Cambrige Notes: Principles of Accounting: Electronic Data Processing

• With the advent of computers electronic data processing has become prevalent
• Electronic data processing is the use of computers in recording, classifying, manipulating,presenting and summarizing data
• In the early days of computers electronic processing was rather limited
• At first it involved the use of electronic calculators to aid manual data processing
• Electronic spreadsheets were introduced first in larger businesses and until their usage reached even smaller businesses
• Packages like excel are sometimes used in conjunction with manual processing to create and present trial balances and financial statements
• Later on complete accounting packages were introduced such as Sage Pastel and Quicken
• These replaced the actual accounting books with electronic versions of:
• The Day Books
• The Journal
• The Ledgers
• Transactions are only entered once e.g. in the Sales Day Book and the other entries are automatically recorded
• Once the period ends the software automatically balances off the accounts, creates the Trial Balance and Financial Statements
• For this reason electronic processing is often called automatic processing
• In recent times extensive use has been made of ICT
• ICT stands for Information and Communication Technologies
• This is when Information Technology(IT) is combined with Communications Technology
• Information technology- is the application of computers to store, study, retrieve, transmit, and manipulate data, or information
• Communication technology refers to all those innovations that allow digital communication to take place allowing people to share and exchange data and information
• ICT refers to technologies that provide access to information through telecommunications
• This includes the Internet, wireless networks, cell phones, and other communication mediums
• With ICT every/most aspect of the accounting function is automated
• Computerized tills record sells and automatically adjust the stock figure, purchases are made automatically, vehicle mileage is used to calculate depreciation for the period etc
• Branches in other locations, countries or continents can submit their data quickly and it is included in the group financial statements
• Electronic data processing often involves hardware and software
• Hardware refers to the tangible parts such as the actual computers, network equipment such as wires, fiber and printers
• Software refers to the intangible parts of the system that come in the form of applications e.g. accounting packages such as Pastel, spreadsheet packages such as Excel etc

Advantages

• Speed-electronic processing fast and data can be quickly stored and retrieved
• Efficient- source document can be quickly stored and retrieved cheaply they also occupy little physical space
• Reduces labour costs
• Can carry out repetitive tasks quickly without getting bored or making mistakes
• Accuracy is improved for example a bar code is scanned and the price of the item appears on the screen and is quickly incorporated into the sales figure with no manual intervention
• Implementing corrections is trivial
• It is adaptable a single change can be quickly applied to the entire data set
• Principles can be applied retroactively to all data instantly for example a change to straight line method of depreciation can be applied to past data for comparison

Disadvantages

• Electronic data processing can require expensive upfront costs although technologies such as cloud computing has done much to reduce this
• Expensive software licencing costs
• Requires training which can be time consuming and expensive
• Results in redundant layoff of some bookkeepers and record keeping personnel
• Can be expensive to maintain the systems
• The systems are vulnerable to hacking, malware and powercuts

NB With its advantages and due to the fact that most of its advantages can be easily mitigated electronic processing is to be preferred.

In fact there is very little use case for manual processing in the real world except in very small businesses such as vendors

To access more topics go to the Principles of Accounting Notes.