Accounting For Management

Accounting for Management
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: sn.selvaraj@yahoo.com Page 1

Semester I

UNIT V ACCOUNTING IN COMPUTERISED ENVIRONMENT
Significance of Computerized Accounting System Codification and Grouping of
Accounts Maintaining the Hierarchy of Ledgers Pre-packaged Accounting
Software

SIGNIFICANCE OF COMPUTERIZED ACCOUNTING SYSTEM
Computerized accounting system refers to the method or scheme by which financial
information on business transactions are recorded, organized, summarized, analyzed,
interpreted, and communicated to stakeholders through the use of the computer and
computer-based systems such as the internet and accounting software. This also refers
to the mechanized process of facilitating financial information flows as well as the
automation of accounting tasks such as database and recording and report generation.

In other words, the computerized accounting systems involve installation of
computers, equipment, specialized and very skilled workforce, which may raise the
united cost for an organization but sufficiently provides information as and when
required. There is a system catering to the needs of the enterprise and a general set-up
may not be sufficient.

Therefore, a specially designed system for specific organization may be needed. The
utility of this system and its effectiveness involves the skill of the accountants and the
technology features that are made available to them.

Salient Features of Computerized Accounting
1) Fast, Powerful, Simple and I ntegrated: Computerized accounting is designed to
automate and integrate all the business operations, such as sales, finance,
purchase, inventory and manufacturing. With Computerized accounting,
accurate, up-to-date business information is literally at the fingertips. The
Computerized accounting combine with enhanced MIS, Multi-lingual and Data
organization capabilities to help the company simplify all the business
processes easily and cost-effectively.
2) Complete Visibility: Computerized accountings giving the company sufficient
time to plan, increase the customer base, and enhance customer satisfaction.
With Computerized accounting the company will have greater visibility into
the day-to-day business operations and access to vital information.
3) Enhanced User Experience: Computerized accounting allows the company to
enter data in a variety of ways which makes work a pleasure. Adapting to the
specific business needs is possible.
4) Accuracy and Speed: Computerized accounting has User-definable templates
which provide fast, accurate data entry of the transactions; thereafter all
documents and reports can be generated automatically, at the press of a button.
5) Scalability: Computerized accounting adapts to the current and future needs of
the business, irrespective of its size or style.


6) Power: Computerized accounting has the ability to handle huge volumes of
transactions without compromising on speed or efficiency.
7) For Improved Business Performance: Computerized accounting is a highly
integrated application that transforms the business processes with its
performance enhancing features which encompass accounting, inventory,
reporting and statutory processes. This helps the company access information
faster, and takes quicker decisions. Computerized accounting also guarantees
real-time optimization of operations and enhanced communication.
8) Quick Decision Making: Generates real-time, comprehensive MIS reports and
ensures access to complete and critical information, instantly.
9) Complete Reliability: Computerized accounting makes sure that the critical
financial information is accurate, controlled and safe from data corruption.

Advantages of Computerized Accounting
Automation of tedious clerical jobs
Speed and accuracy
Low cost of packages
Automatic generation of standard reports
Redundant data storage permits efficient generations of some reports
Lowering operating costs and enhancing competitive advantage.
Easy Availability of Books of Accounts
Complete costing records available

Disadvantages of Computerized Accounting
Transactions orientation only
Periodic not real time reporting
Limited flexibility for ad hoc reports
Data corruption

CODIFICATION AND GROUPING OF ACCOUNTS
Data stored in ledgers must be organized in a logical manner. The most common way
to do that is to use coding techniques. Codification plays a very important role in a
computerized accounting system. It enhances accuracy and processing efficiency.

The functions of a code are two-fold:
1) It allows the identification of a data item, record or file in brief; and
2) It helps in retrieving and manipulating data.

In designing a coding system, the following factors should be taken for consideration:
Make sure the code allows for increase in number of accounts to be coded. For
example, do not choose a two-digit account code for fast growing diversified
company.
Make the coding system as simple as possible in order to minimize costs,
facilitate memorization and interpretation of coding categories and ensure
employee acceptance.


Make sure that the coding system is consistent:
i) With companys organizational set-up; and
ii) Across the different divisions of an organization.

Coding Techniques
Coding is the systematic assignment of number to items to classify and organize them.
Though each organization has its own coding technique, most organizations use
block code for coding their accounts. In this technique, blocks of numbers with a
numerical sequence is reserved for each class of accounts. For example, 100-199
reserved for fixed assets and 200-299 reserved for current asset and so on.

