A SHORT HISTORY OF ACCOUNTING

From the early days of clay tokens to the invention

of the abacus. The history of accounting is asold as
civilization, among the most important professions
in economic and cultural development,and
fascinating. There is no proper information about the
origin of accounting but according tosome writer it
b e g a n i n t h e Ven i c e / F l o r e n c e a r e a i n I t a l y. A
hundred years later, Luca Pacioli(Father of
Accounting), a Franciscan monk, wrote a math book
that suggested merchant neededthree things
sufficient cash or credit, an accounting system, and
a good bookkeeper.It was 18
th
century when the proper accounting system was felt
to be maintained. A famous potter named - Josiah
Wedgwood was a highly successful potter when a
depression hit, and hediscovered that not only were
his clerks ignoring much needed paperwork, they
were alsostealing money hand over fist. He took the
time to examine the books in detail,
notinginaccuracies and becoming aware of the
importance of calculating overhead into the costs of
his pottery. It took another fifty years or so for the
occupation now known as accountant to comeinto
vogue.In the mid-19
th
century, the first accounting firm opened in 1845 in
London, but accountingtechnology and technological
advances in accounting such as accounting software
didnt comeuntil much later.
E A R LY TE C H N O L O G Y
Accounting technology has always played a role in
keeping track pf numbers, and the idea of using
machines to solve mathematical problems goes back
centuries. Leonardo da Vinci actuallydesigned a
machine he called the Codex Madrid that contained
t h i r t e e n w h e e l s t h a t r e g i s t e r e d digits.W h i l e t h e r e
were several other attempts to build a numbers

calculator, it was Blaise Pascal, aFrench scientist,

who invented the early calculator (interestingly
enough, he also is credited withinventing the
roulette machine and the wrist watch)In 1885,
William Burroughs invented the first working adding
machine. The first batch of machines didnt sell very
well since Mr. Burroughs was the only person who
can use them, sothey were recalled, and the
corrective automatic adding machine was invented.
Naturally, thismodel sold much better.Adding
machine and then later-much later-calculator made
the job of accounting much easier.They led to fewer
mistakes, greater accountability, and speed up the
work of the average bookkeeper or accountant.
Technological advances in accounting always mean
increased speedand efficiency.
T H E 2 0 t h C E N T U RY I N F O R M ATI O N R E V O L U T I O N
While there were subtle changes in the field of
account ting from its early through the 1970s,
the job remained virtually the same: paper record of
columns of numbers. But with the invention of the
computer and accounting software, that all
c h a n g e d . I n 1 9 3 0 , Van n e v e r B u s h , a p r o f e s s o r a t M I T,
built an electronic differential
analysre.Other inventor such as Konrad Zuse and
Howard Aiken built hybrid binary arithmetic
machines andused electric relays to calculate sums.
Professor Aiken worked with IBM, and in 1942 they
builtwhat could be called the first computer. Over
the course of the next fifty years, massivecomputers
capable of only simple calculation went from filing
entire rooms to the small desktopcomputer most of
us at home and the office today.Computer and
accounting software allows accountants to use
electronic spreadsheets-eliminatingthe need for
adding machine, calculators, and pencil and ledgers
in one fell swoop. It becamemuch simpler for the
accountant to keep track of information on a minuteby-minute basis andcompletely eliminate most

mistakes. This has led to greater efficiency and

accountability, andhas changed the face of
accounting considerably.
Computer Role In Modern Accounting
THE USE OF COMPUTERS IN ACCOUNTING
A computer is a set of electronic device that can
systematically and sequentially follow a set
of instructions called a program to perform highspeed arithmetic and logical operations on
data.Because of the rapid changes in finances and its
related fields, accurate record keeping iscritical.
Computerizing a business tasks of accounting
procedures, increases efficiency. With acomputer and
its appropriate software, one can request and receive
an in house balance sheet, anincome statement, cash
flow and statements of affairs and other accounting
reports within ashort time: hence an increase in
productivity. Lets take time to briefly see the role
computersare playing in the field of accounting,
changing some of the things that were manually done
andfacilitating accounting data processing.
A. Spreadsheets
Electronic Spreadsheets allow you to do anything
that you would normally do with a calculator, pencil
and columnar scratch pad. A typical integrated
double entry accounting spreadsheetsystem will
contain some of the following components: general
ledger, inventory levels, order entry, payroll, time,
and billing etc...
B. General Ledger
Electronic General Ledgers are labor saving device
for the preparation of financial statementsand for
establishing multiple income and cost entries. It
takes charge of secondary postings.
C. Inventory Control
Electronic Inventory Control module has multiple
functions, which includes tracking inventoryfor both
costing and tax purposes, aid managers in
controlling purchasing (and the overall levelof

