Use Of Accounting Software For A Manufacturing Unit

Significance of Accounting Software

Discuss about the Use of Accounting Software for a Manufacturing Unit.
 

It has become almost mandatory for every business organisation to have accounting software which can record the business transactions and carry out other important functions like invoicing, collection and disbursement of payments, stock valuation, and providing reports like profit and loss account, balance sheet to analyze the financial position of the business. There are many companies which provide accounting software according to the needs of the business. Some of them include Myob, QuickBooks, and Zero. A business may choose from the available options depending upon its business needs and the functionalities provided by the software.

A manufacturing firm is involved in production of goods which it sells to earn profits. The events in a manufacturing set up normally comprise of purchase of raw material, processing the material to convert it into a finished product. Next event is selling of the finished product. Apart from sale of goods, the payment to employees is another event. For carrying out the business transactions, a company needs finance, obtaining and paying for the loan is yet another event. For the Kiama based manufacturer of dairy products also above events will take place. In carrying out the above events, various economic transactions take place, some of which are mentioned below:

1. Purchase of raw material – for a dairy manufacturer, the raw material would be milk which will be purchased from a farm owning cows. The purchase may be made in cash or credit. Cash is paid for immediately and credit purchases are paid later as per the terms of credit.
2. Conversion of raw material into finished goods – the milk will be converted to yogurt and cheese. For this fermentation will be carried out on the milk. Before the product is finished, it may be in work in process inventory. Hence, the business needs to record the stock of the material at its cost using an appropriate stock valuation method. In this case, the manufacturer may stock the cheese.
3. Sale/return of finished products – once the product is manufactured, in this case cheese and yogurt, the manufacturer will sell these products. The transaction will be recorded in the accounting books with information like sales amount, name if the buyer. An invoice will be generated to be issued to the buyer. If the payment is not collected on the spot, a debtor’s account will be created and the payment whenever received will be recorded accordingly.
4. Payment of salaries/wages to employees – the company may pay the employees on a periodic basis. The company makes payment to the employees either through cash or check. In paying the staff, the firm deducts tax at source to be paid to the government; hence another transaction is to pay taxes to government.
5. Financing – the manufacturer may want to acquire a loan to finance its business transactions. Hence, receiving of cash, payment of interest and repayment of debt are various transactions that will take place for the event.
6. Purchase of assets – for carrying out the business activities, a firm will need assets like the dairy manufacturer will require equipments to convert milk into cheese.
7. Payment of tax – a manufacturer normally makes two types of tax payments. One is the tax on sale of goods and the other is the tax on behalf of employees deducted at source.

For recording the above transactions, a company may either depend on manual accounting or purchase accounting software which will help in recording the above transactions

Every transaction that takes place must be recognized, classified and documented. The entries should be recorded in a journal and the various accounts being affected by the transaction should be updated. All the journal entries should be posted in the various ledger accounts. At the end of the accounting period, a trial balance should be prepared with the help of ledger to see if the debit equals credit or not. Therefore with the help of trial balance financial statements like profit and loss account, balance sheet and statement of cash flows should be prepared.

Under manual accounting, the above accounting cycle is prepared by the employees on a period basis.

Under computerized accounting, only the recording of transactions needs to be done by employees i.e. entering the data and rest all the steps of accounting cycle like generating invoices, making of financial reports is automatically prepared by the software.

There are many advantages of accounting software over manual book keeping some of which are discussed below:

1. Speed and Accuracy – accounting software is faster as far as entering information is concerned. The built in database of suppliers and customers helps in quick data entry. There is more accuracy as there is only one entry required per transaction whereas in manual accounting two to three entries are made for each transaction.
2. Automatic document production – documents like invoices, purchase orders, credit notes, payroll documents are all done automatically in the accounting software whereas in manual accounting, separate print outs have to be taken for each document. (Weber, NA)
3. Real time information – an accounting software helps in providing information real time i.e. it can create reports before the accounting period so that the current financial position can be determined. Under manual accounting, reports are prepared at the end of the accounting period. Also the information can be made available to different users at the same time which is not possible with manual accounting.
4. Management information – various useful reports are produced by accounting software which are useful to the managers in monitoring and controlling business. Important reports include financial statements, debtors and creditors ageing, stock valuation report etc. these reports have to be prepared manually under manual accounting which is very time consuming. (Hadler, NA)
5. Cost savings – there are cost savings in terms of staff, audit expenses as records are neat and up to date.
6. Efficiency – use of accounting software increases efficiency as better inventory control and debt collection reports help in improving cash flow. Also time and resources wasted in recording all entries is avoided.
7. GST/VAT return – the software creates automatic figures of GST and VAT returns based on the accounting transactions so no time is wasted whereas under manual accounting, tax figures need to be calculated manually.

(Opentuition, 2016), (Meall, 2010) 

When a company makes sales, there are a series of transactions that take place. Based on these transactions, the journal entries are recorded in the accounting software. So when the dairy manufacturer makes sales, the following transactions cycle will take place:

• Creating sales order – when there is sale of any item like cheese or yogurt, a sales order is created in the accounting software. The customer is located on the software and a sales order is created by entering the quantity and delivery date and any applicable GST and customer’s ABN is automatically updated.

The Sales Order Functionality helps to Track the Merchandise that has been Delivered and How Much is Left to be Delivered.

• Converting sales order to sales invoice – the sales order is converted into sales invoice at the time of delivery of sales merchandise. Only when sales invoice is created, the sales journal entries are posted in the respective ledgers. The customer account balance is automatically updated.
• Recording credit sales – if the sale is on credit, the credit sales invoice is created in the software.
• Recording part cash and part credit sales – the total sales is recorded in the sales item and then a cash receipt is recorded separately receipts payments window.
• Collection of accounts receivable – after a credit sale is made, next step in the cycle is to receive the money. There are two steps in this process:

1. Recording the receipt of money received from the customer
2. Recording the deposit of money in the bank account

• Sales returns – sales may be returned by the customer. This is recorded in the software in two steps:

1. First a credit note is created by creating a negative invoice
2. Then the credit note is applied to an existing invoice

(Perdisco, 2016)

In today’s world, most of the business organisations have switched over to electronic software as using manual set of accounts poses risks and costs for a business. One of the greatest risks is loss of books of accounts due to fire or theft. If the records are lost, the business may go for a toss. Also it is very time consuming and there are great chances of human error. In electronic accounting, accuracy is higher as all records can be pulled from the software itself. Manual accounting becomes tedious as it is a routine work and may get boring.

Hence it is advisable to use accounting software which has a cost to it but the advantages derived are more than the costs and hence is recommended. 

References 

Weber, A, (NA), Manual Accounting Versus Computerized Accounting, accessed online on 21^st July, 2016, available at https://www.experience.com/alumnus/article?channel_id=accounting&source_page=breaking_in&article_id=article_1173385201144

Hadler, G., (NA), The Advantages of using Computerised Accounting Software,  accessed online on 21^st July, 2016, available at, https://www.itseducation.asia/computerized-accounting.htm

Perdisco, (2016), Sales Command Centre, Myob Learning Centre, accessed online on 21st July, 2016, available at, https://www.perdisco.com/au/myobLearning/sales/

openTuition.com, (2016), Types of Business Transactions and Documentation, accessed online on 21^st July, 2016, available at, https://opentuition.com/fia/fa1/types-of-business-transactions/

Meall, L., (2010), Online Accounting Software, Chartec Software Product Guide, Information Technology Faculty, ICAEW