Theoretical Aspects Of Computerization Accounting Essay

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Accounting is a major means of helping managers of an organization, potential equity investors of an organization, creditors, bond holders, donors, suppliers and customers of an organization and other stake holders to take decisions.

Accounting provides information for three major purposes: External reporting, routine internal reporting, and Non Routine internal reporting. These reports are used by managers of the company for their internal decisions, support projects, investors, creditors, government authorities and stakeholders.

While reports are prepared in different formats and basic data is manipulated or summarized in various ways to facilitate decision making, there is one data base maintained by the accounting system that contains data in the form of debits and credits to various accounts maintained in the accounting system. Accountants combine these data items in various ways to provide information to internal and external users that are used to determine the present and future economic stability of the organization. It has been proven that the companies that use good accounting practices have a competitive advantage over their opponents.

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Not only is accounting very important in the business world it is also beneficial for ordinary people to know as well, when making financial investment decisions.

Accounting can be divided into three major divisions namely Financial Accounting, Cost Accounting and Management Accounting

Objective:

The main objective of this paper is to examine the problems, prospects and success of computerization of accounting function.

Methodology:

The group distributed questionnaires to 10 small, medium and large companies which were duly responded to and filled in. The group also gathered some materials from the internet, books, journals and lecturer's class presentation on Financial Accounting.

Conclusion:

By analyzing the questionnaires' responses, reference books, internet browsing and lecture notes the group members have come to the conclusion that computerisation of accounting function in today's world of technology with pertaining problems, challenges, prospects and successes cannot be ignored and are discussed in details in this project.

Introduction

In simple terms, Accounting is the systematic recording, reporting, analyzing and interpreting of financial transactions of a business. In earlier days, Accounting functions were performed manually whereby a lot of paperwork had to be done with accumulation of registers. This was the practice until after the introduction of computers, hardware and software with their associated applications whereby accounting functions are put into an electronic form using databases. However, some organizations are yet to computerize while others have partially computerized their accounting functions.

Theoretical Aspects of computerization

A successful computerisation exercise needs senior management support by taking ownership of the project, then sensitize the importance of the project to all stakeholders. Thereafter a plan will be required which should have the following mandatory inputs:-

Financial ability budgeted for the exercise (funds)

Computer software including the accounting package, hardware and connectivity between computers (network) depending on the size of the organisation.

Skilled team comprises of personnel in the field of ICT and Finance

Awareness to affected parties as staff, suppliers, and stakeholders.

Continuous improvements and training.

Push to move abreast with technology.

The organisation might decide to adapt best practice methodologies to manage the project as Project in a Controlled Environment (PRINCE2), The Project Management Body of Knowledge (PMBoK) or Project Management Methodology (PMM).

Benefits and Disadvantages of Computerisation

Computers have become an integral part of the modern society. Technology has managed to transform all manual work into electronic form using databases and applications. An example of computerisation are in the areas of education, industries, banking sector, medicines, transportation, insurance, space technology and climate, in preparing pay rolls, and communications.

Advantages of computerisation:-

With larger reductions in the cost of hardware, software and availability of user-friendly accounting software package, it allows for computerization of accounting system.

A computerized system is more accurate, timely, faster, efficient and cheaper in processing of information and maintaining, as a result it promotes integrity and transparency.

Instant and / or Automatic generation of accounting documents like invoices, cheques and statement of account;

No more manual processing of the data- all automatically been posted to the various ledgers/accounts and

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Many types of useful reports, interpretations and analysis can be done and generated for management and decision makers.

Disadvantages:-

Power failure, computer viruses and hackers are the inherent problems of using computerized systems.

Once data been input into the system, automatically the output are obtained hence the data being input needs to be validated for accuracy and completeness, the GIGO (Garbage In (Input) Garbage out (Output) concept should be observed at all times.

Accounting system not properly set up to meet the requirement of the business due to badly programmed or inappropriate software or hardware or personnel problems can cause more havoc.

Danger of computer fraud if proper level of control and security whether internal and /or external are not properly instituted.

Computerization of Accounting Functions

Businesses large and small, public and private, for profit and nonprofit are driven by numbers. Whether it's tracking sales, managing inventory or making payroll. Smart managers know that keeping tabs on those numbers is crucial, but without a solid accounting function, that task can become an organizational nightmare. Organizations seeking a well-rounded accounting function need to consider several aspects of accounting functions beyond just simple debits and credits.

The common functions of accounting are as follows:

Recording:

This is the basic function of accounting. It is essentially concerned with not only ensuring that all business transactions of financial character are in fact recorded but also that they are recorded in an orderly manner. Recording is done in the book of accounting known as Journal.