expenditure) and minimizing the investment in

inventory (and subsequent loss of cash flow).It is
integrated with the general ledger so it can
automatically set aside the correct amount
f o r processing further.
D. Accounts Receivable
Computer Role In Modern Accounting
Electronic Accounts receivable can get your bills out
the same day you perform a service.Electronic
accounts receivable module can prepares invoices
for...
ROLE OF COMPUTERS IN ACCOUNTING
The most popular system of recording of accounting
transactions is manual which requiresmaintaining
books of accounts such as Journal, Cash Book,
Special purpose books, and ledger and so on. The
accountant is required to prepare summary of
transactions and financialstatements manually. The
advanced technology involves various machines
capable of performingdifferent accounting functions,
for example, a billing machine. This machine is
capable of computing discount, adding net total and
posting the requisite data to the relevant
accounts.With substantial increase in the number of
transactions, a machine was developed which
couldstore and process accounting data in no time.
Such advancement leads to number of
growingsuccessful organisations. A newer version of
machine is evolved with increased speed, storage,and
processing capacity. A computer to which they were
connected operated these machines. Asa result, the
maintenance of accounting data on a real-time basis
became almost essential. Nowmaintaining accounting
records become more convenient with the
computerised accounting.The computerised
accounting uses the concept of databases. For this
purpose an accountingsoftware is used to implement
a computerised accounting system. It does away the
necessity tocreate and maintain journals, ledgers,

etc., which are essential part of manual accounting.

Someof the commonly used accounting softwares are
Tally, Cash Manager, Best Books, etc.Accounting
software is used to implement a computerised
accounting. The computerisedaccounting is based on
the concept of database. It is basic software which
allows access to thedata contained in the data base.
It is a system to manage collection of data insuring
at the sametime that it remains reliable and
confidential. Following are the components of
Computerisedaccounting software
Preparation of accounting documents:Computer helps in preparing accounting documents
like Cash Memo, Bills and invoices etc.,and
preparing accounting vouchers.
Recording of transactions
Every day business transactions are recorded with
the help of computer software. Logical scheme is
implied for codification of account and transaction.
Every account and transactionis assigned a unique
code. The grouping of accounts is done from the
f i r s t s t a g e . T h i s process simplifies the work of
recording the transactions.
Preparation of Trial Balance and Financial Statements
After recording of transaction, the data is
transferred into Ledger account automatically bythe
computer. Trial Balance is prepared by the computer
to check accuracy of the records.With the help of
trial balance the computer can be programmed to
prepare Trading, Profitand Loss account and Balance
Sheet. These components can be shown as:

Computerised Accounting

It is one of the transaction processing systems which

is concerned with financial transactionsonly. When a
system contains only human resources it is called
manual system; when it usesonly computer resources,
it is called computerised system and when it uses
both human andcomputer resources, it is called
computer-based system.These steps can be explained
with an example making use of Automatic Teller
M a c h i n e ( ATM ) f a c i l i t y b y a B a n k - C u s t o m e r.
1. Data Entry
: Processing presumes data entry. A bank customer
o p e r a t e s a n ATM f a c i l i t y t o m a k e a w i t h d r a w a l . T h e
actions taken by the customer constitute data which
is processedafter validation by the computerised
personal banking system.
2 . D a t a Val i d a t i o n
: It ensures the accuracy and reliability of input
data by comparing thesame with some predefined
standards or known data. This validation is made by
the Error Detection and Error Correction

procedures. The control mechanism, wherein actual

inputdata is compared with predetermined norm is
meant to detect errors while error
correction procedures make suggestions for entering
correct data input. The Personal
I d e n t i f i c a t i o n Number (PIN) of the customer is validated
with the known data. If it is incorrect, as u g g e s t i o n i s
made to indicate the PIN is invalid. Once the PIN is
validated, the amount of withdrawal being made is
also checked to ensure that it does not exceed a prespecified limitof withdrawal..
3. Processing and Revalidation
: The processing of data occurs almost
instantaneously incase of Online Transaction
Pr oces sing ( OLTP) pr ovided a valid data ha s been
fed to thesystem. This is called check input validity.
Revalidation occurs to ensure that the transactionin
t e r m s o f d e l i v e r y o f m o n e y b y ATM h a s b e e n d u l y
c o m p l e t e d . T h i s i s c a l l e d c h e c k o u t p u t validity.
4. Storage
: Processed actions, as described above, result into
financial transaction data i.e.withdrawal of money
by a particular customer, are stored in transaction
database of computerized personal banking system.
This makes it absolutely clear that only
validtransactions are stored in the database.
5. Information
: The stored data is processed making use of the
Query facility to producedesired information.
6. Reporting
: Reports can be prepared on the basis of the
required information contentaccording to the
decision usefulness of the: The processing of data
occurs almostinstantaneously in case of Online
Tran saction Pr oces sing ( OLTP) pr ovided a valid data
has been fed to the system. This is called check
input validity. Revalidation occurs to ensure thatthe
t r a n s a c t i o n i n t e r m s o f d e l i v e r y o f m o n e y b y ATM
has been duly completed. This is called check output
validity.

