Report on computer based accounting package

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This report details the results of a study commissioned by the Board on 1 November 2010. We were asked to explain how a computer based accounting package is organised, identify the advantages and disadvantages of a computerised package compared to a manual accounting system and to discuss the way in which such a package maintains control over systems.

II METHODS

The following study procedures were adopted:

Review of relevant literatures on computer based accounting and accounting information system

III FINDINGS

1. How a Computer Based Accounting Package Is Organised.

A computer based accounting package is software that carries out your bookkeeping process by receiving data input of your day to day transactions and transforming this data into financial records of your business transactions. This package will then produce a statement at the end of your fiscal year which will provide financial information about the company and conveys its financial position to the stakeholders of the company.

There are various types of computer based accounting packages available. Some of the common ones used by most organisations according to Elikai, Ivancevich M. and Ivancevich H. (2007) are:

QuickBooks

SAP

PeopleSoft

Oracle

ADP

Great Plains

JD Edwards

Peachtree

Computer based accounting package can be organized in two ways.

Client-Server or

Single User Set-up

Client Server Network

A client is an algorithm, software, which is also a front end program (Kamal, 2002). Front-end is composed of user-based applications. There's another computer or an embedded system, known as the back end, which are composed of back end databases and application utilities for the front end program.

A server is a program, called back end program. Back end refers to a computer that connects to one or multiple clients (Kamal, 2002). It has a large amount of databases and application which provide software and utilities to clients.

Therefore, Client-Server network is composed of both front-end and back-end application. It is a network consisting of a server and a number of clients, whether remote or local. This is for a network or complex environment.

Figure 1. Client Server Network Example

Source: Kamal, 2002

As seen in figure 1, a network interconnects a client and server software on the same or different systems. A server will have embedded programs for things such security, verification and transaction management.

Single User Set-up

Basically this refers to a single software system and database. It carries out similar functions but it serves a single user only. This is simply a single computer that stores both the data and executes the application. This is usually for home users or small offices whereby there is only one accountant, in other words, a simple environment.

Figure 2. Accounting cycle

Source: Celender, 2010

Accounting packages follows the same accounting cycle as illustrated in Figure 2. It begins from recording journal entries, classifying into individual ledger accounts, summarizing in the operating and financial reports such as trading account and balance sheet, and interpreting through its decision support system.

Information Users

Data

Information communication

Data Collection

Data Processing

File Update

Figure 3. Data Processing Cycle

Source: BPP Professional Education Staff, 2007.

Accounting package follows a data processing cycle, illustrated in figure 3.

a) Data is collected - a system/procedure for ensuring all data needed is collected and made available for processing.

b) Process data into information - by summarizing, classifying and analysing.

c) Updated files - bringing files up to date to record current transactions.

d) Communicated information - statements and reports to users.

C:\Users\Suba\Pictures\MP Navigator EX\2010_11_19\IMG.jpg

Figure 4. Accounting Package Integration

Source: Bassett, 1996

Figure 4 shows a simple overview of how an accounting package such as Sage, integrate with each other and the types of end output obtained. Basically, transactions such as purchasing, sales, payroll, expenses and acquisition of non-current assets will be recorded into nominal ledgers through the input of receipt vouchers/invoices, payment vouchers, journal vouchers and cash book entry by users. Once these inputs are processed the end output for each transaction will be produced. Data compiled in the nominal ledgers will be used to produce the financial statements which will be used by stakeholders of the organisation. For further understanding, let's review the 2 main transactions of an organisation; revenue and purchase cycle.

The Revenue Cycle

Figure 5. Sales Order Procedure

Source: Hall, 2008

Sales order procedure includes:

Receiving and processing customer orders

-receipt of customer's order on type and quantity of product wanted.

-run credit check on customer before further processing.

Filing the orders

-receive order activity forwards stock release document to the pick good functions in the warehouse.

-order is then verified and verified stock release document will be forwarded to the ship goods task.

-warehouse staff will adjust stock records according to inventory reduction

Shipping products to customers

-shipping department will receive packing slip and shipping notice from receive order function.

-packing slip will be send with goods to customer.

-shipping notice will be forwarded to billing function.

