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Chapter 12 Applications of Computers in Accounting

A computer is an electronic device, which is capable of performing a variety of operations as directed by a set of instructions. This set of instruments are capable of instrument is instructions is called a computer programme or software. Computer components that can be physically touched such as keyboard, C.P.U, monitor, mouse etc. are known as computer hardware limitations of computer systems include lack of common issue of sense,  lack of own intelligence etc. Components of the computer system are input, central processing unit and output.

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Exercise 1

  • Q1

    State the different elements of a computer system.


    Different elements of a computer system are :
    a) Input Unit
    b) Output Unit
    c) Storage Unit
    d) Central Processing Unit (CPU)
    e) Arithmetic and Logic Unit (ALU)
    f) Control Unit


    List the distinctive advantages of a computer system over a manual system.


    The distinctive advantages of a computer system over a manual system are :

    1) High Speed
    2) High Reliability
    3) Accuracy
    4) Updation of Information
    5) Efficiency
    6) Legibility
    7) Lower Cost
    8) Timely Reporting
    9) Flexible Reporting
    10) Storage and Retrieval
    11) Security of data
    12) Queries


    Draw block diagram showing the main components of a computer.


    a. Input Unit: It is a device through which we enter programs and data into the computer. The data is then stored and processed with the help of programs. The Central Processing Unit The Central Processing Unit (CPU)is divided into three units namely, the control unit, the arithmetic and logic unit and the memory unit.

    b. Control Unit: This unit is considered to be the nerve centre of the computer. It controls all arithmetic operations to be performed. It also coordinates the functions of all the hardware units of the computer.

    1. Arithmetic and Logic Unit (ALU): This unit performs all the arithmetic calculations and logical operations involved in a program.
    2. Memory Unit: The function of this unit is to store data and the set of instructions given by the programmer. The computation results are stored in the memory and they may be used for subsequent computations or sent to the output unit.
    3. Output Unit: The output unit receives information from the CPU and presents it to the user in the desired form. Some common output devices are visual display unit (VDU) and Printer.


    Give three examples of a transaction processing system.


    Transaction processing systems consist of computer hardware and software hosting a transaction-oriented application that performs the routine transactions necessary to conduct business.

    Examples include systems that manage sales order entry, airline reservations, payroll, employee records, manufacturing, and shipping.


    State the relationship between information and decision.


    As a system, every organisation accepts inputs and transforms them into outputs. All organisation systems pursue certain objectives through a process of resource allocation, which is accomplished through the process of managerial decision - making. Information facilitates decision regarding allocation of resources and thereby assists an organisation in pursuit of its objective.


    What is Accounting Information System?


    Accounting Information System refers to the computer-based method used by the companies in order to collect, store and process the accounting and the financial data which is used by the internal users of the company in order to give report regarding various information to the stakeholders of the company such as creditors, investors, tax authorities, etc.


    State the various essential features of an accounting report.


    An accounting report must have the following feature in it :
    (i) Relevance
    (ii) Timeliness
    (iii) Accuracy
    (iv) Completeness
    (v) Summarisation


    Name three components of a Transaction Processing System.


    The following are three main components of a Transaction Processing System (TPS):

    (a) Input: A computerised accounting system accepts the complete transaction data as input through the process of data collection, data editing, data validation and data manipulation.

    (b) Storage: The system stores the inputted data in computer storage media such as hard disk.

    (c) Output: The stored data, through the process of report generation and query support can be retrieved and processed as and when required for generating an accounting report as output.


    Give example of the relationship between a Human Resource Information System and MIS.


    There is a relationship between Human Resource Information System and Management Information System the following are the examples of it:
    (i) Hiring employees as per the requirements
    (ii) Evaluating performance of the workers
    (iii) Enrolling employee in benefits plans

Exercise 2

  • Q1

    ‘An organisation is a collection of interdependent decision-making units that exists to pursue organisational objectives’. In the light of this statement, explain the relationship between information and decisions. Also explain the role of the Transaction Processing System in facilitating the decision-making process in business organisations.


    There is a great relationship between information and decision every organisation accepts inputs and transforms them into outputs. All organisation systems pursue certain objectives through a process of resource allocation, which is accomplished through the process of managerial decision-making. Information facilities decision regarding allocation of resources and thereby an organisation in achieving its objective.

    Every medium sized to large organisation has a well-established information system that is meant to generate the information required for decision - making with the increasing use of information systems in organisation, Transaction Processing System (TPS) have started playing a vital role in supporting business operation.

    Every transaction processing system has three components Input Processing and output, Since Information technology (IT) follows the GIGO principle (Garbage in Garbage out), it is necessary that inputs to the it-based information system are accurate, complete and authorised. This is achieved by automating the input. A large number of the devices are now available to automatically process the inputs process for a TPS.

    Transaction Processing System Transaction Processing System (TPS) are among the earliest computerized systems catering to the requirements of large business enterprises. The purpose of typical TPS is to record, process,validate and store transactions that occur in the various functional areas of a business for subsequent retrieval and usage.

    A transaction could be internal or external, The scope of financial accounting is confined to external transactions only, whereas through the transaction processing system we record all the transaction internal as well as external.


    Explain, using examples, the relationship between the organisational MIS and the other functional information system in an organisation. Describe how AIS receives and provides information to other functional MIS.


    Accounting information system is an important component of the organisation MIS in an organisation. It receives information and provides information to the other functional MIS. The following example illustrates the relationship and data interface between the various sub - components of MIS.

    (i) Accounting Information System, Manufacture System and Human Resource Information System From the figure given below we can go through the relationship between the three information systems, viz manufacturing information system accounting information system and the human resource information system. The manufacturing departments receives the list of workers from the Human Resource (HR) department.

