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Application of Computers in Accounting

Accounting refers to identifying transactions and events of financial nature, record them in the books of account and produce meaningful information for the users. Thus, the foremost function of accounting is to identify transactions and events of financial nature and record them in the books of account.

Accounting process means preparing vouchers for the transactions, writing them in the Journal, posting the recorded transactions in the Ledger Accounts, drawing Trial Balance and thereafter, preparing the Financial Statements, i.e., Trading Account, Profit and Loss Account and Balance Sheet.

The accounting process, whether carried out manually or by use of computers generates accounting records such as Cash Book, Bank Book, Journal, Purchases Book, Sales Book, Ledger and Trial Balance. Besides the accounting records certain reports such as Payroll, Stock Report, Statutory Returns (VAT, CST, etc)., Debtors Report, Creditors Report and Exception Report., etc., are also prepared under both the method.

We have in the earlier chapters, discussed the accounting process, accounting concepts and preparing the final accounts in detail. When the accounting is carried out by means of computers, the accounting process remains exactly the same except that posting of recorded transactions to the ledger accounts and also the totaling of individual accounts and drawing of trial balance is carried out by the computers with the help of softwares. The software may be Readymade Software; customized Software or Tailor-made Software. We shall discuss the softwares later in this chapter.

Let us now, discuss how the computers are applied in accounting-

We had discussed in the beginning of the chapter that computers operate on "Operating Softwares or System, which make the necessary interface between the user and the computer hardware. An example of Operating Software is "Windows", "Windows XP" and "Windows Vista" etc.

Accounting function is carried out utilizing accounting software. Accounting softwares fall in the category of "Application Softwares". The end product of accounting process is producing financial statements, i.e., Trading, Profit and Loss Account and the Balance Sheet and the accounting softwares are so designed that the financial statements are produced by the system itself.

A credible financial statement can be prepared if the accounting concepts and principles are followed. It necessarily means capital expenditure and capital income or receipts be transferred to Balance Sheet while revenue expenditure and revenue incomes be transferred to Trading, Profit and Loss Account. This objective of accounting can be achieved when the account heads are defined in a manner that capital expenditures and capital incomes form part of the Balance Sheet under appropriate main head. Similarly, revenue expenditure and revenue incomes form part of the Trading, Profit and Loss Account. The process by which this objective is achieved is known as "Grouping of Accounts".

The process of "Grouping of Accounts" is carried out by giving a code to each main head, sub- heads and thereafter individual account heads. Code of the main head signifies whether the account is an item belonging to assets, liabilities, expenses or incomes. Code of the sub-head signifies the head under which individual account head will appear.

Account if wrongly coded, will lead to errors of principle whereby an item of liability may be treated as income and vice versa. Similarly, an item of asset may be treated as expense and vice versa. The financial statements prepared without rectifying such errors will reveal incorrect financial results and position. Therefore, extreme caution needs to be exercised when grouping of accounts is done and also when the transaction is recorded using computers.

The process of 'Grouping of Accounts' is basic or fundamental requirement for producing financial statements. The second stage of application of computers in accounting is to record individual transactions using the accounting software.

Computers, with the help of Application Software, perform the same functions that are carried out when accounting is done manually. Let us discuss these-
  1. Payr​oll Processing
    Payroll processing means preparation of salaries and wages, accounting along with it the leave records, deduction of provident fund, ESI, etc. Leave records are part of payroll as salaries and wages are prepared taking into account the leaves taken. ESI and Provident Fund are statutory deductions out of salaries and wages and also contribution by the employer.

    Computer takes the data such Employee's Name, Father's Name, Employee code, Basic Salary, Perquisites, Percentage of deduction for Provident Fund, ESI and advance etc. from the Master Data and the number of days from the attendance record. It not only produces the salary and wages sheet timely but also accurately. The entry in the financial books of account is recorded from the payroll processing.
  2. Transaction Processing
    Transactions are recorded using the utility or application software. Transaction recording under the computerized environment is not only accurate but is also time consuming. It is so because two time consuming processes under the manual system namely posting of entries into ledger accounts and casting (totaling and balancing) are automated by the software. Softwares are designed in the manner that the process of posting and casting is carried out simultaneously with recording of transaction.

    A functional key is provided to record transactions relating to cash, purchase, sale and journal. It means that if cash transactions are to be recorded the functional key when operated will open the cash book.
  3. Ledger
    The software is designed in such a manner that the transaction is posted to the ledger account and the ledger account is casted simultaneously with the recording of transactions. We had discussed in this chapter about grouping of accounts. Posting of transactions into ledger account is carried out as guided by the account code given to the transaction.
  4. Trial Balance
    Posting of transactions into ledger account and also casting of ledger accounts is carried out simultaneously with the recording of transaction. It means that a trial balance can be extracted even after every transaction without any efforts.
  5. Financial Statements
    Financial Statements, i.e., Trading, Profit and Loss Account and the Balance Sheet like extracting a trial balance can also be extracted after every transaction.

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