The role of computers in accounting PDF

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The role of computers in accounting

CHAPTER

38

Learning Objectives After reading this chapter you should be able to: Explain the meaning of the key terms and concepts listed at the end of the chapter. Describe the nature of the main basic computer concepts. Describe the main advantages of computerized accounting systems. Discuss the expanding role of computerized accounting systems. Explain the main factors which need to be taken into consideration in the design, operation and management of computerized accounting systems. Discuss the limitations of computer systems.

Some basic computer concepts Today, it is commonplace to keep accounts on a computer. Yet all the basic principles of accounting, as described elsewhere in this book, were devised in an age of paperwork and ledgers. As computers took over, a lot of accounting activity disappeared ‘under the covers’ of sophisticated electronic boxes. The result was that much of the work of accountants was made a lot easier. At the same time, new questions arose. In particular, it is difficult to ascertain exactly what is actually going on inside a computer. How can we be sure that it is carrying out all the accounting procedures correctly? It follows that today’s accountants need to understand computers. Otherwise, their comprehension of how the financial statements have been put together will be incomplete. Th ey do not need to take a nerdy interest in such things as chips, pixels and megahertz ratings. But they must be able to appreciate just how the accounting information is being acquired, held and manipulated in the computer system (see Figure 38.1 for details).

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CHAPTER 38 The role of computers in accounting

How is information captured?

• Information can be typed in via a keyboard. Optical character recognition (OCR) can be used to lift information directly from printed documents (or even handwritten ones, if the writing is good enough). Bar codes can be used to locate and count inventory items. Plastic cards may hold details of a customer’s identity, or store a monetary value. Speech recognition means that, in appropriate conditions, we can talk directly to the computer. For routine activities, a mouse can provide rapid input by enabling the user to ‘point and click’ on a specially designed screen lay-out, known as a Graphical User Interface (GUI). E-commerce enables information to come directly from another source eletronically. Each of these methods of collecting information has different levels of ccuracy, and needs to be subject to different kinds of checks and controls

How is information stored?

• Most computers have a built-in disk drive, capable of storing huge numbers of facts andfigures. This raw information is usually referred to as data. A variety of disks and memory devices are available for transferring data from one system to another. While data is stored, it is important that no one can tamper with it. One way of achieving this is to use a write-once medium, such as a CD which is designed to ‘burn in’ the data permanently, or to save files as read-only or have them password protected

How is information processed?

• Most businesses buy ready-made software packages to run their accounts. There are many thousands of such products on the market. Some are targeted at very specific types of business, such as construction or banking. Packages are now available for even the smallest businesses, such as a local charity or corner shop. At the other end of the scale, larger organizations sometimes find that their operations are so complex and specialised that no suitable packages are available. In this case, they may have to commission bespoke software. This is an expensive option, and the programs may take many months to design, write and test

Figure 38.1 Entering, storing and processing information A real world example of an input user interface follows:

REAL WORLD EXAMPLE

38.1

Source: Author.

808

Sage input screen

38.2 Advantages of computerized accounting systems As well as understanding these basic features of the system, the accountant also needs to be sure that the accounts are being protected against unauthorized changes. The widening of access through networks of computer systems makes this protection more difficult. Within the office, it is common to connect a number of machines onto a Local Area Network (LAN). For example, this enables people to share the use of expensive equipment, such as different types of scanners and printers. A larger organization may operate a Wide Area Network (WAN), linking offices many miles apart. Most computers now come with a standard facility for linking to the largest WAN of all, which is the internet. Network technology is constantly improving and becoming more flexible, though the use of wireless LANs and the ability to send data across mobile phone networks. There are many practical benefits for business in networking their systems, particularly in opening up opportunities for electronic commerce (see later in this chapter). Unfortunately it cannot be assumed that every user of the network has good intentions. Precautions must be taken against malicious attacks, aimed at reading or modifying the company’s data, or, in the worst cases, at disabling the computer systems altogether. Finally, the accountant should always be suspicious of quick and easy solutions. For example, it is easy to set up accounts on spreadsheet soft ware. However, as the accounts grow, it will become increasingly difficult to keep track of them; and since spreadsheets are designed to be easily changed and over-written, they are difficult to control and audit. Similarly, an accounting package which can be set up very quickly may prove exasperating in the longer term. If it cannot handle the kind of account codes, periods, and reporting conventions which are used by the business, you may end up with a situation where the business is adapting its procedures to those imposed by the accounting soft ware, rather than the other way round.

