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Chapter 21 Computers in Accounting

About the chapter: Computers in Accounting is a very important topic which the students studying
Accountancy in Class 11 should study. This chapter talks about various types of technologies which
are used in the preparation and management of financial books of accounts by accountants in India.
The students must understand the role of technology, types of technology and software available
nowadays. In this chapter you will also understand the advantages and disadvantages of using
technology and software in the process of accountancy and passing of entries. As nowadays almost
all companies have stopped using manual books of accounting and have started using computers
and technology's for managing their books of accounts, therefore it is important for students to
understand how this technology works and what are the basic fundamentals they should understand
so that they are also able to work on this technology in the future. In this chapter all these topics have
been explained very well followed by questions which we have solved below.

Very Short Answer Type Questions.......................

Question.1 What do you mean by a Computer?

Answer 1.

A Computer is a data processor that can perform substantial computations. including numerous
arithmetic and logic operations, without intervention of human operator during the run.

Question.2 What are the different elements of a Computer System?

Answer 2.

The following three are the different elements of a Computer System:

1. Hardware

2. Software

3. Humanware

Question.3 What are the advantages of a Computer System over the Manual System?

Answer 3.

The following are the advantages of a Computer System over the Manual System:

1. Large Volume of Transactions: Large volume of transactions can be stored and processed with
speed and accuracy.

2. Scalability: A computerized accounting System is scalable to handle the growing transactions of

the business.

3. Security: The accounting data under the computerized environment is safer than the accounting
data under the manual system. The data can be kept secured by using a password.
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4. Timely Reporting: Availability of reports on time enables the management to take quick decisions,
which is an important element for the success of an enterprise. A computerized accounting system
makes these reports available as and when required.

5. Lower Cost: The cost of maintaining books of account under the computerized process is lower
than in the manual process.

6. Less Paper Work: Under the computerized process, there is less paper work as compared to the
paper work in the manual process.

7. Flexible Reporting: Reporting under the computerized process is flexible in comparison to the
manual process. The database can be processed further to obtain the desired report.

8. Queries: Replies to queries based on external factors can be obtained easily under a computerized
process.

9. Accurate: Computer statements are far more accurate in comparison to manual statements.

10. Updating: Updating and treatment of wrong transactions are easily done.

11. Financial Statements: From the day books, the Voucher Posting software can manage the General
Ledger, Trial Balance and Balance Sheet.

Question.4 What are the different kinds of Software’s?

Answer 4.

The following are the different kinds of Software’s:

1. Readymade Software

2. Customized Software

3. Tailor-made Software

Question .5 What is meant by Utility Software’s?

Answer 5.

Utility Software is a set of computer programs used to perform supporting operations in a computer.
Utility Software usually focuses on how the computer infrastructure (including the computer
hardware. Operating system, application software and data storage) operates. Due to this focus,
utilities are often rather technical and targeted at people with an advanced level of computer
knowledge.

Most Utility Software’s are highly specialized and designed to perform only a single task or a small
range of tasks. However, there are also some Utility Software’s which combine several features in one
piece of software.

Most major operating systems come with several pre-installed utilities. Like: Disk storage, Disk
defragmenters, Disk checkers, Disk cleaners, Disk space analyzers, Disk partitions, Backup, Disk
compression, File managers, Anti-virus, Data compression, etc.

Question .6 Name two Application Software’s.

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Answer 6.

The following are the name of two application Software:

1. Tally

2. Busy

Question .7 What is Accounting Information System (AIS)?

Answer 7.

Accounting Information System (AS) is a sub-system of Management Information System (MIS). It is a

structure that allows its users to collect and store business or financial data and transform it into
information and communicate to its Internal and External users. The data so collected, stored and
converted into information must be accurate and relevant to its users. Users of the Accounting
Information System are management, consultants. CEO, regulatory and tax authorities, employees,
etc. Specially trained accountants work with AIS to ensure the highest level of accuracy in an
organization’s financial transactions and record keeping and to make relevant financial data easily
available to its users, all while keeping data intact and secure.

Accounting Information Systems combine the study and practice of accounting with the design,
implementation and monitoring of information systems. Such systems use modem information
technology resources together with traditional accounting controls and methods to provide users
with the financial information necessary to manage their organizations.

Question .8 Write three advantages of AIS.

Answer 8.

