International Journal of Technical Research(IJTR) Vol.

2, Issue 1, Mar-Apr 2013

E-Accounting Practices of SMEs in India

Aradhana Relhan aradhaname@gmail.com Abstract
The Accounting Act of 1997 and further guidelines issued by the Accounting Board in 2000 provide an institutional setting for the use of electronic data media in financial accounting for registering, transferring and storing data as well as reporting information electronically. Thus, source documents and accounting records exist in digital form instead of on paper in an electronic accounting system. E-Accounting is new development in field of accounting. E-Accounting might just be the beginning of a new era where world would be extending its arms to India with perspective that "India is the place which can deliver the best. So e-Accounting has visited India with a rainbow of opportunities. Online accounting through a web application is typically based on a simple monthly charge and zero-administration approach to help businesses concentrate on core activities and avoid the hidden costs associated with traditional accounting software such as installation, upgrades, exchanging data files, backup and disaster recovery. The original research model developed by Iacovou et al. (1995:467) was based on extensive review of the literature on EDI (Electronic Data Interchange) adoption and small business IT. This exploratory research will try to further the understanding of the factors influencing small and medium-sized accounting agencies to adopt e-accounting as well as study the impact of e-accounting in agencies that have adopted e-accounting. The research model includes four factors as determinants of adoption: perceived benefits, organizational readiness, trust, and external pressure. The results will be analyzed ISSN 2278-5787 statistically. Case studies among adopters will be conducted in order to further identify and analyze the actual benefits received, and the impact e-accounting seems to have on accounting procedures and practices.

E-Accounting Practices of SMEs in India

This study explores the e-accounting practices among SMEs in India. The study also looks at the expectations, realities and barriers in adopting e-accounting. The research design is based on a survey methodology using a sample of systematically selected SMEs throughout the country. The findings reveal that SMEs put in place accounting software to generate their financial information. The main value of this paper is the discussion of e-accounting practices of SMEs in India.
INTRODUCTION

The Accounting Act of 1997 and further guidelines issued by the Accounting Board in 2000 provide an institutional setting for the use of electronic data media in financial accounting for registering, transferring and storing data as well as reporting information electronically. Thus, source documents and accounting records exist in digital form instead of on paper in an electronic accounting system. This exploratory research will try to further the understanding of the factors influencing small and medium-sized accounting agencies to adopt e-accounting as well as study the impact of e-accounting in agencies that have adopted e-accounting. Accounting plays a critical role in the success or failure of contemporary business institutions. Accounting systems are Page 1

International Journal of Technical Research(IJTR) Vol. 2, Issue 1, Mar-Apr 2013

responsible for recording, analyzing, monitoring and evaluating the financial condition of companies, preparation of documents necessary for tax purposes, providing information support to many other organizational functions, and so on. Prior to the advent of personal computers, businesses were limited to manual methods for keeping track of financial data. According to Tavakolian (1995), the manual accounting systems consisted of paper ledgers, typewriters and calculators. Typewriters were used to type invoices and cheques, and all calculations were performed using calculators. However, with this system it was possible for errors to be introduced into the data since they could go undetected for quite some time. Like many other industries, the accounting industry changed with the arrival of personal computers. A computerized accounting system is able to handle financial data efficiently, but the true value of an accounting system was that it was able to generate immediate reports regarding the company. What is therefore e- accounting practice? E-Accounting refers to Electronic Accounting, a term used to describe an accounting system that relies on computer technology for capturing and processing financial data in organizations. In the literature, two more terms have been used to describe E- accounting: computer-based Accounting System and Accounting Information System (AIS). Stefanou (2006) observed that although accounting information system does not require a computer to function, the computerization of the accounting function, the term AIS is used primarily to denote the computer-based AIS. In this study the terms E Accounting and financial information system are used to refer to any accounting system that depends on Information and Communication Technology (ICT) for performing its information system functions. Unlike other information systems, Accounting was one of the first functional ISSN 2278-5787