The codes usually begin with the basic accounts of the organization and may be listed
as follows:
Account
Code
Basic Account Name Account
Code
Basic Account Name
100199
200299
300399
400499
500599
Fixed Assets
Current Assets
Miscellaneous Expenses
Share Capital
Reserve and Surplus
600699
700799
800899
900999
1000199
Loans
Current Liabilities / Provisions
Revenues
Expenses
Summary Account

Grouping of Accounts
The process of arranging accounts of a similar nature under a relevant and proper head
is called grouping. A formal record of all transactions to changes in a particular item is
called an account. Hence, grouping of accounts is the process of arranging accounts of
similar nature under a relevant and proper head.

In double entry system of accounting, all financial entries are done with ledgers and
account heads. Therefore, it is prudent that ledger accounts are grouped /classified on
the basis of their functions. These groupings facilitate the identification of ledger
accounts in accordance with their character. Hence, the grouping of accounts helps in
presenting summarized reports and information in an easy and simple manner.

The concept of grouping of accounts has been adopted by almost all accounting
software packages. The system permits to regroups the accounts in accordance with
the needs of users. It provides groups by default (automatic). Fundamentally, there
are four groups:
(1) Assets
(2) Liabilities
(3) Income
(4) Expenditure

The expenditure and income are further classified into direct and indirect. In addition
to the basics groups, there are other accounting groups and sub-classification of these
basic entities.



Grouping of accounts is also found in manual accounting. But it takes place only after
the preparation of trial balance. All these processes involve some additional strains
and consume a lot of time for its compilation. In the case of computerized accounting,
a complete hierarchy of account groups and ledgers are fixed at the time of designing
itself. This helps to generate any type of reports and statements as and when required.
Moreover, re-arrangement of groups can be made with some restrictions in some
places.

Hence, hierarchical relations of the account groups should be set at the time of
creation of ledger accounts. The process of placing a ledger account (at the time of its
creation) under the appropriate account group is called the hierarchical relation of the
account group. Usually, the system gives the facility to place the account when it is
created.

Coding Systems and their Structure
(a) Sequential or serial coding
(b) Block coding
(c) Hierarchical coding
(d) Mnemonic coding
(e) Faceted coding

(a) Sequential or Serial Code
The word sequential means in sequence, of course. A sequential code, therefore,
simply follows a sequence. Imagine we are drafting a register for employees for salary
purposes. We begin with the first employee being assigned the number 00, the second
employee is assigned the number 01 and so on.

In this code, we have allowed for there to be as many as 100 employees, since we
have allocated 2 digits to the code and can assign all of the numbers from 00 to 99,
100 numbers, to that number of employees:
00 Bloggs 01 Smith 02 Jones 03 Brown 34 Smythe 67 Williams
If a new employee were to join this group? He would become employee 68.

(b) Block Code
Block codes are very common in accounting circles in that they commonly form the
basis of charts of accounts, as depicted below:
100 - Fixed assets
200 - Quick assets
300 - Stocks
400 - Long term liabilities
500 - Current liabilities
600 - Equity
700 - Revenues
800 - Expenditures



The 100 Block is allocated to Fixed Assets and only fixed assets. This means that it
is possible to classify up to 100 different fixed assets using this block. Of course, there
may be sub blocks so that we can extend the range of fixed assets we can have.

(c) Hierarchical Code
The coding systems used by libraries, such as the Dewey Decimal system and the
Library of Congress system, are both examples of hierarchical codes. The major
advantage of such systems is that they are, in theory at least, infinitely expandable:
they can be extended for ever; but in a logical, structured, way.

If we assume that code 657 is the library classification number for accounting, then
we can develop the code hierarchically:
657 Accounting
657.01 Financial accounting
657.02 Financial management
657.03 Management accounting
657.03.001 Management accounting, standard costing
657.03.001.01 Management accounting, standard costing, setting standards
657.03.001.02 Management accounting, standard costing, variance analysis
and so on .

The drawback of infinite expandability is that it would need an infinitely large storage
device to store an infinitely large code! A bit flippant, perhaps, but it is true that the
more the code is expanded, the more unwieldy and difficult it becomes to write to read
to understand and to store.

(d) Mnemonic Code
Mnemonic means something that aids the memory and examples of mnemonic codes
are found almost everywhere. A good example of a mnemonic code is the three
character code used to designated international airports:
London Heathrow is LHR
Hong Kong is HKG
Almaty is ALA
Johannesburg is JHB
Toronto is ???

The major advantage of mnemonic codes is that they are very easy to memorize: once
we have understood the pattern or system, learning them really should be easy. Devise
your own mnemonic coding structure and youll see how easy it really is.

(e) Faceted Code
A faceted code is one that is broken down into a number of facets or fields, each of
which signifies a unit of information. We could use a chart of accounts, that is
commonly faceted; but lets work through the faceted code of a furniture
manufacturer. Well consider a code that will deal with direct materials, direct labour,
and indirect costs.