The three advantages of Accounting Information System (AIS) are:

1. It combines the study and practice of accounting with the information systems

2. It implements information systems.

3. It monitors information systems

Question .9 Write three disadvantages of AIS.

Answer 9.

The three disadvantages Of Accounting Information System (AIS) are:

1. The data collected may not be accurate to give correct result.

2. The financial transactions and record keeping should be perfect to provide correct information.

3. The primary data collected should be free from all bias.

Question .10 What do you understand by Grouping of Accounts?

Answer 10.
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Grouping of Amounts means giving a code to each main head, sub-heads and thereafter individual
account heads. Code Of the main head Signifies whether the account is an item belonging to Assets
Group. Liabilities Group, Expenses Group or Incomes Group. Code of the sub-head signifies the head
under which individual account head will appear. A credible financial statement can be prepared if
the accounting concepts and principles are followed. It necessarily means capital expenditure and
capital income or receipts be transferred to Balance Sheet while revenue expenditures and revenue
incomes be transferred to Trading, Profit and Loss Account (Statement of Profit and Loss. in case of
companies). This objective of accounting can be achieved when the accounts heads are defined in
a manner that capital expenditures and capital incomes form part of the Balance Sheet under
appropriate main head. Similarly, revenue expenditures and revenue incomes form part of the
Trading, Profit and LOSS Account (Statement of Profit and Loss. in case of companies). The process by
which this objective is achieved is known as Grouping of Accounts.

Question .11 What do you understand by Readymade or Off-the-Shelf Software?

Answer 11.

Readymade Software’s are the Software’s that are developed not for any specific user but for the
users in general. Since, the readymade Software’s are for general user, it is not necessary that all the
modules of such Software’s are of use for every user. Some of the Readymade Software’s available
are Tally, Busy and Professional Accountant.

Question .12 What are the advantages of Readymade Software?

Answer 12.

The following are the advantages of Readymade Software:

1. Readymade Software are economical

2. Readymade Software are developed by a group of experienced professionals

Question .13 What do you understand by Customized Software?

Answer 13.

The Customized Software means making Changes in the readymade software to suit the specific
requirements of the user or making is user specific. The software available off-the-shelf is modified
to suit the requirements of the user. The developer, to meet specific user requirements, can modify all
the readymade software. However, the user has to bear the cost of such changes.

Question .14 What do you understand by Tailor-Made Software?

Answer 14.

The Tailor-made Software refers to designing and developing user-specific software. These
software’s, being user specific, are not available off the-shelf but are developed to meet the
requirement of the user on the basis of discussion between the user and developers.
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Short Answer Type Questions.......................

Question .1 What is computer? Explain its important features.

Answer 1.

A Computer is a data processor that can perform substantial computations. Including numerous
arithmetic and logic operations, without intervention of human operator during the run. The following
are the important features of a Computer System:

1. Hardware — Computer Hardwares are the components of computer that have physical existence,
such as keyboard, CPU, monitor, mouse, etc.

2. Software — It is a general term for the various kind Of programmers used to operate computer and
related devices. Software is a set of instructions on the basis of which a computer operates. Unlike
computer hardware, computer software cannot be seen or touched. It is the hypothetical or
imaginary part of the computer which is used with hardware to perform computer applications is
known as software.

3. Humanware — People interacting with the computer and executing the program or software are
known as Humanware. They pass on the inputs based on which the computer will carry out specified
operations in accordance with a set of instructions. They constitute the most important part of the
computer system.

Question .2 Explain the main parts of computer system with the help of a diagram.

Answer 2.

1. Central Processing Unit - As the name suggests, the CPU processes all functions within a computer.
It will have control over the functions of the various components.

2. RAM - Random Access Memory or RAM is used for temporarily storing information which is being
currently used for processing.

3. Secondary Storage - Secondary storage is used for storing all the data which is not in current
usage.

4. Input devices - They are hardware components that gather raw data from the user for processing.
Keyboard, mouse, touch screen, microphone, scanner, and light pen are the examples of commonly
used input devices.

5. Output Devices - The function of output devices is to send out the processed (useful) information
out of the computer.

Question .3 Distinguish between Hardware and Software.

Answer 3.

Computer Hardware’s are the components of computer that have physical existence, such as
keyboard, CPU, monitor, mouse, etc. Whereas Software’s is a general term for the various kind of
programmers used to operate computer and related devices. Software is a set of instructions on the
basis of which a computer operates. Unlike computer hardware, computer software cannot be seen
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or touched. It is the hypothetical or imaginary part of the computer which is used with hardware to
perform computer applications is known as software.

