristics.
These are as follows:
Speed
It can access and process data millions times faster than humans can. It can
store data and information in its memory, process them and produce the
desired results. It is used essentially as a data processor. All the computer
operations are caused by electrical pulses and travels at the speed of light.
Most of the modern computers are capable of performing 100 million
calculations per second.
Storage
Computers have very large storage capacity. They have the capability of
storing vast amount of data or information. Computers have huge capacity
to store data in a very small physical space.
Apart from storing information, todays computers are also capable of
storing pictures and sound in digital form.
Accuracy
The accuracy of computer is very high and every calculation is performed
with the same accuracy. Errors occur because of human beings rather than
technological weakness; main sources of errors are wrong program by the
user or inaccurate data.
Diligence
A computer is free from tiredness and lack of concentration. Even if it has
to do 10 million calculations, it will do even the last one with the same
accuracy and speed as the first.

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Versatility

Notes

Computer can perform wide range of jobs with speed, accuracy, and
diligence. In any organisation, often it is the same computer that is used
for diverse purposes such as accounting, playing games, preparing electric
bills, sending e-mail and so on.
Communication
Computers are being used as powerful communication tools. All the
computers within an office are connected by cable and it is possible to
communicate with others in the office through the network of computer.
Processing Power
Computer has come a long way today. They began as mere prototypes at
research laboratories and went on to help the business organisations, and
today, their reach is so extensive that they are used almost everywhere. In
the course of this evolution, they have become faster, smaller, cheaper, more
reliable and user friendly.
Components of Computer
A computer consists of the major components i.e., Input Unit, Central
Processing Unit and Output Unit. Diagrammatically, these components may
be presented as follows:

Fig. 12.1 Components of computer

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Input Unit

Input unit is controlling the various input devices which are used for
entering data into the computer. The mostly used input devices are
keyboard, mouse, and scanner. Other such devices are magnetic tape,
magnetic disk, light pen, bar code reader, smart card reader, etc. Besides,
there are other devices which respond to voice and physical touch. Physical
touch system is installed at airport for obtaining the online information
about departure and arrival of flight. The input unit is responsible for taking
input and converting it into binary system.
l

Notes

Central Processing Unit (CPU)

The CPU is the control centre for a computer. It guides, directs and governs
its performance. It is the brain of the computer. The main unit inside the
computer is the Central Processing Unit. Central Processing Unit is to
computer as the brain is to human body. This is used to store program,
photos, graphics, and data and obey the instructions in program. It is divided
into three subunits:
(a) Control Unit
(b) Memory Unit
(c) Arithmetic Logic Unit (ALU)
Control Unit
Control unit controls and co-ordinates the activities of all the components
of the computer. This unit accepts input data and converts it into computer
binary system.
Memory Unit
This unit stores data before being actually processed. The data so stored
is accessed and processed according to instructions which are also stored
in the memory section of computer well before such data is transmitted to
the memory from input devices.
Arithmetic and Logic Unit
It is responsible for performing all the arithmetical calculations and
computations such as addition, subtraction, division, and multiplication. It
also performs logical functions involving comparisons among variable and
data items.

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Output unit

After processing the data, it ensures the convertibility of output into human
readable form that is understandable by the user. The commonly used output
devices include like monitor also called Visual Display Unit, printer etc.
Notes
INTEXT QUESTIONS 12.1
Fill in the blanks with correct word/words
1. Computer is a fast data ..................... electronic machine.
2. All the computer operations are caused by ..................... pulses and
travels at the speed of light.
3. A computer is free from ..................... and lack of concentration.
4. Computers are being used as powerful ..................... tools.
5. The mostly used input devices are keyboard, ..................... and scanner.
6. Central Processing Unit is to computer, as the ..................... is to human
body.
7. The commonly used output devices include ..................... printer etc.
12.2 LIMITATIONS OF A COMPUTER AND COMPURISED
ACCOUNTING
The limitations of computer are depending upon the operating environment
they work in. These limitations are given below as :
l

Cost of Installation

Computer hardware and software needs to be updated from time to time

with availability of new versions. As a result heavy cost is incurred to
purchase a new hardware and software from time to time.
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Cost of Training

To ensure efficient use of computer in accounting, new versions of hardware

and software are introduced. This requires training and cost is incurred to
train the staff personnel.
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Self Decision Making

The computer cannot make a decision like human beings. It is to be guided

by the user.

