Technical Concepts in Accounting

Technical Concepts   

As now-a-days, almost all the Financial and Accounting Systems are computerized, it is necessary to understand how does it work?

1. Working of any software:

Front End & Back End

• Front End: It is part of the overall software which actually interacts with the user who is using the software.

• Back End – It is a part of the overall software which does not directly interact with the user, but interact with Front End only.

Working;

If a user wants to have some information from back end lets say balance sheet then it will be carried out in following manner;

• User will interact with front end and request front end to generate report.
• Front end will receive request from user and pass it on to back end.
• Back end will process the data, generate report and send it to front end. Front end now displays the data to user.

Why separate Front End and Back End Software? Why not only one?

Reasons are;

Front End and Back End;

Sr. No.	Reason	Software
1.	Domain Expertise	Front end software is meant for handling requests from users. Back end software is meant for storing and handling the data.
2.	Presentation	Front end software interacting with a user is meant for presenting information in proper format, different colors, bold, italic letters, tables, charts, etc.
3.	User Experience	Front end software should guide a user to the desired report or feature. Front end software handles processed data and not raw data like back end. User interface of the front-end software needs to be intuitive.
4.	Speed	Using single software for both the aspects would unnecessarily increase the load and slow down the speed. Separate back end software is used for handling data only. This reduces the load and increases speed of operations.
5.	Language	Front end speaks in the language understood by the user and understands language spoken by the Back end. Back end speaks in technical language not understood by a layman. Front end can speak in both languages those are user’s language and technical language.

Application Software

• Application software performs many functions such as receiving the inputs from the user, interprets the instructions and performs logical functions so a desired output is achieved.

• In most software, there are three layers which together form the application those are;

I) Application layer,

II) Operating system layer

III) Database layer.

This is called 3- Tier architecture.

1. Application layer: The application layer receives the inputs from the users and performs certain validations like, if the user is authorized to request the transaction.
2. Operating system layer: The operating system layer then carries these instructions and processes them using the data stored in the database and returns the results to the application layer.
3. Database layer: The database layer stores the data in a certain form.

👉NOTE: For a transaction to be completed all the three layers need to be invoked. Most application software is built on this model these days.

2. Installed Applications V/s Web Applications

1. Using Software :

These are the two ways of using a software including Financial & Accounting Software;

• Installed Applications are programs installed on the hard disc of the user’s computer.

• Web Applications are not installed on the hard disc of the user’s computer, it is installed on a web server and it is accessed using a browser and internet connection.

• Cloud-based Applications

•   Now a days various applications and other services are available on cloud which a user/client may avail on pay-per-usage basis.
• Organizations need not to install and manage complex IT systems instead host their applications on Internet and outsource the IT functions.
• Most common among them being SaaS – Software as a Service or IaaS – Infrastructure as a Service.

Advantages as well as disadvantages of both types of applications are:

Installed and Web Applications

Sr. no.	Particulars	Installed Application	Web Application
1.	Installation & Maintenance	As software is installed on hard disc of the computer used by user, it needs to be installed on every computer one by one. Updation of software takes a lot of time and effort.	As software is installed on only one computer, i.e. a web server, it need not be installed on each computer. Maintenance is done by vendor.
2.	Accessibility	As software is installed on the hard disc of the user’s computer, user needs to go the computer only, i.e. the computer where software is installed, to use the software. It cannot be used from any computer.	As software is not installed on the hard disc of user’s computer and it is used through browser and internet, it can be used from any computer in the world. Access to the software becomes very easy. Also, it can be used 24 x 7.
3.	Mobile Application	Using the software through mobile application is difficult in this case.	Using mobile application becomes very easy as data is available 24 x 7.
4.	Data Storage	Data is physically stored in the premises of the user, i.e. on the hard disc.	Data is not stored in the user’s server computer. It is tored on web server. Data ownership is defined in SLA.
5.	Data Security	As the data is in physical control   of the user, user shall have the full physical control over the data and he/she can ensure that it is not accessed without proper access.	Data security is a big challenge in case of web application as the data  is not in control of the user or owner of data. It is maintained on a web server.
6.	Performance	A well written installed application shall always be faster than web application, reason being data is picked from local server without internet.	As data is picked from web server using internet, speed of operation may be slower.
7.	Flexibility	Installed applications shall have more flexibility and controls as compared   to   web   application. In this CAPEX is high comparatively.	Cloud based applications allow flexibility against both CAPEX (Capital expenditure) and OPEX(Operational expenditure) to the user. Services can easily be scaled up and scaled down as per the need of user.