Question .4 What are the advantages of computerized Accounting?

Answer 4.

The following are the advantages of a Computer System:

1. Large Volume of Transactions: Large volume of transactions can be stored and processed with
speed and accuracy.

2. Scalability: A computerized accounting System is scalable to handle the growing transactions of

the business.

3. Security: The accounting data under the computerized environment is safer than the accounting
data under the manual system. The data can be kept secured by using a password.

4. Timely Reporting: Availability of reports on time enables the management to take quick decisions,
which is an important element for the success of an enterprise. A computerized accounting system
makes these reports available as and when required.

5. Lower Cost: The cost of maintaining books of account under the computerized process is lower
than in the manual process.

6. Less Paper Work: Under the computerized process, there is less paper work as compared to the
paper work in the manual process.

7. Flexible Reporting: Reporting under the computerized process is flexible in comparison to the
manual process. The database can be processed further to obtain the desired report.

8. Question ueries: Replies to queries based on external factors can be obtained easily under a
computerized process.

9. Accurate: Computer statements are far more accurate in comparison to manual statements.

10. Updating: Updating and treatment of wrong transactions are easily done.

11. Financial Statements: From the day books, the Voucher Posting software can manage the General
Ledger, Trial Balance and Balance Sheet.

Question .5 What is the role of Computer in Accounting?

Answer 5.

The roles of computer in accounting are:

1. Speed: A computer can perform accounting work at a much higher speed than human beings.
Computers have such a fast operating capability that the relevant unit of time is a fraction of a
second.

2. Accuracy: A computer can perform accounting work with a high rate of accuracy. The computer
cannot make mistakes if proper instructions are given.

3. Reliability: Computers are immune to tiredness, boredom and fatigue. Therefore they are more
reliable than human being in performing accounting work.
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4. Versatility: It refers to the ability of computers to perform a verity of tasks, simple as well as
complex. Hence it can be used in performing accounting works.

5. Storage and Retrieval: The computer systems, besides having instant access to data, have huge
capacity to store data in a very small physical space and in a safe way. A normal computer hard disk
can store a bulk of data without occupying any physical space.

Question .6 What considerations should be borne in mind for Designing Accounting Reports?

Answer 6.

Data when processed becomes information. When the related information is summarized to meet a
particular need, it is called a report. The content and design of the report is expected to vary
depending upon the level to which it is submitted and decision to be made on the basis of the report.
A report must be effective and efficient to the user and should substantiate the decision—making
process.

Question .7 Write a detailed comparison between Manual Accounting and Computerized

Accounting.

Answer 7.

Accounting is a process of identifying, recording. Classifying and summarizing financial transactions

to produce financial statements. The detailed comparison between Manual Accounting and
Computerized Accounting are given below:

1. Identifying Financial Transactions: Identifying financial transactions and recording them in the
books of account by applying the principles of accounting is a manual process carried out by an
authorized person or on the basis Of the accounting manual. This process is, hence common under
both the processes.

2. Recording: The process of recording transaction in the books of original entry, posting them in the
ledger accounts, performing mathematical functions are carried out manually under the manual
process. In the computerized process, transactions are recorded in the books of account and the
remaining functions are performed without any further process or command being carried out
manually.

3. Classification: In the manual process, the transactions are recorded in the books of original entry
and are posted into the ledger accounts. It means that, after recording the transaction, another
process of posting is performed. In computerized accounting, the posting process is carried out by
internal shorting of data that is with the help of utility or application software, without any further
process.

4. Summarizing: In the manual system of accounting, the data under each Ledger is summarized
and a balance of each account is ascertained to prepare a Trial Balance. As a result, preparing ledger
accounts is essential to prepare a Trial Balance. In the computerized process, a transaction or event,
once recorded, is stored in the database and can be processed to produce a Trial Balance directly.

