Most businesses no longer keep their books in bound ledgers. They use software that records each transaction once and updates every related account and report at the same moment. The accounts themselves are the same: assets, liabilities, equity, income and expenses. What changes is how entries are made, stored, checked and reported, and what can go wrong.
This topic covers computerised accounting systems and accounting packages: how they compare with manual systems, the main types of package and what they do, what to consider when choosing one, how data is edited and controlled, and the limits of these systems. It is the first of three topics on computerised and virtual accounting.
The next covers digitisation, data structures and virtual accounting, and the last covers artificial intelligence, blockchain and remote-working fraud.
In 30 seconds
A Computerised accounting system keeps the same types of account as a manual system but records entries in software and a database. Compared with manual books it is Faster, more accurate, easier to store and back up, and it logs changes automatically in an audit trail.
Package types are Enterprise resource planning (ERP) systems (SAP, Oracle), Accounting software (QuickBooks, Sage, Tally, Xero, Wave), Cloud-based software (QuickBooks Online, Zoho Books) and Industry-specific software. Choose a package by Cost, flexibility, type and timing of processing, hardware needs, reliability, integration and user requirements. Limits are a high set-up cost, data loss without backups, dependence on technology, security threats, staff training needs and software that does not fit the industry.
Manual and computerised systems compared
Both systems use the same types of account: assets such as cash and receivables, liabilities such as payables and loans, equity, income and expenses. They differ in how the accounts are maintained.
| Feature | Manual | Computerised |
|---|---|---|
| Recording | By hand in journals and ledgers | In software, stored digitally |
| Speed | Slow, with manual calculation and posting | Fast, with automatic calculation |
| Accuracy | Prone to human error | More accurate, with built-in formulas and checks |
| Storage | Physical space for books and files | Little space, quick access and backups |
| Updating | Tedious | Related accounts and reports update automatically |
| Reports | Prepared by hand | Instant, in several formats |
| Data security | Exposed to theft, fire and loss | Passwords, encryption and automatic backup |
| Audit trail | Hard to trace changes | Changes are logged automatically |
| Cost | Lower set-up cost, higher labour cost | Higher set-up cost, lower running cost |
| Scalability | Hard to scale | Handles more transactions and users easily |
Accounting records and tools
Records. A computerised system uses source documents (invoices, receipts, purchase orders), ledgers that are updated automatically from them, and financial statements. The records sit in a database, so physical books are not needed. Features include automated invoice generation, support for several currencies, customisable reports, document management, data validation, error correction and data analysis.
Data validation and error correction. The software checks entries, for example dates and numbers, and shows an error message when an entry is invalid. Validation rules can be set to keep data consistent. Transactions can be reversed or edited, with an audit trail of changes.
Data analysis. The software can produce statements of financial position and statements of profit or loss, visualise data, support ad-hoc analysis, and help with budgeting and forecasting.
Types of accounting package
| Type | What it is | Examples |
|---|---|---|
| Enterprise resource planning (ERP) | Integrates accounting with human resources, supply chain and customer relationship management | SAP, Oracle, Microsoft Dynamics |
| Accounting software | Focused on accounting: reporting, invoicing and expense tracking, for small and medium businesses | QuickBooks, Sage, Tally, Wave, Xero |
| Cloud-based software | Hosted online and available from anywhere, suited to remote teams and several locations | QuickBooks Online, Zoho Books, Xero |
| Industry-specific software | Built for one industry, for example project costs in construction or donations and grants for non-profits | Construction, healthcare and non-profit packages |
Features of the specific packages: QuickBooks is widely used by small and medium enterprises for invoicing, payroll, inventory, tax calculation and reporting. Sage is popular in the United Kingdom (UK) and internationally and supports several currencies, budgeting and detailed reporting. Xero is cloud-based, with bank reconciliation, invoicing, expense and cash flow tracking, payroll and real-time reporting.
Tally is widely used in Africa and Asia for accounts, inventory, payroll and statutory compliance, including value added tax (VAT) and GST. Wave is a free online solution for freelancers and small businesses. Microsoft Dynamics is an ERP suite for medium and large organisations.
Uses and benefits. Packages are used for financial reporting, invoicing and billing, expense tracking, budgeting and forecasting, compliance and taxation, and financial analysis. The benefits are efficiency, accuracy, better decisions from real-time information, better compliance, and scalability as the business grows.
Choosing a package
The key factors to weigh before buying are:
- Cost, meaning the total cost of ownership: software, set-up and running costs.
- Flexibility, the ease of amending, updating or upgrading.
- Type of processing, such as batch processing or real-time processing.
- Timing of processing, the speed of processing and reporting.