Storage
: Processed actions, as described above, result into
financial transaction data i.e.withdrawal of money
by a particular customer, are stored in transaction
database of computerized personal banking system.
This makes it absolutely clear that only
validtransactions are stored in the database.
5. Information
: The stored data is processed making use of the
Query facility to producedesired information.
6. Reporting
: Reports can be prepared on the basis of the
required information contentaccording to the
decision usefulness of the report.
NEED AND REQUIREMENTS OF COMPUTERSIED
ACCOUNTING
The need for computerised accounting arises from
advantages of speed, accuracy and lower costof
handling the business transactions.

Numerous Transactions
The computerised accounting system is capable of
handling large number of transactions withspeed and
accuracy.

Instant Reporting
The computerised accounting system is capable of
offering quick and quality reporting becauseof its
speed and accuracy.

Reduction in paper work

A manual accounting system requires large physical
storage space to keep accountingrecords/books and
vouchers/ documents. The requirement of stationery
and books of accountsalong with vouchers and
documents is directly dependent on the volume of
transactions beyond

a certain point. There is a dire need to reduce the

paper work and dispense with large volumes
of books of accounts. This can be achieved by
introducing computerised accounting system.

Flexible reporting
:-T h e r e p o r t i n g i s f l e x i b l e i n c o m p u t e r i s e d
accounting system as compared to manual
accountingsystem. The reports of a manual
accounting system reveal balances of accounts on
periodic basiswhile computerised accounting system
is capable of generating reports of any balance as
whenrequired and for any duration which is within
the accounting period.

Accounting Queries
:--T h e r e a r e a c c o u n t i n g q u e r i e s w h i c h a r e b a s e d o n
some external parameters. For example, aquery to
identify customers who have not made the payments
within the permissible credit period can be easily
answered by using the structured query language
(SQL) support of databasetechnology in the
computerised accounting system. But such an
exercise in a manual accountingsystem is quite
difficult and expensive in terms of manpower used.
It will still be worse in casethe credit period is
changed.

On-line facility:
Computerised accounting system offers online
facility to store and process transaction data so asto
retrieve information to generate and view financial
reports.

Scalability:-Computerised accounting system are fully equipped

with handling the growing transactions of afast
growing business enterprise. The requirement of
additional manpower in Accountsdepartment is
restricted to only the data operators for storing

additional vouchers. There isabsolutely no

additional cost of processing additional transaction
data.

Accuracy --The information content of reports generated by the

computerised accounting system is accurateand
therefore quite reliable for decision- making. In a
manual accounting system the reports andinformation
are likely to be distorted, inaccurate and therefore
cannot be relied upon. It is so because it is being
processed by many people, especially when the
number of transactions to be processed to produce
such information and report is quite large.

Security ---Under manual accounting system it is very difficult

to secure such information because it isopen to
inspection by any eyes dealing with the books of
accounts. However, in computerisedaccounting
system only the authorised users are permitted to
have access to accounting data.Security provided by
the computerised accounting system is far superior
compared to anysecurity offered by the manual
accounting system.
BASIC REQUIREMENTS OF THE COMPUTERISED
ACCOUNTING SYSTEM
The basic requirements of any computerised
accounting system are the followings:

Accounting framework ----It is the application environment of the

computerised accounting system. A
healthyaccounting framework in terms of accounting
principles, coding and grouping structure is a precondition for any computerised accounting system.

Operating procedure ------

A well-conceived and designed operating procedure

blended with suitable operatingenvironment of the
enterprise is necessary to work with the
computerised accounting system.The computerised
accounting is one of the database-oriented
applications wherein thetransaction data is stored in
well- organized database. The user operates on such
database usingthe required interface and also takes
the required reports by suitable transformations of
storeddata into information. Therefore, the
fundamentals of computerised accounting include all
the basic requirements of any database-oriented
application in computers.
LIMITATIONS OF A COMPUTER AND COMPURISED ACCOUNTING
The limitations of computer are depending upon the
operating environment they work in.
Theselimitations are given below as :

Cost of Installation
Computer hardware and software needs to be updated
from time to time with availability of new versions.
As a result heavy cost is incurred to purchase a new
h a r d w a r e a n d s o f t w a r e from time to time.

Cost of Training
To ensure efficient use of computer in accounting,
new versions of hardware and softwareare
introduced. This requires training and cost is
incurred to train the staff personnel.

Self Decision Making

The computer cannot make a decision like human
beings. It is to be guided by the user.

Maintenance
Computer requires to be maintained properly to help
maintain its efficiency. It requires aneat, clean and
controlled temperature to work efficiently.

Dangers for Health

Extensive use of computer may lead to many health
problems such as muscular pain,eyestrain, and
backache, etc. This affects adversely the working
efficiency and increasingmedical expenditure.