• # Revision:A Level Accounts Module 1 - Computers in accounting

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Computers in accounting

## Contents

Traditionally accounts were kept by the means of handwritten record. Computers have only begun to be used in some of the functions of accounting over the last fifteen years or so. As computers became cheaper, easier to use, and more powerful, more firms have decided to computerise their own accounting records. However, some firms, (albeit a declining number) still prefer to use handwritten accountings. This leads us to believe that there must be reasons for and against using computers in accounting.

What we need to consider here is how computers are used in accounting, and then we should be able to evaluate the potential uses and limitations of using computers in accounting.

## How are computers used in accounting?

Most firms will make some use of a computer within accounting at some point. Some firms will have all their accounting performed by computers. What we need to understand is how the computer can be used.

A computer-generated spreadsheet is commonly used by firms when presenting their accounts. A simple spreadsheet will appear as a grid to which both numbers and text can be inserted. Each 'cell' of the spreadsheet can be used to insert data. A typical spreadsheet will appear as follows:

 2000 2001 2002 2003 £ £ £ £ Sales 25,000 27,500 29,750 32,000 Cost of goods sold 13,000 14,500 16,900 17,500 Gross profit 12,000 13,000 12,850 14,500

One of the attractions of using a spreadsheet is that the calculations can be done by the computer. Some data, such as sales and cost of goods sold would need to be manually typed in, but then the gross profit can be automatically calculated by inserting a formulae into the relevant 'cell' which states how the profit is to be calculated, Once inserted then the formulae can apply to the whole row (or whole column) which makes the process both easier and more less likely to be inaccurate.

Obviously the example above is a fairly limited illustration of how spreadsheets can be used but for many small firms, the use of a spreadsheet is the main way in which computers are integrated into the work of the accountant.

### Accounting software

There are accounting software packages then can be purchased by a firm that will perform many, if not all of the tasks that would normally be manually entered by the person responsible for the firm's accounts. These packages will be able to produce many of the accounting records that were previously produced by hand. Transactions may be entered into the computer package and many will produce the double entry records based on this one entry. Although the exact capabilities of each package will vary, it is possible that most, if not all of these packages will be able to produce invoices for purchases and sales. They calculate VAT returns, discounts and all the other areas of the accounting information system. Logically, these packages will also produce the final accounts for the business when required.

For larger firms this software can actually be tailor-made for the firm's own specific requirements. This sort of tailor made package is known as a 'bespoke' system. These packages are normally produced by a specialist computer software firm who have experience in producing accounting packages. Technically, these packages are available for any firm, but given the expense of a bespoke system and the general low cost of a 'off the shelf' system (one that can be used by any firm), most firms will simply purchase a general package.

## Advantages of using computers within accounting

The main benefits of using computers (to any level within accounting) can be summarised as follows:

### Increased accuracy

Computers are less likely to make errors. In fact they should not make errors at all. Things will still go wrong, but this is likely to be the fault of the person entering the data into the computer, rather than the computer itself making an error.

### Time saving

The use of a computer should be able to speed up the whole process of keeping accounting records. This is especially likely to be the case when the firm wishes to produce the final financial statements at the end of a period. The computer will be able to extract a trial balance (if necessary at all- perhaps this won't be needed?) and produce the trading and profit and loss account as well as the balance sheet almost instantaneously, based on the data already inputted.

### Performance analysis

Once the data has been inputted, it is possible to manipulate the existing data to produce variations on the firm's overall performance. Even a simple spreadsheet can be manipulated to consider different scenarios. For example, a firm may wish to see the effects of am increase in sales of the overall profit level. A range of forecasted accounts can be generated to see how well the firm could expect to produce in the future (this is known as sensitivity analysis).

The data can be manipulated into accounting ratios automatically, which allow managers to assess the overall performance. For example, the profits can be related to sales, to capital or to assets to see how effectively the firm is operating.

### Job satisfaction

The use of computers in accounting will free up time for the accountant to concentrate on more wide ranging tasks. This means that there is likely to be increased job satisfaction within he firm. Studies suggest that if workers are more satisfied or more motivated in the workplace, they are likely to be more productive in their output.

## Disadvantages of using computers within accounting

The use of computers does not provide a perfect solution. There are drawbacks associated with the introduction of computers.

### Cost

Computers have fallen in price over the last ten years. Also, computers are far more powerful then earlier models. However, the cost of the computer and of any associated software packages can still present a large item of expenditure for the small firm. The purchase will not affect profits, but will affect the firm's cash flow position. The cost of training staff will also have to be factored into the equation when deciding if and what sort of accounting package to purchase.

### Reliability

Computers are generally very reliable but problems do occur. If the computer hardware (they physical computer and other devices used in the system) or the software develops a fault, then it is likely that the whole system will not able to be used until the fault can be addressed. This could be very problematic if the fault takes time to found and corrected.

### Training time

It may take time for operators to be trained in using any accounting package on the computer. This requires personnel to be diverted form other areas that they may have been working on. However, this problem is becoming less important as newer software packages have become increasingly 'user friendly' (easier to use to even a novice).

## Conclusion

The fact that nearly all firms make some use of computers in accounting suggests that the benefits outweigh the costs. Most firms have found computers a very valuable addition to their abilities in processing the vast amounts of finical data. However one can never underestimate the benefits of having a skilled human operator who understands the who accounting system and can reason and use intuition in a way that computer cannot.

## Also See

These notes are aimed at people studying for AQA A Level Accounting Unit 1, but will also be suitable for other courses and exam boards.

Originally submitted by duke_stix on TSR Forums.

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