Advantages of computerized accounting systems In the early days of commercial computing, most of the savings made by companies came from reductions in the numbers of clerks needed to process routine transactions. For example, a company with several hundred employees might use the computer to carry out the weekly payroll calculations. Computers would work out all the employees’ entitlements and deductions in a fraction of the time required by the clerical teams they displaced. Accounting applications were a popular first choice to be implemented on the computer, because they necessarily involved many such repetitive activities. Often a set of identical tasks, such as calculating the pay for each employee, would be run through the computer in a batch, and this mode of operation became known as batch processing. Batch processes saved labour, but the programs carrying out the processing tended to be very infl exible. Th e accounting data would be stored in a way which suited the accounting program, making it difficult to access for any other kind of analysis. There was no way in which accounting reports could be created ‘on demand’. All this changed with the arrival of on-line or interactive processing in the late 1970s. This style of working is taken for granted today, since it is used by everything from a PC package (such as a spreadsheet) to mainframe-based services (for example, as used in internet-based insurance or banking services). At the time, however, it was regarded as a tremendous innovation for users to be able to interact directly with the computer. As the new interactive techniques developed, so did most of the advantages that can be found in computer systems today. Two particular advantages can be summarized as follows.

Simultaneous access to data Only a handful of people can study a set of conventional books simultaneously. Through interaction with a computer system, in contrast, large numbers of users can all have access to the same information. Not only can they gain immediate access to the ledger entries of customer X or supplier Y, they can do so without worrying about where the ledgers are held, or whether someone else might be using

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CHAPTER 38 The role of computers in accounting them at the same time. Similarly, if a change is made to the ledger (for example, customer X finally makes an overdue payment), this information is instantly available to everyone else logged in to the accounting system.

Improved accuracy of data When data items are being entered interactively (perhaps with an operator filling in an ‘electronic form’ on the computer screen) the accounting program can carry out a certain amount of checking while the data entry is in progress. It cannot, of course, prevent the operator from making quite fundamental mistakes, such as typing in the wrong amount for a quantity ordered. However, it can do numerous other checks; for example, to prevent a key item of data from being omitted by mistake, or to ensure that the amount received in a payment matches the amount due. Mistakes can also be avoided by reducing the need for data to be keyed in time and again. For example, a customer’s address and other basic details can be typed in during an initial setting-up session. Thereafter, the details are stored in the computer’s files, and altered as and when required because of a change in the customer’s circumstances (such as a new address or telephone number). All the operator has to do is to type in a customer reference number or surname to initiate a search, and all the relevant detail will be brought up on the screen. Some systems carry this approach further by providing data default values for entries where the input is going to be predictable in the great majority of cases. Thus, a default may be set for the price of an item, the size of a discount, or the number of days within which payment is due. In a small minority of cases, the operator may need to change the default to another value. Most of the time, however, the operator merely has to confi rm the default value, thus reducing the amount of typing required, and making it less likely that any erroneous values will be entered. A screen which illustrates the use of preset details and defaults is shown as Figure 38.2.

Order No. 10025

Thomas Tanks plc 15, Railway Cuttings, Birmingham B15 2TT

Customer code

T009

Date received

25/09/X2

Date required

09/10/ X2

Product code

Quantity

Description

Value

PR5544

20

A4 paper

£216.20

PR5592

12

markers, black

£15.24

Credit Limit £4,000.00

Figure 38.2 A simplified screen layout for order entry

Th e operator only needs to enter the shaded values – the computer can generate a new order number, provide today’s date, and retrieve details such as the customer’s address and the price and description of each product. Apart from the benefits that result from interactive working, computerised accounting has brought benefits in two other main areas.

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38.2 Advantages of computerized accounting systems

Improved detail Storage in a computer system is not confined in the same way as in the pages of a book. It can handle a more or less indefinite number of rows and columns. Records of transactions do not therefore have to be confined to very basic information such as the date and amount. A variety of other details can easily be added; for example, when a sale is made, codes can be recorded to show what category of customer this was, the identity of the salesperson, the product type, the sales district, and so on. When details on perhaps hundreds of customers are recorded in this way, they provide a rich source of data for the company to analyse.

Improved reporting Having recorded accounting transactions in electronic form, the production of reports becomes a matter of running some appropriate soft ware to turn the data into summaries and tables (for management accounting) or standard statement of financial position and statement of comprehensive income (for financial accounting). No longer do staff have to extract information directly from the ledger entries. This saves a lot of staff time, and reduces errors of calculation and transcription. There is, of course, an important proviso: the soft ware used to generate the reports must be free of any errors in its logic. This raises important questions about the role of the accountant. Is he or she to take the computer figures at face value? If so, does this not hand over too much responsibility to the computer programmer? Of course, the accountant cannot check through every line of code appearing in the program, but at the same time he or she should be conscious that no programmer is infallible. Today, a growing proportion of accountants’ expertise is centred on checking the reasonableness and consistency of figures generated from computers. Most accounting soft ware provides facilities for generating period-end and year-end reports as described elsewhere in this book, and will produce a ‘trial balance’. This trial balance does not have quite the same role as that described in Chapter 11 ‘The balancing of accounts and the trial balance’. For example, most accounting software, while adhering to double-entry conventions in presenting ledger information, does not actually require the user to post the amount on both sides of the ledger – this is usually taken care of automatically by the system. If any errors are apparent in a trial balance, the finger of suspicion should fall first and foremost on possible flaws in the software. Most organizations like to be able to analyse accounting data in other ways, besides the rather formalized summaries provided in the standard financial reports. Reports can generally be produced in one of three ways as outlined in Figure 38.3.