- Hardware requirements, including network configuration.
- Reliability of the outputs.
- Integration with other systems such as ERP and customer relationship management (CRM).
- User processing requirements: ease of use, functions and performance.
Editing data and controls
The editing tools include find and replace, data validation, undo and redo, transaction editing, batch editing, and filtering and sorting to review the data. Good practice is to Back up data before significant edits, Verify the changes for accuracy and completeness, and Document the changes with the reasons for them.
Limitations
Computerised systems have these limitations:
- a High initial cost of software, hardware, installation and training
- the Risk of data loss without regular backups, for example from viruses or power failure
- Dependence on technology, so a crash or network failure disrupts work
- Security threats such as hacking and phishing
- the need for Staff training, without which errors continue and the system is under-used
- Software limitations, since generic packages may not fit an industry without costly customisation
The ideas in more depth
Background (general information technology (IT) knowledge). A computer posts exactly what is keyed in, so wrong input gives wrong output. Validation catches some errors, such as an impossible date or a missing field, but cannot catch a figure that is valid but wrong, such as a price keyed as 10,000 instead of 1,000.
Controls over access, such as passwords and different rights for different users, and regular backups stored away from the main system, protect the data. Batch processing collects transactions and processes them together, while real-time processing updates the records as each transaction is entered.
Some books say “statement of comprehensive income” where this course says “statement of profit or loss”. The two statements are the same for this syllabus.
Worked example: Kano Wholesale Ltd
Scenario. Kano Wholesale Ltd is choosing between two packages. Package A is installed on its own computers: set-up ₦300,000, an annual licence of ₦120,000, and training of ₦80,000. Package B is cloud-based: no set-up, a subscription of ₦210,000 a year, and training of ₦40,000. The business expects to use the package for three years. It then posts a sale of ₦500,000 plus VAT at 7.5%.
Required: the three-year cost of each and the entries that the sale updates.
- Package A.
300,000 + (3 × 120,000) + 80,000 = ₦740,000. - Package B.
(3 × 210,000) + 40,000 = ₦670,000.
B is ₦70,000 cheaper over three years. - Judgement. Cost is only one factor. B needs a reliable internet connection and gives access from anywhere. A gives more control over the data but needs backups and hardware support. Integration, reliability and the ability to meet the business’s needs also matter.
- The sale.
VAT = 7.5% × 500,000 = 37,500, so the customer owes 537,500.
One entry in the software updates, automatically, the sales ledger, the receivables control account, the sales account and the VAT payable account: Dr Receivables 537,500, Cr Sales 500,000, Cr VAT payable 37,500.
Reports such as the receivables list and the trial balance are then up to date without further posting.
Common mistakes in the exam
- Saying that a computerised system needs different accounts from a manual one. The types of account are the same.
- Claiming that computerised systems have no errors. Wrong input still gives wrong output.
- Confusing ERP systems, which cover the whole business, with accounting software, which covers accounting only.
- Comparing only the purchase price of packages instead of the total cost of ownership.
- Forgetting the limitations, such as data loss, security threats and staff training.
- Mixing up batch and real-time processing.
- Naming a package without stating what it is used for.
- Forgetting to back up data before large edits.
Quick revision
- Same accounts, different method: faster, more accurate, instant reports, audit trail.
- Types: ERP, accounting software, cloud-based, industry-specific.
- Choose on cost, flexibility, processing, hardware, reliability, integration and user needs.
- Limitations: set-up cost, data loss, dependence, security, training, fit.
Practice questions
These are original questions in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one first.
Section A style: multiple choice
Question 1. When an invoice is entered in a computerised system, the related accounts and reports are:
- Updated automatically
- Updated only at the year end
- Updated by hand
- Not updated
Show the answer
A. Records update automatically across related accounts and reports.
Question 2. An ERP system:
- Records accounting transactions only
- Is a free online invoicing tool
- Integrates accounting with other functions such as human resources, supply chain and customer relationships
- Is a type of spreadsheet
Show the answer
C. SAP and Oracle are examples of such integrated systems.
Question 3. Cloud-based accounting software allows users to:
- Work only without an internet connection
- Access their accounting data from anywhere, at any time
- Avoid keeping any records
- Eliminate all security risks
Show the answer
B. It is hosted online, which suits remote teams and several locations.
Question 4. Which of these is a limitation of a computerised system?