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Maintenance

Computer requires to be maintained properly to help maintain its efficiency.

It requires a neat, clean and controlled temperature to work efficiently.
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Dangers for Health

Extensive use of computer may lead to many health problems such as

muscular pain, eyestrain, and backache, etc. This affects adversely the
working efficiency and increasing medical expenditure.

Notes

Role of computers in accounting

The most popular system of recording of accounting transactions is manual
which requires maintaining books of accounts such as Journal, Cash Book,
Special purpose books, ledger and so on. The accountant is required to
prepare summary of transactions and financial statements manually. The
advanced technology involves various machines capable of performing
different accounting functions, for example, a billing machine. This
machine is capable of computing discount, adding net total and posting the
requisite data to the relevant accounts.
With substantial increase in the number of transactions, a machine was
developed which could store and process accounting data in no time. Such
advancement leads to number of growing successful organisations. A newer
version of machine is evolved with increased speed, storage, and processing
capacity. A computer to which they were connected operated these machines.
As a result, the maintenance of accounting data on a real-time basis became
almost essential. Now maintaining accounting records become more
convenient with the computerised accounting.
The computerised accounting uses the concept of databases. For this
purpose an accounting software is used to implement a computerised
accounting system. It does away the necessity to create and maintain
journals, ledgers, etc., which are essential part of manual accounting. Some
of the commonly used accounting softwares are Tally, Cash Manager, Best
Books, etc.
Accounting software is used to implement a computerised accounting. The
computerised accounting is based on the concept of database. It is basic
software which allows access to the data contained in the data base. It is
a system to manage collection of data insuring at the same time that it
remains reliable and confidential.
Following are the components of Computerised accounting software:
1. Preparation of accounting documents
Computer helps in preparing accounting documents like Cash Memo, Bills
and invoices etc., and preparing accounting vouchers.

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2. Recording of transactions

Notes

Every day business transactions are recorded with the help of computer
software. Logical scheme is implied for codification of account and
transaction. Every account and transaction is assigned a unique code. The
grouping of accounts is done from the first stage. This process simplifies
the work of recording the transactions.
3. Preparation of Trial Balance and Financial Statements
After recording of transaction, the data is transferred into Ledger account
automatically by the computer. Trial Balance is prepared by the computer
to check accuracy of the records. With the help of trial balance the computer
can be programmed to prepare Trading, Profit and Loss account and Balance
Sheet. These components can be shown as :

Fig. 12.2 Components of computerised accounting software

Computerised Accounting
Transaction processing system (TPS) is the first stage of computerised
accounting system. The purpose of any TPS is to record, process, validate
and store transactions that occur in various functional areas of a business
for subsequent retrieval and usage. TPS involves following steps in
processing a transaction: Data Entry, Data Validation, Processing and
Revalidation, Storage, Information and Reporting.

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It is one of the transaction processing systems which is concerned with

financial transactions only. When a system contains only human resources
it is called manual system; when it uses only computer resources, it is called
computerised system and when it uses both human and computer resources,
it is called computer-based system.

