ERP - Background and motives
We already mentioned that ERP systems started by converting large piles of papers that accountants, along with financial managers, used to track a company’s business processes into software modules capable of achieving the same using minimal effort and data entry. These software modules are somehow integrated in a way that minimizes data duplication, and thus they are able to generate accounting journals (An accounting journal typically consists of a number of journal entries that describe a business transaction in a specific sequence) and produce large amounts of unique reports that help give insights into the business operations and how it is performing. This is ideally the financial manager’s responsibility along with the company’s accountants.
A financial manager is responsible for the financial health of an organization. He produces financial reports, and develops strategies and plans for the long-term financial goals of an organization.
We also mentioned how valuable it is to minimize the number of entries and how it reflects when trying to correct wrong entries. We entered the entry once and, therefore, we are required to only correct that one entry and it reflects everywhere else by reading the corrected entry. This is contrary to when it was a lot of papers with one entry entered many times and therefore had to be corrected in every single place it was entered. The process used to be a bit daunting. Now it is almost instantaneous.
One of the valuable assets a good software piece provides to an enterprise is dynamic integration between ERP modules and how they collaborate towards achieving what the accounting team needs accomplished.
In a period of time after manual accounting systems were ditched and before ERP software reached its current form, ERP modules had no form of integration. That meant the software was able to reduce data entry in addition to many other advantages, but entries had to be entered everywhere in the required modules. For example, a transaction to transform funds from “treasury A” to “treasury B” had to be entred in the treasury module and the accounting module (also known as the general ledger).
Now with dynamic integration between these two modules, an accountant has to transfer funds in the treasury module, and the software will generate the journal entries required on its own. These journal entries will reflect automatically in the accounting module in the form of ‘posted journal entries’. We see how that form of integration between ERP modules is able to make things easier, so accountants and financial managers are not strained by unnecessary hassles that will get in the way of their productivity.
Still, manual accounting systems are used by small businesses, as they have lower upfront cost, less than complex accounting software, and are relatively easy to use for tech-inexperienced employees. New or small businesses may not have many financial entries to make and, therefore, their accounting needs are simple, so they may not be able to utilize most of the benefits an ERP system provides. As long as the person in charge of manually keeping the financial records knows what he or she is doing, it can be just as accurate as a computerized accounting system.
However, this comes at a great cost. Accounting, for any business, can be a complex undertaking if not properly understood. A manual accounting system requires deep understanding of the accounting process in a way that may be unnecessary with a computerized accounting system, an ERP system in this case. Unraveling the complexity of financial records by hand is time consuming even when understood. Human errors may get into play when it comes to inaccurate financial records; there is no doubt manual accounting is tiresome and tedious. This causes bookkeepers to make mistakes as a result. Additionally, records are only available in paper format, which may cause issues if they are lost, stolen, or damaged.
Now that we value how ERP systems make our lives easier, let’s delve into one of these building blocks of an ERP system and that is the accounting module, also known as the general ledger.