    It sends the details of production achieved by the workers on the basis of which the HR department directs the finance and accounts (F&A) department to pay the wages. The details of the wages paid and statutory dues are also sent by the F&A departments to the production department also to the HR department to monitor the performance of workers.

    The HR department communicates to the other departments about the good/bad performance on the basis of which decision on various operational matters may be taken.

    (ii) AIS and Marketing Information System Consider the business process in the Marketing and Sales departments involving the following activities

         (a) Inquiry
         (b) Contact creation
         (c) Entry of orders
         (d) Dispatch of goods
         (e) Billing to customers

    The accounting sub-system transaction cycle include the processing of sales order, credit authorisation custody of the goods, inventory position, shipping information receivables etc, It also keeps a track of the customer accounts e.g. Aging Report which should be generated by the system.

    (iii) AIS and Manufacturing Information System Business process in the production department may involve the following activities

         (a) Preparation of plans and schedules
         (b) Issue of material requisition forms and jobs cards
         (c) Issue of inventory
         (d) Issue of order for procurement of raw materials
         (e) Handling of vendors invoices
         (f) Payments to vendors

    Hence, it can be said that a computerized accounting system is a sub component of the accounting information system which transforms the financial data into meaningful information and communicates the information to the decision - makers. The reports demanded may be routine or specific ones.and the other functional information system in an organisation.


    ‘An accounting report is essential a report which must be able to fulfil certain basic criteria' Explain? List the various types of accounting reports.


    When a data is processed properly than it becomes information and when such related information is summarized to meet a particular need, it is called a report. The content and design of the report is expected to vary depending upon the level to which it is submitted and decision to make on the basis of the report. A report must be effective and efficient to the user and should substantiate the decision making process. Every accounting report must be able to fulfill the following criterion:

    (i) Relevance
    (ii) Timeliness
    (iii) Accuracy
    (iv) Completeness
    (v) Summarization

    Type of Accounting reports:

    The accounting reports generated by the accounting software may be either routine reports or on the specific requirements of the user. E.g. the ledger is a routine report while a report on supplies of a particular item by a given party is an on-demand report. However,from a broader perspective, the Accounting related MIS reports may be of following reports:

    (i) Summary Reports: Summarizes all activities of the organisation and present in the form of summary reports like profit and loss account and balance Sheet.
    (ii) Demand Reports: This reports will be prepared only when the management requests them, e.g, Bad Debts Report for a given product ,Stock Valuation Report.
    (iii) Customer /Supplier Reports: According to the specifications of the management it will be prepared. e.g. Top 10 Customers reports , Interest on customer Account / Invoices, Statement of Account, Customer Reminder Letters Outstanding /Open Delivery Order ,Purchase Analysis ,Vendor Analysis Report.
    (iv) Exception Reports: According to the conditions or exception the report is prepared. e.g. Inventory Report in short supplies ,Stock Status Query ,Over stocked Status ,etc.
    (v) Responsibility Reports: The MIS structure specifies the premises of management responsibilities. e.g the report on Cash Position is to be submitted by the head of finance and Accounts Departments.


    Describe the various elements of a computer system and explain the distinctive features of a computer system and manual system.


    A computer system is a combination of six elements :

    (i) Hardware: Hardware of computer consists of physical components such as keyboard, mouse monitor and processor.

    (ii) Software: A set of programmers which is used to work with such hardware, is called its software. A coded set of instructions stored in the form of circuits is called firmware. There are six types of software as follows.

    (a) Operating system
    (b) Utility Programmer
    (c) Application Software
    (d) Language Processors
    (e) System Software
    (f) Connectivity software

    (iii) People: People interacting with the computer are also called live - aware of the computer system. They constitute the most important part of the computer system such as System Analysts, Programmers and Operators.

    (iv) Procedures: The procedure means a series of operations in certain order or manner to achieve desired results. There are three types of procedures which constitute technical components. Parts of computer system hardware - oriented, software-oriented system and internal procedure.

    (v) Data: These are facts and may consist of number, text, etc. These are gathered and entered into a computer system.

    (vi) Connectivity: The manner in which a particular computer system is connected to others through telephone lines, microwave transmission, satellite link, etc. is the element of connectivity.

    Distinct Features of Computer System and Manual System A computer system has some special feature which a manual system fails to maintain .Some of them are as follows

    (i) Speed: Speed of computer makes it special. Normally, human beings take into account a second or a minute as a unit of time. But computers have such a fast operating capability that the relevant unit of time is fraction of a second.

    (ii) Accuracy: It refers to the degree of exactness with which computations are made and operations are performed. Through the manual system one might spend years in detecting errors in computer calculation or updating wrong records. Most of the errors in the Computer Based Information System (CBIS) occur because of bad programming ,erroneous data and deviation from procedures. These errors are caused by human beings.

    (iii) Reliability: Its Refers to the ability with the computers to remain functional to serve the user. Computer systems are well -adapted to performing repetitive operations. They are immune to tiredness and boredom of fatigue. Therefore, they are more reliable than human beings. On the other hand manual systems cannot be reliable upto that extent.

    (iv) Versatility: It refers to the ability of computers to perform a variety of tasks, simple as well as complex. Computers are usually versatile unless designed for a specific application. A general purpose computer is capable of being used in any area of application business, industry, scientific, statistical, technological, communications and so on. A general purpose computer, when installed in an organisation, can take over the jobs of several specialists because of its versatility.

    (v) Storage: The computer system, besides having instant access to data, has a huge capacity to store such data in very small physical space. On the other hand, the human brain has some limitations to remember all the events.

    It is clear from the above discussion that computers' capabilities outperform human capabilities. As a result, a computer, when used properly, will improve the efficiency of an organisation.

Exercise 20

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