Electronic Accounting System In Retail Business - Essay Example

Electric Accounting System Accounting is an important part of any business venture. It allows for the communication of the financial information of the business units to the users such as the managers and the shareholders. It allows for the greater understanding of the functioning of a company, and helps manage the resources in a better manner through the systematic management of the revenues and the expenditure of the organization. In the following paper there shall be conducted a detailed discussion on the changes that have been experienced in the accounting system of a retail business in the wake of the adoption of the electronic method of accounting as opposed to the paper accounting of the inventory. The study of the market has reflected that the changes in the technological sector have affected the functioning of the businesses. With the advancement of the technology in the late 20th and the early 21st century, the industries have been observed to have become more dependent on technological functioning (Kalpan, Johnson, 1987). One of the many changes has been in the accounting sector, where there has been observed a noticeable shift from the use of paper to the use of calculators and other such technologies for maintenance of the accounts of an organization. The accounting that has today emerged is seen to have followed the basic principles of accounting that have been established by the state. This is considered to ensure that the accounting of the finances of a company is carried out in a transparent method. The principle of accounting that is followed by a retail business is the GAAP. GAAP is the General Accepted Accounting Principles, which are the ?standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements.? These look at the inventory management of the retail business (Takatera, S, 1962). It can be based on the first in first out or the last in first out principle based on the choice of the principle (Carruthers, Bruce G., & Espeland, Wendy Nelson 1991). This helps ensure that the accounting is carried out in a more organized manner. The first widgets you bring into inventory will be the first ones sold as product. A ?widget? is an imaginary item that could be just about any product First in, first out, or FIFO as it is commonly referred to, is based on the principle that most businesses tend to sell the first goods that come into inventory. Last in first out is more commonly referred to as LIFO, and is based on the assumption that the most recent units purchased will be the first units sold. The advantage of last in, first out accounting, or LIFO, is that typically the last widgets purchased were purchased at the highest price and that by considering the highest priced items to be sold first, a business is able to reduce its short-term profit, and hence, taxes. The accounting that is carried out in a retail business is a very difficult process, as the books have to be maintained on a daily basis, and these have to be tallied at the end of each day to ensure that they balance out. This process is made all the more complicated in the cases of retail businesses that provide a wide range of products as the accounting then has to process various groups at the same time. Due to this problem, most of the businesses today try to ensure that the accounting is maintained on the basis of the different departments so that the whole process is more efficiently carried out. Although this allows for better compartmentalization and efficiency, it makes the whole process of accounting lengthier. Thus, all these concerns need to be accommodated in the accounting system of a retail business. Before the electronic method of accounting is analyzed, there has to be established a better understanding of the inventory accounting that existed prior to the electronic system. The system that was in place today is different from the system that existed earlier. The former system made no use of technology and based completely on the manual method of calculation. This method made use of the manual accounting of the various items that were bought in. These were categorized and then recorded manually, and all sales were then recorded on the basis of the sales. These books were maintained on a daily basis and the records were balanced out either on a weekly or a monthly basis depending upon the size of the organizations. The entire process required the input of a lot of human labor. The process of calculations, accounting and book keeping was more difficult and lengthy. The coming of the electronic methods of accounting has made a significant difference to the system of accounting. The entire process is today more dependent on technological input and the human labor has been decreased to a large extent. These include the simplest of technology such as the calculator, to the latest software that has been developed such as the Peachtree Complete Accounting. The electronic method of accounting calls for the figures of the expenditure and the revenues to be credited directly to the computer. This is highly efficient and has led to the simplification of the entire process of accounting. There are many advantages of the electronic method of accounting. The first and perhaps the most important advantage of the system is that it is highly efficient. It reduces the margin or error to a minimum. The electronic method of accounting is based on the usage of machines and softwares for accounting and calculating and reduces the human effort in the process to a minimal. This allows for better clarity in the system, and there is a reduced chance of error (Lee, Geoffrey A, 1977). For example, in the case of calculations, the accountant may make some mistakes in the addition and subtractions of the huge figures but in case of the electronic method this danger is eliminated from the system Human factor cannot be free of error at all times, but in the case of the electronic method of accounting, the results are without error at all times. Another important advantage of the electronic method of accounting is that it is more cost effective. The earlier method of inventory required a large amount of human effort and labor, but the new method is more efficient. The method has an initial investment involved, but after that it can be manually controlled by one or two individual. But in case of a retail business, especially large ones, there had to be an accountant or more employed to keep the books. The cost of employing an accountant is reduced in this method. The third advantage of the system is that it is more time efficient, and can provide information without much time. It can be utilized and updated on a daily basis, and the electronic method provides for better time management. This is of great importance especially given the current market trends of competitiveness (Leigh M, 2007). The earlier process is more time consuming while the software system can process data at a much faster rate. The new method also helps in better management and allows for a more economic planning process to be adopted. The electronic system makes the entire process of retailing more transparent and this allows for greater understanding of the functioning of the organization. The data can be easily accessed under this system and through the analysis of the data the management of the organization can be carried out in a more economic and efficient manner in accordance to the needs of the system. Finally, the advantage of the system also lies in the fact that the softwares that are today being developed are highly advanced (Business-Commerce-Trade, 2010, Online). The softwares are developed in regards to specific businesses. Thus, the retail business can adopt the software that has been developed in relation of retail accounting to make the process more accurate and efficient. Given the above advantages, the review of the electronic counting system also points out to certain disadvantages in the system. The first important disadvantage of the system is that it is devoid of human discretion. It can only analyze the provided information, but the data analysis has to be carried out by the human factor. Another important disadvantage of the system is that the cost of setting up the system is high. There has to be installed the hardware and then the software. Also there is also the additional cost of energy usage and electricity dues are added to the financial burden of the organization (Ziegenfuss, D, 2000). The most important disadvantage of the system is that the system leaves the organization open to the risk of loss of data, in case of a collapse of the system or software due to viruses or other reasons. Also e accounting has left companies vulnerable to the risk of hacking and stealing online. These disadvantages are a real threat in the market today. But there has to be realized that even with the given risk, the advantages of the electronic system far out weight the disadvantages of the system. This fact is only reinstated by the reality that the numbers of organizations that are adopting this method of accounting are growing everyday in the market. Thus, the electronic method of accounting is highly effective in the management of the books of a retail business. Reference: Business-Commerce-Trade, 2010, Online, Why shift to Accounting Software?, accessed at http://businessvn.net/2010/03/why-shift-to-accounting-software/ on June 15, 2010 Carruthers, Bruce G., & Espeland, Wendy Nelson 1991,?Accounting for Rationality: Double-Entry Bookkeeping and the Rhetoric of Economic Rationality, American Journal of Sociology, Vol. 97, No. 1, July 1991, pp. 37 Lee, Geoffrey A, 1977,?The Coming of Age of Double Entry: The Giovanni Farolfi Ledger of 1299-1300, Accounting Historians Journal, Vol. 4, No. 2, 1977 p.80 Leigh M, 2007, Electric accounting in today?s world, Business and Finance, accessed on June 15, 2010 at http://www.associatedcontent.com/article/247316/electronic_accounting_in_todays_world.html?cat=3 Kalpan, Johnson, 1987, Relevance Lost, Harvard Business School, Harvard Publication, pp 126-128 Takatera, S, 1962,?Early experiences of the British balance sheet, Kyoto University,?Economic Review, Vol. 83, October 1962, p.37-38, 41, 44-45 Ziegenfuss, D, 2000, Looking at what influences ethical perception and judgment, [Electronic Version], Management Accounting Quarterly, Vol 19, pp 41-47 Read More