-before shipping, clerk will reconcile the physical items with these documents and stock release document from warehouse.

-bill of lading will be raised.

Billing customers on time

-upon receipt, item shipped are reconciled with sales order.

-necessary details such as tax, freight charge, are added to the sales order.

-sales invoice will be raised and sent to customer.

Accounting the transactions

-record invoice details to sales journal.

-update accounts receivable.

-post to general ledger.

The relationships between all this tasks are shown in figure 5.

The Purchasing Cycle

Figure 6. Purchasing Process

Source: Gelinas and Dull, 2009

The purchasing process (Figure 6) shows the process responds to request for goods received from the inventory process and from various departments. A purchase order will be send to the vendor and various notices to other department and processes. Vendor will send goods with packing slip, resulting addition notices being send out.

2. Advantages and disadvantages

Both computerised and manual accounting has their own advantages and disadvantages. Let's review the advantages a computerised accounting package has against manual accounting.

Advantages

Disadvantages

1. Efficiency and speed in computing the

financial statements.

2. Multiple accounting steps are done in one

entry.

3. Financial statements can be created at any

time and as often as needed.

4. Mobility of reporting to stakeholders at any

place and any time.

5. Reliability of information produce as it can

be considered true and fair.

6. No routine work are carried out to input

data into the system.

7. Increased accuracy by reducing human error

and system being able to counter check by

itself.

8. Internal control system of increased

productivity.

9. Easy back up and restoration of records

made available by the software.

10. Numerous accountants can be working on

the books at the same time.

11. Unbalanced journal entries cannot be

posted which allows accountant to realize

and correct the mistake.

1. Expensive to purchase such software

package.

2. High costs on developing, introducing and

using the system such as the subscription

fees and renewal fees that are required

annually.

3. Special trainings for personnel needed which increases human resource cost.

4. Dependence on machines might lead to

human resource deficiency.

5. Risk of exposure to virus/hacking as the

softwares are used on computers that are

constantly online.

6. Degree of thrust without review that's

placed on generated information can be a

major risk if the software malfunctions

and produces improper information.

Table 1.

Sources: Elmaleh, 2007; Weber, 2010; Weygandt, Kimmel & Kieso, 2010

3. Discussion on the ways such accounting package maintains control over systems.

Output Controls

Input Controls

Process Controls

Figure 8.

There are two main controls over systems which are internal and external control. According to Boczko (2007), the internal control consists of:

a) Detective control

Are controls that detect errors or irregularities that may have occurred by preparing monthly trial balances, reviewing policy procedures, having stock counts, carrying out monthly bank reconciliations and carrying out internal audits periodically.

b) Corrective control

Are controls that correct errors or irregularities that have been detected by creating backup copies of the master files, complying with data protection policies, using sufficient data to produce information and processing the corrective procedures with proper manner.

c) Preventive control

Are controls that keep errors or irregularities from occurring in the first place. To do so, management duties are segregated, official documents are used for filing, proper authorisation procedures are carried out, a proper control method is created to prevent unwanted access to the resources of a firm and standard or policies defined by authorities should be obliged.

c) Systems security

Are security features e.g. passwords, in the software that prevents unwanted breaches such as unauthorised access to the accounts, unauthorised use of organisation's resources, improper deletion or alteration of information without proper approval, processing interruptions and system failure due to external factors.

d) Other controls

Other application controls are as stated:

i. only authorised data are processed by the system.

ii. processing procedure must be efficient, effective, appropriate, accurate and completed.

iii. processing process is carried out securely.

iv. secured systems specific processing procedures are carried out.

v. systems specific processing errors are identified and corrected.

IV CONCLUSIONS

Computer based accounting packages are organised in two ways which are Client-Server or Single User Set-up. Both computerised and manual accounting have their own advantages and disadvantages but it's clear that computerised accounting holds more advantages as it is a modern era and technology play a significant role in organisations now. By using computer based accounting packages, proper control over the systems which are security, preventive, detective and corrective controls, are executed. Overall, it is recommended that computer based accounting packages be used as it is the most efficient and reasonable method to carry out accounting in organisations.

Subagheeta Subramaniam,

Accounting Consultant.

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