areas to benefit from computerization when computers were initially introduced to organizations (Doost, 1999). The rest of the paper is structured as follows: Section two discusses the extant literature. Section three describes the methodology used. Section four discusses the results of the study and finally section fives concludes the study. Features of E accounting:-E-accounting can be recognized by the following characteristics which all make for a much more efficient accounting process. 1 .Multi-user access 2. Multi-site access 3 .A single / multiple, shared database(s) 4 .Zero system administration for endusers 5. Very economical to provide service to large number of clients 6. Enhancements and fixes continuously developed and installed by service provider LITERATURE REVIEW:-Challenges facing the financial accounting and the accounting profession have been discussed among researchers (see for example Alles et al. 2000; Olivier 2000; Sutton 2000; Vasarhelyi & Greenstein 2003). There seems, however, to be a number of concepts used in the literature relating to the use of technology in financial accounting. Rezaee et al. (2000 and 2001) write: Many economic events are now being captured, measured, recognized, and reported electronically, without any paper documentation; and online, realtime accounting (RTA) is emerging as the system of choice. Under real-time accounting (RTA) systems, much of the financial information and audit evidence are available only in electronic form. Traditional source documents such as Page 2

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purchase orders, invoices, and checks are replaced with electronic messages, and underlying accounting data (e g. journals, ledgers, and schedules) are in electronic forms or files. Accounting systems are responsible for analyzing and monitoring the financial condition of firms, preparation of documents necessary for tax purposes, providing information to support the many other organizational functions such as production, marketing, human resource management, and strategic planning. Without such a system it will be very difficult for SMEs to determine performance, identify customer and supplier account balances and forecast future performance of the organisation. The primary purpose of an accounting information system (AIS) is the collection and recording of data and information regarding events that have an economic impact upon organisations and the maintenance, processing and communication of such information to internal and external stakeholders (Stefanou, 2006). When organizations adopt eaccounting, they usually discover that even though computerized accounting systems handle financial data efficiently, their true value is that they are able to generate immediate reports regarding the organization (Hotch, 1992). Prior to the advent of personal computers, businesses were limited to two methods for keeping track of financial data (Tavakolian, 1995). One method was to install a mainframe computer and set up a data processing department. This approach had its own difficulties: the mainframe computer was expensive and many qualified ICT personnel were required to handle the various tasks involved in processing the accounting data. In most cases, large

corporations were the only organizations that could afford such an expensive system. The other option was to have a manual accounting system. Such a system consisted of paper ledgers, typewriters and calculators. Each customer or vendor was on a separate ledger card which contained all the transactions for that company. Typewriters were used to type invoices and cheques, and all calculations were performed using calculators. The key drawback of the manual system was that it was possible for errors to be introduced into the system and that the error could go undetected for quite some time RESEARCH METHODOLOGY This study relied on a sample of systematically selected SMEs throughout the country. We sampled 100 SMEs from the NBSSI database. SMEs in India are defined as firms employing less than 100 workers. Out of the 100 questionnaire sent out, 56 were received, representing 56%. The resulting response rate was expected for a survey of this type considering that empirical studies involving SMEs have been known to generate far lesser percentage response rates. The sample included both users and non users of e-accounting systems. The survey instruments included open ended and closed ended questionnaires. We also followed up with personal or telephone interviews with managers of these firms. In order to ascertain the benefits of e-accounting, we focused on SMEs that adopt accounting software in their operations. Users of accounting software were selected from the cliental lists of some accounting software application providers.

RESEARCH MODEL An examination of prior research on the adoption of EDI was taken as a starting point for this study. The examination reveals that the original research model developed by Iacovou et al. (1995:467) was based on extensive review of the literature on EDI (Electronic Data Interchange) adoption and small business IT. The Iacovou et al. (1995) model has also been empirically tested ISSN 2278-5787 Page 3

International Journal of Technical Research(IJTR) Vol. 2, Issue 1, Mar-Apr 2013

and the determinants were found to be significant predictors of intent to adopt EDI (Chwelos et al. 2001). The researchers identified three factors - perceived benefits of EDI, organizational readiness, and external pressures - as the main reasons that could explain the EDI adoption behavior of small firms and the expected impact of the technology. Of these factors external pressure and readiness were considerably more important than perceived benefits.

