INTRODUCING COMPUTER

11 ACCOUNTING
Although some businesss, particularly small ones, still use paper-based
accounting systems, an increasing number are now operating computerised
accounting systems. Small and medium-sized businesses can buy off-the
shelf accounting programs from suppliers such as Sage while larger
businesses often have custom-designed programs.
The accounting programs carry out functions such as invoicing, dealing with
payments, paying wages and providing regular management reports such as
trading and profit and loss accounts and balance sheets.
Businesses also make considerable use of computer spreadsheets,
particularly for budgets. They can also be used for speeding up the processes
in manual accounting systems, setting up a trial balance, for example.
The introduction of a computer accounting system can provide major
advantages such as speed and accuracy of operation. There are also certain
disadvantages, such as cost and training needs which the management of a
business must appreciate before taking the decision to convert from a
manual to a computerised accounting system.

F EATURES OF C OMPUTER A CCOUNTING

facilities
A typical computer accounting program will offer a number of facilities:
on-screen input and printout of sales invoices
automatic updating of customer accounts in the sales ledger
recording of suppliers invoices
automatic updating of supplier accounts in the purchases ledger
recording of bank receipts
making payments to suppliers and for expenses
automatic updating of the general (nominal) ledger
automatic adjustment of stock records
Payroll can also be computerised often on a separate program.
 introducing computer accounting 153

management reports
A computer accounting program can provide instant reports for management, for example:
aged debtors summary a summary of customer accounts, showing overdue amounts
trial balance, trading and profit and loss account and balance sheet
stock valuation
VAT Return
payroll analysis

computer accounting ledger system

We have already have covered the Ledger in Chapters 6 and 13. The Ledger which basically
means the books of the business is a term used to describe the way the accounts of the business
are grouped into different sections:
sales ledger, containing the accounts of debtors (customers)
purchases ledger, containing the accounts of creditors (suppliers)
cash books, containing the main cash book and the petty cash book
general ledger (also called nominal ledger) containing the remaining accounts, eg expenses
(including purchases), income (including sales), assets, loans, stock, VAT
The interface of a ledger computer accounting system is designed to be user-friendly. Look at the
toolbar of the opening screen of a Sageaccounting system shown below and then read the notes
printed underneath.

structure of a Sage computer accounting program

ASSETS = asset records

FINANCIALS = management reports

INVOICING = processing sales invoices

PRODUCTS = stock records

BANK = cash book (bank receipts and payments)

NOMINAL = nominal (or general) ledger

SUPPLIERS = purchases ledger (the accounts of suppliers)

CUSTOMERS = sales ledger (the accounts of customers)

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using a computer accounting system

Computer input screens are designed to be easy to use. Their main advantage is that each transaction
needs only to be input once, unlike in a manual double-entry system where two or three entries are
required. In the example below, payment is made for copy paper costing 45.50. The input line
includes the nominal account number of bank account (1200), the date of payment, the cheque
number (234234), and the nominal account code for stationery expenses (7500). The net amount of
45.50 is entered and the computer automatically calculates the VAT. The appropriate amounts are
then transferred by the computer to bank account, stationery expenses account and VAT account.

1/4/2005

The screen below shows an invoice input screen. In this example 20 black Enigma 35s are being
invoiced to R Patel & Co in Salisbury. The computer will in due course print the invoice, which will
contain the name of the seller as well as all the customer details held in the accounting programs

1/4/2005
 introducing computer accounting 155

computerised ledgers an integrated system

A computerised ledger system is fully integrated. This means that when a business transaction is
input on the computer it is recorded in a number of different accounting records at the same time.
For example, when the sales invoice on the previous page is entered on the screen and the ledgers
are updated an integrated program will:
record the amount of the invoice in the customer account R Patel & Co in the sales ledger
record the amount of the invoice in the sales account and VAT account (if appropriate) in the
general ledger
reduce the stock of goods held (in this case black Enigmas) in the stock records
At the centre of an integrated program is the nominal ledger which deals with all the accounts except
customers accounts and suppliers accounts. It is affected one way or another by most transactions.
The diagram below shows how the three ledgers can link with the nominal (general) ledger. You can
see how an account in the nominal ledger is affected by each of these three transactions. This is the
double-entry book-keeping system at work. The advantage of the computer system is that in each
case only one entry has to be made. Life is made a great deal simpler by this,
Note that VAT account is omitted from this diagram for the sake of simplicity of illustration. VAT
account will be maintained in the nominal (general) ledger and will be updated by all three of the
transactions shown.