Pre-programmed report formats • For example, a commonly used report is an analysis of the sales ledger, to determine which customers are slow payers Report generator • This permits a more ‘do-it-yourself’ approach to report generation. The user can design a report from scratch, defining where fields are to appear, what should be shown in each field, and what titles and headings are to be used Separate report generating software • For example, a spreadsheet. The accounting system will offer an extract or export feature, which allows selected date to be written out to a file in a rows-and-columns format

Figure 38.3 Methods of generating reports

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CHAPTER 38 The role of computers in accounting An example of a pre-programmed aged trade receivables report of this kind is shown in Figure 38.4.

SALES LEDGER; ACCOUNT BALANCES (AGED) Cust. code

Cust. name

Credit limit

Balance

Current period

30 Days

Over 30 days

T009

T. Tanks

4000

1760.15

1203.45

556.70

00.0

T011

B. Timms

5000

4516.25

4020.15

324.10

172.0

T016

N. Todd

1500

1035.65

1035.65

0.00

00.0

T023

M. Tubbs

2500

519.23

380.12

98.56

40.55

Figure 38.4 Part of a typical computer-generated report. It enables customers with large or long-standing debts to be identified quickly

The three ways in which reports can be generated are summarised in Figure 38.5. Standard reports are often circulated around the organization on a scheduled basis – for example, at the end of each month. ‘One-off ’ reports may be generated on demand, usually with the aid of a more flexible tool such as a spreadsheet. Increasingly, such reports are circulated within the organization via e-mail or other electronic services.

Accounting Package

Report: standard format

Data in ledgers Report: customer-designed format

Export facility

Spreadsheet

Figure 38.5 The generation of reports from accounting packages

Once accounting soft ware has become firmly established in the organization, a final benefit can be achieved from having data for successive years or periods held in electronic form. This makes it possible to look at how key financial indicators have changed with time, and to predict what will happen if particular trends continue.

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38.3 Expanding the role of the accounting system

Expanding the role of the accounting system While accountants were often the first people in the organization to use computers, other departments soon followed their example. Th is led to demands for the various different computer systems to be linked together. Accounting ceased to be a completely separate function, and possibilities opened up for handing information in entirely new ways. For example, entering accounting information was no longer restricted to clerks in the accounting department: it could be collected at source from devices such as supermarket check-outs, credit card machines and ticket dispensers. Th e arrival of the home PC and the internet meant that customers could be asked to fill in order screens for themselves, rather than having this done for them by a shop assistant or a telephone sales clerk. Companies began to be much more inventive in their use of computer technology. They no longer used computers to imitate the traditional ways of doing things. Ways were found of speeding up information flows, and helping employees to make decisions more rapidly. This became known as business process re-engineering (BPR). When BPR projects called for changes to accounting systems, as they often did, this sometimes led to intense discussions over possible conflicts with basic accounting principles, particularly in respect of control and audit. Closer links between systems within the company (as illustrated in Figure 38.6) also led to demands from managers for a better analysis of what was happening in the company as a whole. Integrated soft ware capable of providing this kind of overview began to appear, offering what was termed enterprise resource planning (ERP).

Job costing

Stock control

Accounts ledger reports

Payroll

Figure 38.6 Extending the range of information available, through integrating the accounting software with software used in other parts of the company

Companies also looked at the outside world, and sought ways of improving the electronic links between themselves and their trading partners. Figure 38.7 shows a typical old-fashioned approach to communications. This is not only involved a delay of a day or two while letters were printed, posted and delivered; all the information printed out by the sender then had to be keyed back into a computer by the recipient. Electronic data interchange (EDI) was the first step in streamlining this process, by defining standard ways of transmitting forms used in common transactions (such as orders, payments, and deliveries) directly between computers. EDI not only speeded things up, but eliminated the errors which tended to arise when the information was re-keyed (see the lower part of Figure 38.7).

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CHAPTER 38 The role of computers in accounting

Conventional communication

Order printed

Postal service

Order re-keyed into supplier’s system

Electronic data interchange

Details sent in standard format acro...