Readiness Perceived Benefits

Trust

External Pressure

Adoption & Integration Of e-accounting

Impact of E-accounting

E-accounting Adoption Model

1. Perceived benefits refer to the level of recognition of the relative advantage that EDI technology can provide the organisation (Iacovou et al. 1995:468). These benefits can, according to the researchers, be grouped into direct benefits, for example reduced transaction costs and higher information quality, and indirect benefits or opportunities, which refer to the impact on business processes and relationships, for example increased operational efficiency, better customer service, and increased ability to compete. 2. Organizational readiness refers to the level of financial and technological resources of the firm. Further, financial readiness refers to financial resources available to pay for installation costs, implementation of any subsequent enhancements, and ongoing expenses during usage whereas technological readiness is concerned with the level of sophistication of IT usage and IT management in an organization (Iacovou et al. 1995:468-469). 3. External pressure to adopt refers to influences from the organizational environment. The two main sources of external pressure to adopt are competitive pressure and the imposition by trading partners. As more competitors and trading partners become EDIcapable, small firms are more inclined to adopt EDI in order to maintain their own competitive position (Iacovou et al. 1995:470). 4. Trust between the small and medium-sized accounting agency and the client is considered to be an important factor for the adoption of an e-accounting system, and for the further integration of the system as well as information sharing. Continuity with the same clients increases the likelihood of building a trustful relationship

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EDI Adoption is the process during which the small business becomes capable of transacting via EDI. EDI integration is the phase during which a firm alters its business practices and applications so that they interface with its EDI applications internally with other applications and externally with other trading partners. Adoption and integration can also be undertaken at the same time (Iacovou et al. 1995:468). The adoption of EDI requires coordination between at least two organisations, the relationship between the organisation and its prospective trading partner(s). A similar cooperation is assumed to be needed in an interorganisational e-accounting system between the accounting agency and its client(s). E-accounting is, as such, an example of a technology with network effects. Thus, the actions of one firm will depend on other firms. This kind of collective actions and technology have been studied within a number of disciplins, for example the study of Bouchard (1993) about critical mass theory. The positive benefits of having a critical mass of firms adopting the same technology is however only one aspect. Another significant factor is enacted power, such as when one firm encourages the other one to adopt e-accounting According to the Accounting Board (2000) the use of automation will lead to a more efficient and reliable accounting as well as reduce the costs of accounting. These are, however, only perceived benefits and the obtained benefits might differ. As the benefits of an e-accounting system are not widely known or visible, it feels useful and interesting to make a further investigation on this subject. Also, the perceived benefits of non-adopters and adopters of eaccounting may differ, as the non-adopters are expected to describe what they think will be the future, potential benefits, but the adopters are assumed to be more precise about the actual benefits ANALYSIS OF RESULTS TABLE 1 CHARACTERISTICS OF SAMPLED FIRMS Frequency Percentage Size
Micro Small Medium 6 18 32 10 4 42 36 4 6 21 9 3 5 10 31 59 17 7 76 79 8 13 40 15 5 9

Firm Sole-proprietor Partnership Limited Liability Company Gender

Male Female both

Industry Manufacturing Agriculture Construction & Mining Hotel & Hospitality ISSN 2278-5787

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Information Technology Medical Services Wholesale & Retail Trade General Services

