Accounting (9706) | Computerised accounting systems

A-Level Financial Accounting (9706) Study Notes: Computerised Accounting Systems (3.4)

Hello future accountant! Welcome to one of the most practical and relevant chapters in your A-Level journey. You’ve mastered the rules of the Double Entry system using manual journals and ledgers. Now, we move into the modern world: the Computerised Accounting System.

Don't worry, the fundamental rules of debit and credit don't change! The computer just speeds everything up. This chapter focuses not on *how* to use specific software (you won't be tested on that!), but on the critical process of moving from a manual system to a digital one, and how we ensure the data remains accurate and secure.

Why Computerise Accounting? (A Quick Review of AS Content 1.2)

Remember the manual system? It involved ledgers, journals, and lots of paperwork. A computerised system changes this by automating key tasks.

• Speed and Efficiency: Transactions are recorded much faster.
• Automatic Calculations: Trial balances, totals, and financial statements are generated instantly.
• Accuracy: Reduces human errors (like calculation mistakes) once the initial input is correct.
• Better Reporting: Provides timely and detailed reports for decision-making.

Section 1: The Process of Transferring Accounts to a Computerised System (3.4.1)

Imagine you are moving all your valuable financial records from old paper boxes (manual system) into a brand-new digital filing cabinet (computer system). This move, or system transfer, must be done meticulously to avoid disaster.

Step-by-Step Guide to the Transfer Process

The transfer process generally follows a structured plan, ensuring that no data is lost and the new system mirrors the old financial structure accurately.

1. Preparation and Planning (The Clean-up)

• Data Cleansing: Before moving data, the old manual records must be thoroughly checked and cleaned. This means correcting any errors (like those you learned in the Trial Balance section, 1.4.2) and writing off any old irrecoverable debts. The goal is to start the new system with perfect, up-to-date figures.
• Standardisation: Ensure all terminology and policies used in the manual system (e.g., depreciation rates, inventory valuation) are coded consistently into the new software.
• Set up the Chart of Accounts: This is the backbone of the computer system. It's a structured list of all the ledger accounts (e.g., Assets, Liabilities, Revenue, Expenses) with assigned codes (e.g., 1000 for Cash, 5000 for Sales).

2. Data Input and Transfer (The Move)

• Input Opening Balances: The final, audited balances from the manual system (usually the year-end Statement of Financial Position figures) are inputted into the computerised ledger as opening balances. This is the official starting point.
• Data Mapping: If the new system uses different codes or structures than the old one, a "map" is created to ensure the old data is filed into the correct new digital account.

3. Testing and Verification (The Double Check)

• Parallel Running: This is a crucial control measure. For a defined period (e.g., one month), the business continues to run the old manual system AND the new computerised system simultaneously.
• Comparison: At the end of the period, the results (e.g., Trial Balances, Sales Totals, Inventory figures) from both systems are compared. If they match, the new system is verified as accurate. If they don't match, errors in the new system setup or transfer must be found and corrected.
• Cut-Over: Once the new system is proven to be completely accurate, the old manual system is officially retired, and the business begins operating solely on the computerised system.

Section 2: Ensuring the Integrity of Accounting Data (3.4.1)

The greatest weakness of any computerised system is the quality of the data entered. The principle of Garbage In, Garbage Out (GIGO) applies heavily here. Data Integrity means the data is accurate, complete, consistent, and reliable.

To ensure data integrity during and after the transfer, businesses rely on a variety of controls.

A. Input Controls (Stopping Errors at the Source)

These controls check the data immediately as it is entered into the system. They are designed to prevent errors before they enter the main accounting ledgers.

• Data Validation Checks: The computer automatically checks the data against specific rules:
  • Range Check: Ensures a number falls within acceptable limits (e.g., payroll hours must be between 0 and 60).
  • Existence Check: Ensures essential fields are filled (e.g., an invoice cannot be processed without a customer code that "exists" in the system).
  • Format Check: Ensures data is in the correct structure (e.g., a date must be DD/MM/YYYY).
• Source Document Approval: Ensuring that transactions cannot be entered unless they are supported by an authorised document (e.g., an invoice signed by the purchasing manager).
• Authorisation and Access Levels: Limiting who can input high-risk data (e.g., only the chief accountant can post journal adjustments).

Analogy: Input Controls are like the traffic lights and road signs that prevent a driver from going the wrong way or speeding excessively.

B. Processing Controls (Checking Data While it Moves)

These controls ensure that data is processed correctly after input, especially when processing large batches of transactions.

• Control Totals (Batch Totals): Before entering a batch of 50 invoices, the manual total of the invoice values is calculated. The computer system then calculates its own total after processing the batch. If the two totals don't match, a transaction error has occurred.
• Hash Totals: Similar to control totals, but used for non-financial data (e.g., adding up the customer account numbers in a batch). This total has no financial meaning but confirms that all the correct customer records were processed.
• System Log/Audit Trail: The computer records every action taken (who accessed a file, what change they made, and when). This allows accountants to trace any discrepancies back to the source.

C. Security Controls (Protecting the Data)

Computerised systems concentrate all financial information in one place, making security paramount.

• Passwords and User IDs: Essential for limiting access to authorized users and enforcing different levels of authority (e.g., a sales clerk can input sales invoices but cannot view the CEO's salary details).
• Regular Backups: Creating copies of the entire accounting database frequently (daily or hourly) and storing them securely, often off-site (in the cloud or a separate physical location). This protects against hardware failure, fire, or cyber-attacks.
• Firewalls and Antivirus Software: Protecting the system from unauthorised external access (hackers) and malware.
• Physical Security: Ensuring that the servers or computers holding the data are physically protected from theft or damage.

Section 3: Advantages and Disadvantages of Computerised Systems

While we often focus on the efficiency gains, the computerisation process introduces new challenges that accountants must manage.

Advantages of Introducing a Computerised Accounting System

• Real-Time Information: Financial statements and reports can be generated immediately, aiding speedy management decision-making.
• Increased Accuracy: Built-in validation checks, control totals, and automatic double-entry posting reduce human calculation errors.
• Storage and Retrieval: Large volumes of data can be stored compactly and retrieved instantly for audits or analysis.
• Integration: Accounting software can easily link to other systems, like inventory management or point-of-sale systems.

Disadvantages of Introducing a Computerised Accounting System

Don't worry if this seems tricky at first; understanding the drawbacks helps you understand the importance of controls!

• High Initial Cost: Requires significant investment in hardware, software licensing, and staff training.
• Reliance on IT: The business is vulnerable to system crashes, power failures, or corrupted data if backups aren't maintained.
• Fraud Risk: If access controls are weak, a sophisticated user can potentially commit large-scale fraud quickly and remotely.
• Data Transfer Risk: The transfer of historical data (the process we covered in Section 1) is risky; if initial opening balances are incorrect, all subsequent data will be inaccurate (GIGO).
• Need for Expert Training: Staff must be trained and potentially retrained when software updates occur.