Types of Ledgers with Examples

In accounting there are three types of ledger accounts, i.e. Personal, Real and Nominal. But as far as Financial and Accounting Systems are concerned, ledgers may be classified in two types only, those are;

• Ledger having Debit Balance and ledger having Credit Balance

Types of Ledgers

Why Accounting software does not recognize any ledger as personal, real or nominal, instead it recognizes it as an Asset, Liability, Income or Expense Ledger?

• Basic objective of accounting software is to generate to two primary accounting reports, i.e. profit & loss Account and Balance Sheet. Income and expense ledgers are considered in profit & loss Account and Asset and liability ledgers are considered in Balance Sheet. Hence every ledger is classified in one of the four categories, i.e. Income, expense, Asset or liability.

• Difference between Total Income and Total expenses, i.e. profit or loss as the case may be, is taken to Balance Sheet. So everything in accounting software boils down to Balance Sheet. Balance Sheet is the last point in accounting process.

• Any ledger can be categorized in any one category only, i.e. Asset, liability, Income or Expense. It cannot be categorized in more than one category.

• Ledger grouping is used for preparation of reports, i.e. Balance Sheet and profit & loss Account.

Grouping of Ledgers

There are four basic groups in Accounting, i.e. Income, Expense, Asset, Liability.

 There may be any number of sub groups under these four basic groups. Grouping is important as this is way to tell software what is the nature of the ledger and where it is to be shown at the time of reporting.

Example: Cash ledger is an asset ledger and should be shown under current assets in Balance Sheet. If we group cash ledger under indirect expenses, it shall be displayed in profit and loss account as expenditure. Software cannot prevent incorrect grouping of ledger.

How Many Voucher Types

1. Voucher Types    

                Voucher;

• A voucher is a documentary evidence of a transaction.
• There may be different documentary evidences for different types of transactions.
• In computer language, the voucher is a place where transactions are recorded. It is a data input form for inputting transaction data.
• In some financial systems, instead of the word ‘Voucher’, the word ‘Document’ is used.
• In accounting, there may be different types of transactions; hence we use different voucher types for recording of different transactions.

Types of vouchers used in accounting:

Voucher Types;

Sr. No.	Voucher Type Name	Module	Use
1	Contra	Accounting	For recording of four types of transactions as under. Cash deposit in bank Cash withdrawal from bank Cash transfer from one location to another.Fund transfer from our one bank account to our own another bank account.
2	Payment	Accounting	For recording of all types of payments. Whenever the money is going out of business by any mode (cash/bank)
3	Receipt	Accounting	For recording of all types of receipts. Whenever money is being received into business from outside by any mode (cash/bank).
4	Journal	Accounting	For recording of all non-cash/bank transactions. E.g. Depreciation, (provision, Write-off, Write-back, discount given/received, (purchase/Sale of fixed assets on credit, etc.
5	Sales	Accounting	For recording all types of trading sales by any mode (cash/bank/credit).
6	Purchase	Accounting	For recording all types of trading purchase by any mode (cash/bank/credit).
7	Credit Note	Accounting	For   making       changes/corrections in already recorded sales/purchase transactions.
8	Debit Note	Accounting	For   making       changes/corrections in already recorded sales/purchase transactions.
9	Purchase Order	Inventory	For recording of a purchase order raised on a vendor.
10	Sales Order	Inventory	For recording of a sales order received from a customer.
11	Stock Journal	Inventory	For recording of physical movement of stock from one location to another.
12	Physical Stock	Inventory	For making corrections in stock after physical counting.
13	Delivery Note	Inventory	For recording of physical delivery of goods sold to a customer.
14	Receipt Note	Inventory	For recording of physical receipt of goods purchased from a vendor.
15	Memorandum	Accounting	For recording of transaction which will be in the system but will not affect the trial balance.
16	Attendance	Payroll	For recording of attendance of employees.
17	Payroll	Payroll	For salary calculations.

2. Voucher Number
   • A Voucher Number or a Document Number is a unique identity of any voucher/ document.
   • A voucher may be identified or searched using its unique voucher number.