3 4 9 2

5 7 16 3

Table 1 presents the characteristics of the firms based on, size, form, ownership, and gender and industry classifications. On the size classifications, the firms were grouped as: micro representing 10% of valid respondents, small (31%) and medium (59%). The form of business organization was also identified: Sole proprietorships were made up of 17% of the total respondent firms, 7% of the valid respondent firms were organized as partnership and the remaining 76% were organized as limited liability companies. Majority (79%) of the firms were male owned. Eight industries were identified and they are agriculture, representing 15% of valid respondents, manufacturing (40%), mining and construction (5%), wholesale and retail trade (16%), hotel and hospitality (9%), information technology (5%), medical service (7%) and general services (3%).Corollary to the above is to assess the country of the art of e-accounting systems use among SMEs in India. TABLE 2 STATUS OF COMPUTER USAGE Use of computers in Respondents Percentage operations Yes 54 97 No 2 3 Total 56 100 Use of accounting softwares in operation Yes 56 100 No 0 0 Total 56 100 Kinds of accounting softwares Pastel 7 13 Sun business systems 6 11 Tally 13 23 Sage 5 8 Excel 14 25 QuickBooks 4 7 Others 7 13 Total 56 100 Platform Network 33 59 Standalone 16 28 Peer-to-peer 7 13 Total 56 100

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The results as indicated in Table 2 suggest that almost all the respondents use computers in their operations and that all SMEs contacted use accounting softwares in their operations. This implies that majority of SMEs in India have adopted e-accounting systems. The result of this study showed that Pastel, Sun business System, Tally, Sage, Excel and QuickBooks are the kinds of accounting softwares that SMEs have adopted. The result reveaded that majority of the SMEs (25%) are interested in excel based accounting system while 9% preferred the use of Sage accounting software. However, a study is needed to investigate how firm-level characteristics influence the adoption of e-accounting system. On platform of the accounting usage, majority of the respondents have some form of network. While 59% use network, 13% adopt peer-to-peer
platform. Sixteen, representing 28% adopt standalone system.

TABLE 3 GOALS OF IMPLEMENTING COMPUTERISED SYSTEMS Benefits Timely information management Large storage capacity Reduction of clerical works Cost effectiveness All the above Total Functionality Account receivables Account payables Inventory management Pay roll General ledger Fixed assets management Bank reconciliation and cash management All the above Total Performance Very satisfied Somewhat satisfied Somewhat dissatisfied Very dissatisfied Total Respondents Percentage 5 8 2 4 3 5 2 4 44 79 56 100 Respondents Percentage 2 4 2 4 2 4 2 4 3 5 1 2 2 2 42 75 56 100 Respondents Percentage 22 39 25 45 6 11 3 5 56 100

Table 3 shows the goals for implementing computerised accounting systems among SMEs in India. Out of 56 SMEs who use computers in their operations, 44 representing 79% of the respondents reiterated that the use of computer enables them to reduce cost, enhance clerical works, provide sufficient space to store data and process information for management decision. Two (4%) indicate that the use of computer has enabled them to effectively manage their cost of ISSN 2278-5787 Page 7

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operation, 5% mentioned that their computer usage reduces clerical works, 4% use computer to facilitate storage of data while 8% of the respondents use computers to provide timely management information for decision making. With regard to accounting and finance functions of accounting software, almost all the respondents indicated that they use the software for accounts receivables functions as well as accounts payables, inventory management, payroll, general ledger, fixed assets management, bank reconciliation and cash management. Eighty four percent of the SMEs are satisfied with the performance of their accounting software. It is only small number of the firms selected who were not very satisfied with the results of their accounting software. TABLE 4 PROBLEMS AND CHALLENGES OF IMPLEMENTING COMPUTERISED SYSTEMS Problems Respondents Percentage Inaccuracy of reports 1 2 Frequent breakdown of the system 14 25 Inability of the system to support large volume of 6 11 data Lack of constant supply of electricity 21 38 Inability to import or / and export data 5 9 Inability to fully comprehend and interpret the results 4 7 All the above 5 8 56 100 Total Table 4 shows With the issue of the benefits of computerized accounting information in mind, a question was designed to explore the significance, prevalence and potential problems and challenges inherent in most Indian SMEs. The survey result shows that majority of the respondents encounter problems in supply of electricity as 38% of the respondents say they have problems in accessing uninterrupted supply of power. The result shows that 25% of the SMEs contacted indicated that frequent breakdown of their accounting system is their next biggest problem. However, only 5 firms representing 8% indicated that they face all the problems listed. These include, inaccurate reports generated by the accounting systems, frequent breakdown of the system, inability of the system to support large volumes of data, lack of constant supply of power, inability to import or / and export data, and inability to fully comprehend and interpret the results from the system.