In this example, there are three facets, or fields, to the code:
Facet 1 is the department or cost center, and is 2 digits long
Facet 2 is the cost heading, and is 2 digits long
Facet 3 is the cost item, and is 4 digits long
Facet 1: 00 Preparation
01 Carpentry
02 Assembly
03 Finishing
04 Upholstery
Facet 2: 00 Direct materials
01 Direct labour
02 Direct expenses
03 Indirect costs
Facet 3: 0000 - 0100 Direct material descriptions
0101 - 0150 Direct labour grades

0151 - 0500 Factory overhead cost
items

MAINTAINING THE HIERARCHY OF LEDGERS
Once the classification of accounts into various groups is completed and codification
is done after formation of major, minor, sub, and detailed heads the same is required
to be inserted into the computer system.

Account master files are created with codes and description of the accounts. Some
accounting software allows ledgers and subsidiary ledgers to be created from the main
ledgers. The subsidiary ledgers can further be sub-divided to sub-subsidiary ledger
thereby allowing grouping under various profit centers. These are particularly useful
where accounts are maintained without codes. In a coded system this is easily
achieved by allotting codes to major, minor, sub and detailed heads and thereafter
obtaining reports based on these codes.

Apart from the general ledger and the subsidiary ledger (or the sub-subsidiary ledger
as is available in some software) there are other ledger accounts that are automatically
created by any standard accounting software. These are the debtors ledger and the
creditors ledger.

At the time of creation of the account heads some of account heads are indicated to the
system as cash account, bank account, debtors account and creditors account.
Thereafter, whenever an entry is made say with a cash account and a bank account the
computer automatically indicates it as a contra in the reports. Similarly when a sale


transaction is made, the reflection is given in the debtors account and when a purchase
transaction is made the reflection goes to the creditors account.

Another important ledger which forms part of most standard accounting package is the
inventory ledger. In simple accounting software this may give only the movement of
inventory items without valuation of inventories. However, many of the packages give
the option of valuation of inventories based on the method of costing set like the
FIFO, LIFO, Weighted Average, etc.

PRE-PACKAGED ACCOUNTING SOFTWARE
Accounting software imposes certain demands on you or your book-keeper. If a
person has a manual system, he learned which journals to keep what records in, and
perhaps at the end of the month he posted them all to the general ledger. There may
not have been much thought about the impact of each transaction and management
information or even tax strategies.

But electronic accounting forces the person to deal with these issues from the start,
when the person set-up the chart of accounts, and on a daily basis when he enter and
disburse each transaction. He will be generating the financial statements and reports,
and the overall structure and disbursement will determine the usefulness and validity
of these reports and statements.

So, the entire team including the management should understand the package and will
be able to participate in the set-up and daily use of the system. Book-keeping, tax
strategies through the accountant as well as management needs must be closely
coordinated for best results.

The installation and maintenance of the system should be simple and the staff must be
provided proper training. Pre-packaged accounting software normally provides the
following facilities:
1) Setting-up the company
2) Setting-up records for customers and suppliers
3) Setting-up the general ledger and accounts along with their codes
4) Selling to customers on credit
5) Buying from suppliers on credit
6) Collection from customers and suppliers payment
7) Cash receipts and payments
8) Bank accounts and bank reconciliation facilities
9) Month-end reports routines
10) Corrections and adjustments
11) Sales invoicing
12) Inventory management
13) Double entry book-keeping



The software provides with necessary information to Set-up Company, customers,
suppliers, vendors, products and other details. The software creates the database tables
storing this information. Generally each table relates to a master file in the system.

Standard pre-packaged accounting software generally creates the following master
files:
Company Master File: Storing the details of the company including name,
address, phone numbers, accounting period, sales tax registration number, VAT
registration number, CST registration number, PAN and TAN numbers.
Accounts Master File: Storing the name of the accounts and the codes. It also
stores the information regarding account type like asset or liability or an
income or expenditure and the balance amount in the accounts.
Sub-Ledger Master File: Storing details of sub-ledgers.
Customer Master File: Storing contact and transaction details of the customers
Vendor Master File: Storing contact and transaction details of the vendors.
Production Master File: Storing the name, code and other details of the
products.
Division Master File: Storing detailed information of all the divisions of the
organization.