Notes

These steps can be explained with an example making use of Automatic

Teller Machine (ATM) facility by a Bank-Customer.
1. Data Entry : Processing presumes data entry. A bank customer operates
an ATM facility to make a withdrawal. The actions taken by the
customer constitute data which is processed after validation by the
computerised personal banking system.
2. Data Validation : It ensures the accuracy and reliability of input data
by comparing the same with some predefined standards or known data.
This validation is made by the Error Detection and Error Correction
procedures. The control mechanism, wherein actual input data is
compared with predetermined norm is meant to detect errors while error
correction procedures make suggestions for entering correct data input.
The Personal Identification Number (PIN) of the customer is validated
with the known data. If it is incorrect, a suggestion is made to indicate
the PIN is invalid. Once the PIN is validated, the amount of withdrawal
being made is also checked to ensure that it does not exceed a prespecified limit of withdrawal.
3. Processing and Revalidation : The processing of data occurs almost
instantaneously in case of Online Transaction Processing (OLTP)
provided a valid data has been fed to the system. This is called check
input validity. Revalidation occurs to ensure that the transaction in terms
of delivery of money by ATM has been duly completed. This is called
check output validity.
4. Storage : Processed actions, as described above, result into financial
transaction data i.e. withdrawal of money by a particular customer, are
stored in transaction database of computerized personal banking system.
This makes it absolutely clear that only valid transactions are stored in
the database.
5. Information : The stored data is processed making use of the Query
facility to produce desired information.
6. Reporting : Reports can be prepared on the basis of the required
information content according to the decision usefulness of the report.

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INTEXT QUESTIONS 12.2

Fill in the blanks with correct word/words :
Notes

1. Computer hardware and ....................... need to be updated from time

to time.
2. The ....................... cannot make a decision itself like human beings.
3. ....................... requires a neat, clean and controlled temperature to work
efficiently.
4. The most popular system of recording of accounting transactions is
.......................
5. The computerised accounting uses the concept of .......................
6. Accounting ....................... is used to implement a computerised
accounting.
12.3 NEED AND REQUIREMENTS OF COMPUTERSIED
ACCOUNTING
The need for computerised accounting arises from advantages of speed,
accuracy and lower cost of handling the business transactions.
l

Numerous Transactions
The computerised accounting system is capable of handling large
number of transactions with speed and accuracy.

Instant Reporting
The computerised accounting system is capable of offering quick and
quality reporting because of its speed and accuracy.

Reduction in paper work

A manual accounting system requires large physical storage space to
keep accounting records/books and vouchers/ documents. The
requirement of stationery and books of accounts along with vouchers
and documents is directly dependent on the volume of transactions
beyond a certain point. There is a dire need to reduce the paper work
and dispense with large volumes of books of accounts. This can be
achieved by introducing computerised accounting system.

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Flexible reporting
The reporting is flexible in computerised accounting system as compared
to manual accounting system. The reports of a manual accounting
system reveal balances of accounts on periodic basis while computerised
accounting system is capable of generating reports of any balance as
when required and for any duration which is within the accounting
period.

Notes

Accounting Queries
There are accounting queries which are based on some external
parameters. For example, a query to identify customers who have not
made the payments within the permissible credit period can be easily
answered by using the structured query language (SQL) support of
database technology in the computerised accounting system. But such
an exercise in a manual accounting system is quite difficult and
expensive in terms of manpower used. It will still be worse in case the
credit period is changed.

On-line facility
Computerised accounting system offers online facility to store and
process transaction data so as to retrieve information to generate and
view financial reports.

Scalability
Computerised accounting system are fully equipped with handling the
growing transactions of a fast growing business enterprise. The
requirement of additional manpower in Accounts department is restricted
to only the data operators for storing additional vouchers. There is
absolutely no additional cost of processing additional transaction data.

Accuracy
The information content of reports generated by the computerised
accounting system is accurate and therefore quite reliable for decisionmaking. In a manual accounting system the reports and information are
likely to be distorted, inaccurate and therefore cannot be relied upon.
It is so because it is being processed by many people, especially when
the number of transactions to be processed to produce such information
and report is quite large.

Security
Under manual accounting system it is very difficult to secure such
information because it is open to inspection by any eyes dealing with

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the books of accounts. However, in computerised accounting system

only the authorised users are permitted to have access to accounting
data. Security provided by the computerised accounting system is far
superior compared to any security offered by the manual accounting
system.
Notes
Basic requirements of the computerised accounting system
The basic requirements of any computerised accounting system are the
followings:
l

Accounting framework
It is the application environment of the computerised accounting system.
A healthy accounting framework in terms of accounting principles,
coding and grouping structure is a pre-condition for any computerised
accounting system.