TABLE 5 WAYS OF IMPROVING THE SYSTEM Ways of improving the system The needs to be easier for updates Multiple window operations at the same time The need to use the firm logo on the invoice within the system Customisation of report ISSN 2278-5787 Respondents Percentage 2 4 2 4 2 4 1 1 Page 8

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All the above Total

49 56

87 100

Table 5 shows how SMEs can manage and improve upon their accounting systems. Almost all the respondents contacted suggest that the system should be easier to up-date, the use of multiple window operations at the same time should be encouraged and the need to use the firm logo on the invoice within the system should be included in the package. In addition, customisation of report will solve the problem of the inability of the SMEs to fully comprehend and interpret the results generated from the system. Problems in e-accounting:-1 .Data security All the data of the company resides on a remote server: however, a back up can be taken regularly. 2 .Speed Most of the currently available online office suites require a high broadband Internet connection. 3. Lacks some features available on the offline office suites: but this is progressively becoming available (MS LIVE, Google online-Suite, Think free, Zoho Office, internet Office. Biz and eDesk Online) 4 .A network connections (usually Internet access) is required to send and receive changes. That is, internet dependence makes it more difficult to work offline. From above criticisms, it can be said that today, where information can be compromised and distributed, global firms need to be cent-percent assured that their information is safe and are being safeguarded from identity theft. Being professionals, Indian Chartered Accountants should be absolutely confident about the work process, ensure service integrity, observe professional ethics and generate trust and Confidence in the client for striking a lasting business relationship. CONCLUSION:-The contribution of this study lies in the empirical analysis of the determinants of eaccounting adoption. The results of the study may give some evidence on the managers intentions of small and medium-sized accounting agencies towards e-accounting and thus predict future use of e-accounting systems. The study examined the e-accounting practices among Indian SMEs. The study revealed that almost all the SMEs sampled attach a lot of importance to financial information by employing at least degree holders and Chartered Accountants to handle their accounting information. The study also showed that majority of the firms put in place accounting softwares to generate their financial information. This has the tendency to reduce cost, enhance clerical works, and provide sufficient space to store data and process information for management decision in a timely manner. In terms of functionality, the results of the study showed that almost all the SMEs use the software for accounts receivables functions as well as accounts payables, inventory management, payroll, fixed assets management, bank reconciliation and cash management. The results of the study also revealed that majority of the SMEs encounter problems in supply of electricity with the frequent breakdown of their accounting system. We found that almost all the SMEs are generally satisfied with the performance of their accounting software. It is recommended that SMEs in India adhere to good and standard accounting principles in Page 9

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their operations. The adoption of e-accounting would ensure proper accounting practices as good accounting practices have several implications for entrepreneurs and SME managers. Good accounting and control systems could assist in evaluating the performance of the organisation and its managers. SMEs with proper books of accounts are often capable of attracting external financing easily. SMEs that maintain good accounting and management information tend to be viewed favourably by finance providers. This study is limited to small and mediumsized accounting agencies for which some adoption factors, assumed to be relevant in this context, are tested. There is a danger that additional significant factors have not been included in the study, and any comments and suggestions for further improvements on this ongoing research project are very welcome REFERENCES
[I] [II] [III] Amidu, M. and Abor, J. (2005), Accounting Information and Management of SMEs in India, The African Journal of Finance and Management, 14(1), pp. 15 23. Doost, R. K, (1999), Computers and Accounting: Where Do We go from Here? Managerial Auditing Journal, 14(9), pp. 487 488. Fowler, F. (1993), Survey Research Methods, Sage, Newbury Park, CA. Holmes, S. and Nicholls, D. (1988), An Analysis of the Use of Accounting Information by Australian Small Business, Journal of Small Business Management, 2, pp. 5768. Hotch, R. (1992), Accounting: Financial Software, Nations Business, March 1992, pp. 46. Lohman, J. M. (2000), The Legal and Accounting Side of Managing a Small Business, Ingrams, 26, 21.

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