Nominal Ledger the centre of a ledger accounting system

suppliers account
records the amount
owing
PURCHASES
LEDGER
a business buys from
a supplier on credit
sales account
records the sale customers account
records the amount
purchases account
due
records the purchase
SALES
NOMINAL LEDGER LEDGER
advertising account
records the expense
a business sells to a
customer on credit

a business pays the advertising

bank account bill from the bank account
records the
money paid out

BANK
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C OMPUTER S PREADSHEETS

A spreadsheet is a grid of boxes cells set up on the computer, organised in rows and columns
into which you can enter text and numbers. It enables you to make calculations with the figures. The
computer program will work out the calculations automatically once you have entered an appropriate
formula in the cell where the result of the calculations is required.
The major advantage of a spreadsheet is that if you change any of the figures the computer will
automatically recalculate the total, saving you much time and effort.
Spreadsheets are used for a variety of functions in business:
producing invoices working out costs of products sold, calculating and adding on VAT and
producing a sales total
working out budgets for future expenditure
working out sales figures for different products or areas
A commonly used spreadsheet program is Microsoft Excel.
Spreadsheets may be used in a wide variety of accounting functions. The first of the two examples
illustrated here is very simple: it shows the two columns of a trial balance. The spreadsheet has been
set up with columns for account names, debit balances, credit balances and totals for the columns.
When the figures have been entered, they will automatically produce totals which should balance.
 introducing computer accounting 157

The second example of a computer spreadsheet used in the accounting process is a form of
budget known as a cash flow forecast. This is a projection of the cash inflows and outflows of
a business over a period of months. Each month the spreadsheet calculates the total inflow (row
11) and outflow (row 23) and uses them to calcuate the net cash inflow/outflow (row 24). This
figure is then used to calculate the projected bank balance of the business (row 26). This figure
is useful as it will show if the business needs to borrow from the bank.
The advantage of the spreadsheet in this example is that if the business wishes to change any of
the receipt or payment amounts eg if the sales receipts increase then the cashflow figures will
automatically be recalculated, potentially savings hours of work.

A DVANTAGES AND D ISADVANTAGES OF C OMPUTER A CCOUNTING

In this chapter so far we have stressed the advantages of the introduction of computers to carry out
accounting functions in a business. There are, however, some disadvantages as well, and any business
introducing computer accounting will need to weigh up carefully the pros and cons. This is an area
which has featured in past examinations.
The remainder of this chapter will deal with these advantages and disadvantages and provide an
example in the form of a Worked Example based on the effect on employees of the introduction of a
new computer accounting system.
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advantages of computer accounting

The main advantages of using a computer accounting program such as Sage include:
speed data entry on the computer with its formatted screens and built-in databases of
customer and supplier details and stock records can be carried out far more quickly than any
manual processing
automatic document production fast and accurate invoice and credit note printing,
statement runs, payroll processing
accuracy there is less room for error as only one account entry is needed for each transaction
rather than the two (or three) required in a manual double-entry system
up-to-date information the accounting records are automatically updated and so account
balances (eg customer accounts) will always be up-to-date
availability of information the data can be made available to different users at the same time
management information reports can be produced which will help management monitor and
control the business, for example the aged debtors analysis which shows which customer
accounts are overdue, trial balance, trading and profit and loss account and balance sheet
VAT Return the automatic production of figures for the regular VAT return
legibility the onscreen and printed data should always be legible and so will avoid errors caused
by poor figures
efficiency better use is made of resources and time; cash flow should improve through better
debt collection
staff motivation the system will require staff to be trained to use new skills, which can make
them feel more valued

disadvantages of computer accounting

The main disadvantages of using computer accounting programs include:
capital cost of installation the hardware and software will need to be budgeted for, not only
as one-off expenditure but also as recurrent costs because computers will need replacing and
software updating
cost of training the staff will need to be trained in the use of the hardware and software
staff opposition motivation may suffer as some staff do not like computers, also there may be
staff redundancies, all of which create bad feeling
disruption loss of work time and changes in the working environment when the computerised
system is first introduced
system failure the danger of the system crashing and the subsequent loss of work when no
back-ups have been made
back-up requirements the need to keep regular and secure back-ups in case of system failure
breaches of security the danger of people hacking into the system from outside, the danger
of viruses, the incidence of staff fraud
health dangers the problems of bad backs, eyestrain and muscular complaints such as RSI
 introducing computer accounting 159