The entry screen generally provided in the accounting packages are as follows:
1) Cash receipts and payments entry
2) Bank receipts and payments entry
3) Petty cash voucher entry
4) Journal entry
5) Purchase order GRN, bill, purchase return entry
6) Sales order, challan invoice, sales return entry
7) Debit notes and credit notes entry
8) Cash sales and purchase memos
9) Production
10) Consumption
11) Stock transfer

Advantages of Pre-Packaged Accounting Software
o Easy to Install
o Relatively Inexpensive
o Easy to Use
o Back-up Procedure is Simple
o Flexibility
o Very Effective for Small and Medium Size Business

Disadvantages of Pre-Packaged Accounting Software
Does not cover peculiarities of specific business.
Does not cover all functional area
Customization may not be possible in most such software
Lack of security and Bugs in the software


Customized Accounting Software
Customized accounting software is one where the software is developed on the basis
of requirement specifications provided by the organization. The choice of customized
accounting software could be because of the typical nature of the business or else the
functionality desired to be computerized is not available in any of the pre-packaged
accounting software. An organization desiring to have an integrated software package
covering most of the functional area may have the financial module as part of the
entire customized system.

A feasibility study is first made before the decision to develop software is made. The
lifecycle of customized accounting software begins with the organization providing
the user requirements. Based on their user requirement the system analyst prepares a
requirement specification which is given for approval by the user management. Once
the requirement specification is approved, the designing process begins. Development,
testing and implementation are the other components of the system development
lifecycle.

Few business types requiring customized software are:
1) Banking
2) Construction
3) Medical
4) Point of Sale (Retail)

Advantages of Customized Accounting Package
The functional areas that would otherwise have not been covered get
computerized.
The input screens can be tailor-made to match the input documents for ease of
data entry.
The reports can be as per the specification of the organization.
Many additional MIS reports can be included in the list of reports.
Barcode scanners can be used as input devices suitable for the specific needs of
an individual organization.
The system can suitably match with the organizational structure of the
company.

Disadvantages of Customized Accounting Package
Inadequate testing results in bugs remaining in the software.
Inadequate change management procedure
Control measures are inadequate
May delay in completion of the software.

The choice of customized accounting packages is made on the basis of the vendors
proposal. The proposal is evaluated as to the suitability, completeness, and cost and
vendor profiles. Generally preference is given to a vendor who has a very good track
record of deliverables.


Difference between Computer Accounting System and Manual Accounting System
Basis of Difference Computerized System of Accounting Manual System of
Accounting
Analysis and
Classification
Analyze and classify business
transactions by their type. Access
appropriate menu for data.
Analyze and journalize
transactions as they occur.
Posting of Entry Computers automatically post
transactions as a batch or when
entered online
Post every journal entry to
the ledger accounts.
Unadjusted
Balance Display
The unadjusted balances are
available immediately after each
posting
Computer the unadjusted
balance in each account at
the end of the period.
Access to Trial
Balance and
Summarized
Trial balance, if needed can be
accessed as a report.
Trial balance is a
processing step leading to
the financial statements.
Adjusting Entries Enter and post adjusting entries.
Print the financial statements. Run
automatic closing procedure after
backing-up the periodic accounting
periods.
Prepare the financial
statements. Journalize and
post the adjusting entries.
Journalize and post the
closing entries.
Opening and
Closing Balances
The next periods opening balances
are created automatically as a result
of closing.
Prepare the post-closing
trial balance. This trial
balance becomes step1 for
the next phase.
Interpretation and
Presentation
Interpretation and presentation of
data is more graphical, need-based
and sophisticated in comparison to
the manual systems.
These may be slower and
less attractive but can be
customized as per the
need. It definitely lacks
presentation and
promptness.
Reporting Instant reporting is possible as
information is compiled and is
processed immediately. Constant
and instant reporting possible.
The reporting depends on
the frequency of
maintenance of data.
Reporting is comparatively
slower than automated
systems.



Part A Questions
1. What is computerized accounting?
2. What are the advantages of computerized accounting?
3. What is Codification?
4. What are the uses of codification?
5. Mention the names of few coding systems.
6. What is sequential coding?
7. What is meant by grouping of accounts?
8. How to maintain hierarchy of ledgers?
9. What do you understand by pre-packaged accounting software?
10. What are the advantages of pre-packaged accounting software?

Part B Questions
1. Discuss the significance of Computerized Accounting System.
2. Describe codification and grouping of accounts.
3. Explain the advantages of Prepackaged Accounting Software.
4. Enumerate the types of Accounting Softwares.
5. Distinguish between computer accounting system and manual accounting
system.
************

Text Books & References:
1. M.Y.Khan & P.K.Jain, Management Accounting, Tata McGraw Hill, 2011.
2. R.Narayanaswamy, Financial Accounting A managerial perspective, PHI
Learning, New Delhi, 2011.
3. Jan Williams, Financial and Managerial Accounting The basis for business
Decisions, 13
th
edition, Tata McGraw Hill Publishers, 2010
4. Horngren, Surdem, Stratton, Burgstahler, Schatzberg, Introduction to
Management Accounting, PHI Learning, 2011.
5. Websites of Accounting Software

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S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: sn.selvaraj@yahoo.com Page 1

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