Classifying:

Classification is concerned with the systematic analysis of the recorded data, with a view to group transactions or entries of one nature at one place. The work of classification is done in the book termed as "Ledger".

Summarizing:

This involves presenting the classified data in a manner which is understandable and useful to the internal as well as external end-users of accounting statements. This process leads to the preparation of the following statements: (1) Trial Balance, (2) Income statement and (3) Balance sheet.

Analysis and Interpretation:

This is the final function of accounting. The recorded financial data is analyzed and interpreted in a manner that the end-users can make a meaningful judgment about the financial condition and profitability of the business operations. The data is also used for preparing the future plan and framing of policies for executing such plans.

Communicate:

The accounting information after being meaningfully analyzed and interpreted has to be communicated in a proper form and manner to the proper person. This is done through preparation and distribution of accounting reports, which include besides the usual income statement and the balance sheet, additional information in the form of accounting ratios, graphs, diagrams, funds flow statements, IFRS etc.

Protect Business Property:

The other use of accounting function is to protect the property of business from unjustified and unwanted use. The accountant thus has to design such a system of accounting which protects its assets from an unjustified and unwanted use.

Legal Requirement Function:

Furthermore, accounting function has to devise a system that will meet legal requirements. Under the provision of law, a business man has to file various statements e.g., income tax returns, returns for value added tax purpose etc. Accounting system aims at fulfilling the requirements of law. Accounting is a base, with the help of which various returns, documents, statements etc., are prepared.

When the above functions are computerized, a business stands a better chance to perform better with accurate reports and manage time accordingly.

Determinant factors for computerization

Accounting is a necessary function for any business, all businesses must keep records of their income and expenses, and the records should be as detailed as possible. The two biggest advantages of a computerized accounting system are speed and accuracy. A company with a computerized accounting function has better chances and ability for increased efficiency, productivity, performance, accuracy and save time as compared to a company with non-computerized accounting functions.

The factors that determine Computerisation of accounting functions are many, but the most appropriate to any circumstance, and for the purpose of giving a true and fair view to the organisation are listed below:-

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Time spent and complexity in preparation of books of accounts

Errors found in doing the tedious job

Number of employees required in accounts department

Accuracy of accounting records, and reliability of reports

Improve working environment (accumulation of papers and manual registers)

Improve / enhance monitoring and control of financial records including detection and deterrence of fraud activities.

Appreciation to available technology with its benefits

Critical Issues on computerization of accounting functions

In the process of computerising the accounting functions of any organization, there are critical issues that should be considered before the exercise, during the exercise and after the exercise for a successful and continuous improvement of computerisation outcome. Some of these issues are:-

Policy and Legal Frameworks

There is a government board which monitors and provides guidelines on operations and preparations of accounting functions for organizations in Tanzania; this board is National Board of Accountants and Auditors (NBAA). Before computerising accounting functions of the organization, NBAA should be consulted for any legal and policy issues that govern accounting operations. Globally, accounting policies should adhere to accounting standards issued by the International Accounting Standard Board (IASB)

Also, Organization policy regarding accounting functions should be examined before computerisation to establish any requirement and / or gap that needs to be addressed for successful results. An example of policy and legal frameworks issues that should be considered for computerization of accounting functions are:-

Tax Returns: - there is a time limitation for submission of all tax returns e.g. PAYE, Skills and Development levy, VAT, Withholding Tax returns. All these should be considered during customization / computerisation process.

Digital signature: - whether the country law and the organisation policy accept digital signature and how it should be implemented in the customization / computerisation process.

Approval process: - how approvals will be inserted as an input for the accounting process to be effective and efficient.

Link to banks and retail outlets: - in-case of automatic and timely update of bank balances and who deposited or withdraw from certain business accounts, this should be considered in the computerisation process.

Financing

Another critical issue in the computerisation of accounting functions is financing. Any organisation with sustainable plans for growth is very sensitive with funds. In financing the computerisation project, the following will be considered:-

Return on Investment (R.O.I)

Computerisation of accounting functions budget against the available funds

Senior Management / Business owners willingness to computerize and take ownership

Continuous maintenance of the system and technical support.

Computer Hardware and Software

After assurance of funds, then the availability of reliable computer hardware and software will follow. The key issues here will be:-

Available specification in the market against requirements and budget

Security issues for unauthorized access to the system from within the organisation and external stakeholders

Maintainability and sustainability of the system to be customized and accommodate any future requirements as per legislation, legal, operations and /or procedure change.

Skilled ICT support staff and accountants (staffing):-

Once the technology assures support to the project, personnel become the issue. Below are factors to be considered:-

Availability of skilled ICT staff to support the system during business operation hours.

Availability of skilled system users (Accountants, cashiers, etc.)