5. Adjustment Entries: Adjustment Entries are passed to rectify an error or to follow the matching
concept of accounting or matching cost with revenue. The process of passing adjustment entries
can be equated with the recording process. These entries are identified and recorded in the books of
account. The remaining process is the same as discussed above.
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6. Grouping of Accounts: One of the basics of correct accounting is determining whether a

transaction is capital or revenue in nature and. accordingly, which account head to be debited or
credited. Once this decision is taken, the account is grouped as an asset, a liability, an income or an
expense at the time of preparing the financial statements. The above process is followed when the
manual system of accounting is adopted. However, in computerized accounting, whether an account
head is an asset, a liability, an income or an expense is decided at the time the transaction takes
place, as in the case of manual accounting. It is also defined whether the particular head of account
shall be shown asset or a liability or an income or an expense.

Question .8 Write down five advantages of computerized Accounting System over the Manual
System of Accounting.

Answer 8.

The following are the advantages of a Computer System over the Manual System:

1. Large Volume of Transactions: Large volume of transactions can be stored and processed with
speed and accuracy.

2. Scalability: A computerized accounting system is scalable to handle the growing transactions of

the business.

3. Security: The accounting data under the computerized environment is safer than the accounting
data under the manual system. The data can be kept secured by using a password.

4. Timely Reporting: Availability of reports on time enables the management to take quick decisions,
which is an important element for the success of an enterprise. A computerized accounting system
makes these reports available as and when required.

Question .9 Computerized Accounting System is the best form of accounting system. Do you
agree? Comment.

Answer 9.

The following are the advantages of a Computer System:

1. Large Volume of Transactions: Large volume of transactions can be stored and processed with
speed and accuracy.

2. Scalability: A computerized accounting System is scalable to handle the growing transactions of

the business.

3. Security: The accounting data under the computerized environment is safer than the accounting
data under the manual system. The data can be kept secured by using a password.

4. Timely Reporting: Availability of reports on time enables the management to take quick decisions,
which is an important element for the success of an enterprise. A computerized accounting system
makes these reports available as and when required.

5. Lower Cost: The cost of maintaining books of account under the computerized process is lower
than in the manual process.

6. Less Paper Work: Under the computerized process, there is less paper work as compared to the
paper work in the manual process.
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7. Flexible Reporting: Reporting under the computerized process is flexible in comparison to the
manual process. The database can be processed further to obtain the desired report.

8. Question ueries: Replies to queries based on external factors can be obtained easily under a
computerized process.

9. Accurate: Computer statements are far more accurate in comparison to manual statements.

10. Updating: Updating and treatment of wrong transactions are easily done.

11. Financial Statements: From the day books, the Voucher Posting software can manage the General
Ledger, Trial Balance and Balance Sheet.

Question .10 What is meant by Accounting Information System? List four features of a goods
Accounting Information System.

Answer 10.

Accounting Information System is a sub-system of Management Information System. It is a structure

that allows its users to collect and store business or financial data and transform it into information
and communicate to its internal and external users. The data so collected, stored and converted into
information must be accurate and relevant to its users. Users of the Accounting Information System
are management, consultants, tax authorities, employees, etc. Specially trained accountants work
with AIS to ensure the highest level of accuracy in an organization’s financial transactions and record
keeping and to make relevant financial data easily available to its users, all while keeping data intact
and secure. Accounting Information Systems combine the study and practice of accounting with the
design, implementation and monitoring of information systems. Such systems use modern
information technology resources together with traditional accounting controls and methods to
provide users with the financial information necessary to manage their organizations.

The lists of four features of a good Accounting Information System are:

1. People are its users.

2. Procedures are the methods and instructions of collecting, storing, retrieving, processing data and
communicating information to its users.

3. Data are all relevant financial and business information required by its users.

4. Controls are the security measures that protect sensitive data. AI must have in controls to protect
data against unauthorized computer access and to limit access and to authorized user.

Question .11 ‘Computerized Accounting is much better than Manual Accounting’. Justify this
statement by giving a comparison of Manual Accounting and Computerized Accounting.

Answer 11.

Computerized Accounting is much better than Manual Accounting. This statement can be justified by
the detailed comparison between Manual Accounting and Computerized Accounting as given
below:

1. Identifying Financial Transactions: Identifying financial transactions and recording them in the
books of account by applying the principles of accounting is a manual process carried out by an
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authorized person or on the basis Of the accounting manual. This process is, hence common under
both the processes.

2. Recording: The process of recording transaction in the books of original entry, posting them in the
ledger accounts, performing mathematical functions are carried out manually under the manual
process. In the computerized process, transactions are recorded in the books of account and the
remaining functions are performed without any further process or command being carried out
manually.

