Four Phases of the Accounting Cycle
There are four main phases of accounting that will be reviewed within the framework of this paper. The first stage is recording. This phase delineates all the activities related to the process of documenting all the available financial information and entering it into the database of the company. These accounting records can be used for different activities as they include an array of various variables and values (including the budget of the company in addition to its business plans, taxes, and financial statements).
Without this particular phase of accounting, the process of determining the monetary outlays would become problematic. The process of recording monetary information can be met in two different environments – business and personal. It is during the recording stage where the accountant has the possibility to divide the existing transactions into categories. In the future, this information will be used for tax purposes as their correct management may save a lot of resources for the company.
The second phase is called classification. Throughout this stage, the accountant determines the amount of expenditures and the number of transactions that were completed over a certain period of time. They need it to be able to categorize the existing data correctly. This accounting phase may help the accountant to perform necessary deductions at the end of the fiscal year. The third phase is summarizing the information. Right after the first two stages, the accountant has to pay close attention to summarizing the information in the approved manner. In order to do that, they go through the numerous sheets (either digital or paper) of information that contain the data regarding all the fiscal operations of the company.
During this phase, the accountant can find out the overall amount of expenditures, salaries paid, annual/ monthly savings, and much more. This stage is necessary to facilitate the next accounting phase. The fourth stage of the accounting cycle is the interpretation of the data. This stage is crucial because it is the only way to identify any possible or applied changes that either impacted the company or are going to do so in the future. This phase provides the accountant with the possibility to predict the financial future of the company as well. A correct interpretation of the available data is necessary if the company wants to organize its budget better and save money to purchase innovative equipment or evaluate stock information.
Benefits of a Computerized System
There are several benefits of a computerized system that significantly contribute to its efficiency throughout each of the stages outlined within the framework of the previous subsection of the paper. The very first advantage of computerized systems is the ability to record data at high speeds without the loss of precision. This claim can be rationalized by the idea that they can enter the data into the system much quicker than their conventional analogs.
Another advantage of the computerized systems is that they are equipped with a built-in error detection mechanism by default. Nonetheless, it has to be mentioned that in some cases, it may be better to perform a manual cross-check. The importance of a computerized system cannot be underestimated when it comes to recording information. Second, there is the stage of summarizing the data. Here, the users of computerized accounting systems can significantly benefit because of the possibility to create reports that pull all the required information from the database entries and create a brief excerpt. At this stage, computerized accounting saves a lot of time for the person that deals with accounting at the company.
Despite the ability to summarize the data programmatically, the accountant may want to go through the records manually so as to gain more insight into the financial operations that were performed during a certain period of time. The stage of summarizing data can be significantly facilitated by means of computerized accounting. Third, there is the stage of classifying the available data.
At this stage, computerized accounting systems may be rather useful because they allow the end user to manipulate the excerpts created throughout the previous stage. The key advantage of a computerized accounting system when it comes to classifying the data is its ability to compile the information almost at the same time as the request is sent to the program. If we compare a computerized system to its manual counterpart, we will see that the latter may take a lot of time in terms of locating the necessary data and compiling it correctly.
Fourth, there is the interpreting stage. Throughout this phase, manual accounting systems cannot compete with their digital rivals because this accounting stage is the most resource-intensive out of all four. Here, the use of manual accounting systems will slow down the process of completing the task and may have a confusing effect on the accountant who is responsible for interpreting the data. If necessary, both computerized and manual accounting systems can be combined but it is not recommended.
References
Gilbertson, C. B., Lehman, M. W., & Ross, K. E. (2014). Fundamentals of accounting. Mason, OH: South-Western.
Ng, P. (2014). 21st century computer solutions: A manual accounting simulation. Bloomington, IN: Authorhouse.
Wang, X. (2015). Financial management in the public sector: Tools, applications, and cases. Abingdon, UK: Routledge.
Weygandt, J. J., Kieso, D. E., Kimmel, P. D., Trenholm, B., Warren, V., & Novak, L. (2016). Accounting principles (12th ed.). Toronto, ON: John Wiley & Sons Canada.