Availability of continuous skills upgrade and training for both ICT and system users.

Challenges and Prospect:-

The Challenges for computerisation of accounting functions could be:-

Security issues involved in a computerized system

Enough budget to fund the computerisation fully

Skilled labor to support the system

Budget to fund continuous improvement as a result of continuous upgrade of technology and modification or change of user requirements.

Fear of the unknown.

Prospects of a computerisation of accounting functions are:-

Enhance efficiency, transparency and accuracy of accounting information

Increase production, staff motivation and integrity

Minimize operations cost and save time.

Instant and automating programmable reports

Conform to legal, policies and regulatory authorities directives

Apply available technology in computerisation to modernize operations.

Actual finding on Selected Companies in Dar-es-salaam

Project Questionnaire summary

Qn.

Question

Government Institution

Private Company

2

Do you have an independent finance dept.

YES

YES

4

Number of Finance Dept. staff

8-1

4-7

5

Number of staff in the organisation

Above 400

Below 100

6

When did the org. computerize accounting function

5 - 10 years ago

5 -10 years ago

7

What prompted computerization of accounting functions

Enhance efficiency

Become up to date

Minimize operations cost

Enhance efficiency

Minimize operations cost

8

challenges encountered during computerisation process

All of the above answers

Technical and skilled staff in ICT

Availability of required hardware and software

9

Did the org. achieved expected objectives

Yes, very much

Yes, to some extent

10

What are initial prospects leading to computerisation

To conform with regulatory authority instruction

To increase efficiency, production, and reduce cost

To become a modern company

To conform to company staff requirements

To increase efficiency, production, and reduce cost

11

Did the org. satisfied with computerisation

Very satisfied

Satisfied

12

What are org. current prospects?

To improve current technology investment in computerisation of the company accounting functions.

To computerize the whole company activities

To increase efficiency, production and reduce cost?

To computerize the whole company activities

Do your company / business have any success story to share as far as computerisation of accounting functions is concerned?

Having a lot of financial transactions, computerization has become the solution for fast processing of financial transactions as well as financial reports. The system is accurate, fast and efficient.

Award from NBAA on ''the best presented Financial Statements'' to Govt. Agencies.

Speed and accuracy in processing suppliers' payment (from the customer feedback / response cards)

Annual Accounts are now finalized on time, not as before computerization of accounting systems.

Company manages to reduce time and complexity of preparation of annual reports and other required reports

helps to control our asset that means it gives the room of cost centers and hence at any time you can be able to view the performance of every assets

Controls of debtors, creditors are all very much easier with computer system.

Transparency of transactions all the way to HQ. Speedy approvals of purchase orders. Real time capability to track expenditure vs. budgets. Timely information for monitoring efficiencies, timely production of reports.

the accounts staffs are quite happy with computerization because it does away with manual posting of financial data; it has helped them to learn more about the features available in the accounting package

Instant access to accounting information. Because each entered transaction is automatically posted to its respective account, all account information is always up-to-date.

Easy document access and production of Purchase orders, debit memos, sales receipts, sales invoices, inventory lists and others can be printed in few seconds.

Legibility. Computerized accounting software eliminates the need to decipher poor or odd handwriting, eliminating much of the possibility of error due to misreading a hand-written line item.

Ability for taxes to be computed automatically. This makes paying quarterly or annual taxes easier since the computerized system will keep a running total of all taxes owed. Assist in preparation of VAT returns and reconciliations against turnover hence reduce the chances of making errors during filling the returns manually.

Any other comments in addition?

Detection and deterrence of fraud activities and therefore enhancement of quality financial report which are more reliable than it used to be before computerization

Use of ICT is one of the best methods to improve efficiency and make an organization becoming cost effective organisation

Computerizations need the sensitization of the employees before the company initial preparations and take ownership of the software to be used.

A computerized accounting system has many benefits including staff motivation, reduction of incidents of theft and fraud and reduction of waste.

ICT Support not timely as:-

Power instability and Network infrastructure/failures

Computer skills to staff as far as ICT is concerned and

Staff attitude to change.

Analysis of the answers from questionnaire

Regardless of which institution among those listed in number 1, all have answered YES in number 2 therefore question number 3 didn't get any response.

Majority of the government agencies have employees 8-12 in their accounts department while private companies have 4-7 employees in their accounts departments.

Conclusion

Computerisation of accounting functions is not a fashion. It is a mandatory requirement for a business to achieve its objectives on time and maintain sustainable growth in the future.

Recommendations

It is recommended that, all accounting functions of the organisation should be computerized to rip the merits of technology and increase profit. Continuous improvements to the computerized system should be sustainable together with training and awareness.