3. Classification: In the manual process, the transactions are recorded in the books of original entry
and are posted into the ledger accounts. It means that, after recording the transaction, another
process of posting is performed. In computerized accounting, the posting process is carried out by
internal shorting of data that is with the help of utility or application software, without any further
process.

4. Summarizing: In the manual system of accounting, the data under each Ledger is summarized
and a balance of each account is ascertained to prepare a Trial Balance. As a result, preparing ledger
accounts is essential to prepare a Trial Balance. In the computerized process, a transaction or event,
once recorded, is stored in the database and can be processed to produce a Trial Balance directly.

5. Adjustment Entries: Adjustment Entries are passed to rectify an error or to follow the matching
concept of accounting or matching cost with revenue. The process of passing adjustment entries
can be equated with the recording process. These entries are identified and recorded in the books of
account. The remaining process is the same as discussed above.

6. Grouping of Accounts: One of the basics of correct accounting is determining whether a

transaction is capital or revenue in nature and, accordingly, which account head to be debited or
credited. Once this decision is taken, the account is grouped as an asset, a liability, an income or an
expense at the time of preparing the financial statements. The above process is followed when the
manual system of accounting is adopted. However, in computerized accounting, whether an account
head is an asset, a liability, an income or an expense is decided at the time the transaction takes
place, as in the case of manual accounting. It is also defined whether the particular head of account
shall be shown as an asset or a liability or an income or an expense.

Question .12 ‘A computer system is capable of performing many things.’ Explain some of the
capabilities of a Computer System.

Answer 12.

A computer system is capable of performing many things. The following are some of the capabilities
of a Computer System.

1. Speed: A computer can perform accounting work at a much higher speed than human beings.
Computers have such a fast operating capability that the relevant unit of time is a fraction of a
second.

2. Accuracy: A computer can perform accounting work with a high rate of accuracy. The computer
cannot make mistakes if proper instructions are given.

3. Reliability: Computers are immune to tiredness, boredom and fatigue. Therefore they are more
reliable than human being in performing accounting work.
 Eduacademy.co.in

4. Versatility: It refers to the ability of computers to perform a verity of tasks, simple as well as
complex. Hence it can be used in performing accounting works.

5. Storage and Retrieval: The computer systems, besides having instant access to data, have huge
capacity to store data in a very small physical space and in a safe way. A normal computer hard disk
can store a bulk of data without occupying any physical space.

Question .13 What are the advantages of Computerized Accounting?

Answer 13.

The following are the advantages of a Computer System:

1. Large Volume of Transactions: Large volume of transactions can be stored and processed with
speed and accuracy.

2. Scalability: A computerized accounting System is scalable to handle the growing transactions of

the business.

3. Security: The accounting data under the computerized environment is safer than the accounting
data under the manual system. The data can be kept secured by using a password.

4. Timely Reporting: Availability of reports on time enables the management to take quick decisions,
which is an important element for the success of an enterprise. A computerized accounting system
makes these reports available as and when required.

5. Lower Cost: The cost of maintaining books of account under the computerized process is lower
than in the manual process.

6. Less Paper Work: Under the computerized process, there is less paper work as compared to the
paper work in the manual process.

7. Flexible Reporting: Reporting under the computerized process is flexible in comparison to the
manual process. The database can be processed further to obtain the desired report.

8. Question ueries: Replies to queries based on external factors can be obtained easily under a
computerized process.

9. Accurate: Computer statements are far more accurate in comparison to manual statements.

10. Updating: Updating and treatment of wrong transactions are easily done.

11. Financial Statements: From the day books, the Voucher Posting software can manage the General
Ledger, Trial Balance and Balance Sheet.

Question .14 Write short notes on the following:

(a) Customized Accounting Software.

(b) Readymade Accounting Software.

Answer 14.

(a)Customised Accounting Software: means making changes in the readymade software to suit the
specific requirements of the user or making is user specific. The software available off-the-shelf is
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modified to suit the requirements of the user. The developer, to meet specific user requirements, can
modify all the readymade software. However, the user has to bear the cost of such changes.

(b)Readymade Accounting Software: are the Software’s that are developed not for any specific user
but for the users in general. Since, the readymade Software’s are for general user, it is not necessary
that all the modules of such Software’s are of use for every user. Some of the Readymade Software’s
available are Tally, Busy and Professional Accountant.