Some peculiarities about voucher numbering;

• Voucher number must be unique.
• Every voucher type shall have a separate numbering series
• A voucher number may have prefix or suffix or both.
• All vouchers must be numbered serially, i.e. 1,2,3,4,5,6 and so on.
• All vouchers are recorded in chronological order and hence voucher recorded earlier must have an earlier number.

3. Accounting Flow:

            Accounting flow from the angle of software;

Flow of Accounting

Why Master and Non-Master Data?

Basic objective of accounting system is to record input in the form of transactions and generate output in the form of reports.

For example a transaction of capital introduction in business in cash 1,00,000 is recorded as;

Let us understand what is stored in the system;

Master Data	Non-Master Data
Voucher Type (i.e. Receipt Voucher in this case)	Voucher Number (i.e. 1 in this case)
Debit Ledger Name (i.e. Cash in this case)	Debit Ledger Amount (i.e. ` 1,00,000 in this case)
Credit Ledger Name (i.e. Capital in this case)	Credit Ledger Amount (i.e. ` 1,00,000 in this case)
	Date (i.e. 01st Apr. 2017 in this case)
	Narration

Points to be noted about master data;

I. Master data is generally not typed by the user, it is selected from the available list.
Example: Debit Ledger name.

II. Master data entry is usually done less frequently say once a year or when there is a need to update.
Example: – Agreed prices are updated in the Vendor master when new prices are negotiated.

III. While inputting the information, user is forced to select master data from the available list just to avoid confusion while preparing reports.
Example: – Same ledger name may be written differently.

IV. Master data is selected from the available list of masters (e.g. Ledgers) to maintain standardization as we need to collect all the transactions relating to one master data at one place for reporting.

Points to be noted about non master data:

I. Non-master data is typed by the user and not selected from available list as it is a non-permanent and it keeps on changing again and again.

II. Sometimes transactional data could also be selected from a drop down list of inputs available to the user.

Example: When a GRN (Goods receipt note) is created by the Stores/Warehouse personnel, they might only select the open purchase orders available in the system and input actual quantities received. In this case, many fields required to complete the transaction is pre-filled by the system and the user is not allowed to edit those fields.

Concepts in Computerized Accounting System

Some key concepts are;

1. Types of Data

Types of Data

Every accounting system store data in 2 ways;

1. Master Data is relatively permanent data not expected to change frequently.
2. Non-Master Data is non-permanent data and expected to change frequently.

1. Master Data:

• Master data is relatively permanent data that is not expected to change again and again.
• It may change, but not again and again.
• In accounting systems, there may be following four types of master data;

Types of Master Data in Accounting Systems;

👉NOTE: All business process modules must use common master data.

1. Non-Master Data:

It is a data which is expected to change frequently, again and again and not a permanent data.

Example:  Amounts recorded in each transaction shall be different every time and expected to change again and again.

Introduction to Generic System

A system may be automated as well as manual. How people sees a system may vary as per their requirements. It is the job of the financial and accounting system to cater to needs of all users.

Different perspectives from different Professionals Different Requirements from Different Persons;

Persons/Professionals	Perspectives/Requirements
Accountant’s view	Balance Sheet and profit & loss Account must be prepared easily without putting much time / efforts.
Auditor’s view	Balance Sheet and profit & loss Account must be correct at any point of time.
Business manager/Owner’s view	I need right information at right point of time for right decision making.

INTEGRATED (ERP) AND NON-INTEGRATED SYSTEMS

System

 “A set of principles or procedures per which something is done; an organized scheme or method”

or

“A set of things working together as parts of a mechanism or an interconnecting network; a complex whole”

or

“A set of detailed methods, procedures and routines created to carry out a specific activity, perform a duty, or solve a problem”.

All systems generally have:

• Inputs, outputs and feedback mechanisms,
• Maintain an internal steady-state despite a changing external environment,
• Have boundaries that are usually defined by the system observer.

Examples:

• Human body is natural and a complete system and is part of Eco System.
• Financial and accounting system

Process;

We can define process from two perspectives;

Definition: Process;
System engineering perspective	Business perspective
A Process is defined as a sequence of events that uses inputs to produce outputs.	A process is a coordinated and standardized flow of activities performed by people or machines, which can traverse functional or departmental boundaries to achieve a business objective and creates value for internal or external customers.