Operating procedure
A well-conceived and designed operating procedure blended with
suitable operating environment of the enterprise is necessary to work
with the computerised accounting system.

The computerised accounting is one of the database-oriented applications

wherein the transaction data is stored in well- organized database. The user
operates on such database using the required interface and also takes the
required reports by suitable transformations of stored data into information.
Therefore, the fundamentals of computerised accounting include all the
basic requirements of any database-oriented application in computers.
On the basis of the discussions, these are the following differences between
manual accounting and computerised accounting
Table 12.1 Difference between Manual accounting and
Computerised accounting
Point of Difference Manual Accounting

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Computerised Accounting

1. Recording

Recording of financial
Data content of these transactions
transactions is through books is stored in well designed data base.
of original entry.

2. Classification

Transactions recorded in the

books of original entry are
further classified by posting
them into ledger accounts.
This results in transaction
data duplicity.

No such data duplications is made.

In order to produce ledger accounts
the stored transaction data is
processed to appear as classified
so that same is presented in the
form of report.

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3. Summarising

Transactions are summarised The generation of ledger accounts

to produce trial balance by is not necessary condition for
ascertaining the balances of trial balance.
various accounts.

4. Adjusting
entries

Adjusting entries are made

There is nothing like making
to adhere to the principle of adjusting entries for errors and
matching.
rectifications.

5. Financial
statements

The preparation of financial

statements assumes the
availability of trial balance.

Notes

The preparation of financial

statements is independent of
producing the trial balance.

INTEXT QUESTIONS 12.3

Fill in the blanks with correct word/words :
1. In a manual accounting system, transactions recorded in the books of
.....................
2. The generation of ledger accounts is not a necessary condition for
making ..................... in a computerised accounting system.
3. The computerised accounting system is capable of handling .....................
of transactions.
4. The ..................... accounting system is capable of offering quick and
quality reporting.
5. Computerised accounting system offers ..................... facility to store
transaction data.
6. Computerised accounting system is ..................... to the manual accounting
system.
7. The computerised accounting is one of the ..................... oriented
applications

WHAT YOU HAVE LEARNT

l

Computer is an electronic device that can perform a variety of operations

in accordance with a set of instructions called programme. It is a fast
data processing electronic machine. It can provide solutions to all
complicated situations.

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Characteristics of computer
Speed Storage Accuracy Diligence Versatility

Notes

Processing
Power

Components of Computer
Input Unit

Central Processing Unit

Control unit
l

Communication

Memory
unit

Output unit

Arithmetic
and logic unit

Limitations of a Computer
Cost of
Installation

Cost of
Training

Self-Decision
Making

Maintenance

Dangers
for Health

Computerised Accounting
Transaction Processing System (TPS) is the first stage of computerised
accounting system.
l Need for computerised accounting
l

Numerous
Instant
transactions reporting
l

Reduction
in paper
work

Flexible
reporting

Online
facility

Accuracy

Security

Difference between manual accounting and computerised accounting

Recording

Classification

Summarising

Adjusting
entries

Financial
statement

TERMINAL QUESTIONS
1.
2.
3.
4.
5.

State the meaning and characteristics of Computer.

Explain the components of computer.
Explain the limitations of a Computer.
Explain the role of Computers in Accounting.
Differentiate between Manual accounting and Computerised accounting
system.
6. Enumerate the basic requirements of any computerised accounting
system.

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ANSWERS TO INTEXT QUESTIONS

Intext Questions 12.1
1. processing
4. communication
7. monitor

2. electrical
5. mouse

3. tiredness
6. brain

2. computer
5. databases

3. computer
6. software

2. trial balance
5. online

3. large number
6. superior

Notes

Intext Questions 12.2

1. software
4. manual
Intext Questions 12.3
1. original entry
4. computerised
7. database

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