WORKED EXAMPLE

situation
Stitch-in-time Limited is an old-fashioned company which manufactures sewing machines. The
Finance Director, Charles Cotton, is considering the introduction of a computer accounting system
which will completely replace the existing manual double-entry system.

He is worried because he knows that the proposition will not go down very well with employees who
have been with the company for a long time.

He asks you to prepare notes in which you are to set out:

(a) the benefits to staff of the new scheme

(b) the likely causes of staff dissatisfaction with the new scheme

solution
(a) potential benefits to staff

the staff will be able to update their skills

they will receive training

they may get an increase in pay

the training will increase their career propsects

they will be motivated

they will get job satisfaction

(b) causes of staff dissatisfaction

staff prefer doing the job in a way which is familiar to them

they do not like computers

they may see their jobs threatened as they worry that redundancies will occur

they do not look forward to the disruption at the time of the changeover

they worry about the possible bad effects to their health, having heard about RSI (Repetitive
Strain Injury and radiation and eye damage from computer screens

they will be demotivated as they consider the new system mechanical they will have to sit
in front of a computer for hours at a time and not be able to communicate with their
colleagues as they have in the past
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CHAPTER SUMMARY

Computer accounting systems save businesses time and money by automating many accounting
processes, including the production of reports for management.

Most computer accounting programs are based on the ledger system and integrate a number of
different functions one transaction will change accounting data in a number of different parts of
the system.

The different functions can include: sales ledger, purchases ledger, nominal (general) ledger, cash
and bank payments, stock control, invoicing, report production

It is common for a payroll processing program to be linked to the nominal ledger of a computer
accounting program.

Computer spreadsheets are often also used to carry out individual functions in an accounting
system, for example the creation of budgets.

A business must consider carefully all the advantages and disadvantages of computer accounting
before installing a computerised system. The main advantages are speed, accuracy, availability of
up-to-date information; the main disadvantages are cost, security implications and possible
opposition from employees.

QUESTIONS
NOTE: an asterisk (*) after the question number means that an answer to the question is given in Appendix 2.

11.1* Explain two advantages to a business of using a computer accounting system to record
financial transactions.

Describe two advantages of using a computer spreadsheet for a document such as a cash-
11.2*
flow forecast.

Explain how three different areas of the accounting system might benefit from the
11.3*
introduction of computer accounting.

A business is planning to introduce a computer accounting system and holds an employee

11.4*
meeting to explain the implications of the change. One employee asks I have heard that
there are all sorts of risks to the computer data which could cause us to lose the lot.
Describe two of the main risks to the security of computer data.

You are the Accounts Manager of a large company which imports and supplies computer
11.5*
games to UK retailers. You want to introduce an integrated computer accounting system
throughout the company.
 introducing computer accounting 161

Explain the advantages you would point out to the line manager of the Sales Ledger section
to persuade her that the new system would help her staff in processing orders and
producing financial documents.

Kings Products is considering the computerisation of its accounting functions.

11.6

REQUIRED
Write a report advising Kings Products Lim ited on the advantages and disadvantages to
the company of this proposal.

To: .................................................................... Date: ...........................................................

From: ...............................................................

Subject: ..................................................................................................................................

................................................................................................................................................

................................................................................................................................................

................................................................................................................................................

................................................................................................................................................

................................................................................................................................................

Assessment and Qualifications Alliance (AQA), 2001

Gerry Mann is the Finance Director of Colourways Limited, a design company. He wants to
11.7*
introduce a computer accounting system into the business, but is encountering opposition
from Helen Baxill, an active trade union member who works in the Finance Office.
Describe:
(a) the objections relating to staff working conditions and welfare that Helen is likely to
raise to try and block the introduction of a computer system
(b) the advantages to staff of a computer system that Gerry could use to persuade Helen
to accept its introduction