- Faster processing
- An automatic audit trail
- Easy scalability
- Risk of data loss if there are no regular backups
Show the answer
D. The other three are benefits.
Question 5. Data validation in accounting software:
- Checks entries for errors, such as invalid dates, and shows an error message
- Deletes the oldest data
- Encrypts the report
- Creates the budget
Show the answer
A. It enforces rules on the data entered.
Question 6. Tally is widely used in:
- Europe only
- Space research
- Africa and Asia, for accounts, inventory, payroll and VAT or GST compliance
- Banks only
Show the answer
C. Tally is known for flexibility, scalability and statutory compliance.
Question 7. Which factor should be considered when choosing an accounting package?
- The colour of the screen
- The age of the owner
- The size of the office
- Cost, flexibility and integration with existing systems
Show the answer
D. These are among the factors listed, with hardware, reliability and user needs.
Question 8. The audit trail of a computerised system:
- Records only sales
- Logs changes automatically, showing what was changed
- Is the same as a trial balance
- Cannot be used for corrections
Show the answer
B. It provides a clear record of changes and corrections.
Question 9. The total cost of ownership of a package includes:
- Only the licence
- Only the hardware
- Software, set-up, training and running costs
- Only training
Show the answer
C. The whole cost over the life of the package should be compared.
Question 10. Which statement is correct?
- Computerised systems are usually more accurate than manual ones, because of built-in formulas and checks
- Manual systems are always faster
- Computerised systems cannot produce reports
- Computerised systems have no limitations
Show the answer
A. Automation reduces arithmetical error, though wrong input still gives wrong output.
Section B style: written questions
Question 11 (10 marks). (a) State four differences between a manual and a computerised accounting system. (4 marks) (b) State six benefits of using accounting packages. (6 marks)
Question 12 (20 marks). Abuja Traders is choosing between Package X, installed on its computers, and Package Y, which is cloud-based. X has a set-up cost of ₦400,000, a licence of ₦150,000 a year and training of ₦100,000. Y has a subscription of ₦240,000 a year and training of ₦50,000. The business expects to use the package for three years.
(a) Explain eight factors the business should consider when choosing a package. (8 marks) (b) Calculate the three-year cost of each package. (6 marks) (c) State four limitations of computerised systems and one control for each. (6 marks)
A further written question
Question 13 (10 marks). (a) List six features that accounting software commonly offers. (6 marks) (b) Explain what data validation and an audit trail do. (4 marks)
Model answers
Show the model answer to Question 11
(a) Any four:
- manual entries are made by hand, computerised entries in software
- manual systems are slower
- computerised systems are more accurate because of built-in checks
- manual books need physical storage, computerised data is stored digitally with backups
- manual records are updated one by one, computerised records update automatically
- manual reports take time, computerised reports are instant
- computerised changes are logged in an audit trail
(b) Any six: efficiency, accuracy, better decisions from real-time information, better compliance, scalability, faster reporting, invoicing and billing, expense tracking, and budgeting and forecasting.
Show the model answer to Question 12
(a) Cost, the total cost of ownership; flexibility to amend and upgrade; type of processing, batch or real time; timing of processing; hardware and network requirements; reliability of the outputs; integration with other systems such as ERP and CRM; user processing requirements such as ease of use and functions.
(b)
- X: 400,000 + (3 × 150,000) + 100,000 = ₦950,000.
- Y: (3 × 240,000) + 50,000 = ₦770,000.
- Y is ₦180,000 cheaper.
(c) High set-up cost, with a budget for software, hardware and training.
Risk of data loss, with regular backups stored away from the main system. Dependence on technology, with a contingency plan for failures. Security threats such as hacking and phishing, with passwords, access rights and security software. Staff training needs, with training before use. Software that does not fit the industry, with a check before purchase.
Show the model answer to Question 13
(a) Any six: automated invoice generation, support for several currencies, customisable financial reports, document management, automated data validation, error correction, data analysis, payroll, inventory management, tax calculation and bank reconciliation. (b) Data validation checks entries as they are made, for example dates and numbers, and displays an error if they are invalid, so data stays accurate and consistent.
An audit trail logs changes automatically, so a reviewer can see what was changed, by whom and when, and trace and correct errors.
Pathfinder on Computerised accounting systems and accounting software
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
Asks you to explain the impact of digital technologies on accounting systems, focusing on machine learning and artificial intelligence, data analytics, mobile accounting and specialised accounting software. The last of these is covered here.
Revise first: Types of accounting package
Computerised accounting is a new syllabus item and no past diet asks for computerised accounting systems directly. Expect items on the benefits and limitations of computerised systems, the types of package, and the factors for choosing one. Check Section A of every diet you practise.
Revise first: Manual and computerised systems compared
Source: ICAN Pathfinder, Financial Accounting. Diets covered: May Diet, 2024. Computerised accounting is a new syllabus item and no past diet asks for computerised accounting systems directly. Diets before November 2014, and November Diet, 2024 onwards, are not covered here.
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