UNIT 1: ACCOUNTING INFORMATION SYSTEM: OVERVIEW

What is an Accounting Information System?

An accounting information system (AIS) consists of people, procedures, and information
technology.

The AIS performs three important functions in any organization:

1. It collects and stores data about activities and transactions so that the organization can
review what has happened.
2. It processes data into information that is useful for making decision that enable
management to plan, execute, and control activities.
3. It provides adequate controls to safeguard the organization’s assets, including its data.
These controls ensure that the data is available when needed and that it is accurate and
reliable.
 Most organizations engage in many similar and repetitive transactions. These transaction types
can be grouped into the five basic cycles, each of which constitutes a basic subsystem in the
AIS:
o The expenditure cycle consists of the activities involved in buying and paying for goods or
services used by the organization.
o The production cycle consists of the activities involved in converting raw materials and
labor into finished products. (Only manufacturing companies have a production cycle;
retail organizations buy finished goods for resale to others.
o The human resources/payroll cycle consists of the activities involved in hiring and paying
employees.(part of expenditure cycle)
o The revenue cycle consists of the activities involved in selling goods or services and
collecting payment for those sales.
o The financing cycle consisted of those activities involved in obtaining the necessary funds
to run the organization and in repaying creditors and distributing profits to investors.
The Study of AIS is Fundamental to Accounting
The Financial Accounting Standard Board (FASB) defined accounting as being an information
system. It also stated that the primary objective of accounting is to provide information useful to
decision makers.
TYPES OF INFORMATION SYSTEM
Data processing
 Electronic data processing (EDP) is the use of computer technology to perform an
organization’s transaction-oriented data processing. EDP is a fundamental accounting
information system application in every organization. As computer technology has
 become commonplace, the term data processing (DP) has come to have the same
meaning as EDP.
 Management information systems
Management information system (MIS) describes the use of computer technology to provide
decision-oriented information to managers. An MIS provides a wide variety of information
beyond that which is associated with DP in organizations. MIS recognizes that managers with in
an organization use and require information in decision-making, and that computer based
information systems can assist in providing information to mangers.
 Decision support systems
In a decision support system (DSS), data are processed in to a decision making format for the
end user. A DSS requires the use of decision models and specialized databases, and differs
significantly from DP system. A DSS is directed at serving ad hoc, specific, non-routine
information requests by management.
 Expert systems
An expert system (ES) is knowledge based information system that uses its knowledge about a
specific application area to act as an expert consultant to end-users.

BASIC FUNCTIONS AND ELEMENTS OF AN ACCOUNTING SYSTEM

An accounting system is comprised of accounting records (checkbooks, journals, ledgers, etc.)

and a series of processes and procedures assigned to staff, volunteers, and/or outside
professionals. The goals of the accounting system are to ensure that financial data and economic
transactions are properly entered into the accounting records and that financial reports necessary
for management are prepared accurately and in a timely fashion.

Components of an Accounting System

Traditionally, the accounting system includes the following components:

 Chart of Accounts
The chart of accounts is a list of each item which the accounting system tracks. Accounts are
divided into five categories:

Assets, Liabilities, Net Assets or Fund Balances, Revenues, and Expenses. Each account is
assigned an identifying number for use within the accounting system.

 General Ledger
The general ledger organizes information by account. The chart of accounts acts as the table of
contents to the general ledger. In a manual system, summary totals from all of the journals are
entered into the general ledger each month, which maintains a year-to-date balance for each
account.

 Journals and Subsidiary Journals

Journals, also called books of original entry, are used to systematically record all accounting
transactions before they are entered into the general ledger. Journals organize information
chronologically and by transaction type (receipts, disbursements, other). There are three primary
journals:
The Cash Disbursement Journal

 is a chronological record of checks that are written, categorized using the chart of
accounts.

 The Cash Receipts Journal is a chronological record of all deposits that are made,
categorized using the chart of accounts.

 The General Journal is a record of all transactions which do not pass through the
checkbook, including non-cash transactions (such as accrual entries and depreciation)
and corrections to previous journal entries.

The process of transferring information from the journals to the general ledger is called posting.
As organizations mature, and handle greater numbers of financial transactions, they may develop
subsidiary journals to break out certain kinds of activity from the primary journals noted above.
The most common examples of subsidiary journals include:

 The Payroll Journal, which records all payroll-related transactions. This may be useful as
the number of payroll transaction s grows and becomes too large to handle reasonably
within the cash disbursements journal.

 The Accounts Payable Journal and Accounts Receivable Journal track income and
expense accruals. These are useful for grouping income and/or expense accruals which
are too numerous to track effectively through the general journal. Some accounting
packages require you to set up all bills as accounts payable and all revenue as accounts
receivable, eliminating the cash disbursements and receipts journals altogether.

 Checkbook
  In very small organizations, the checkbook may serve as a combined ledger and journal.
Most financial transactions will pass through the checkbook, where receipts are deposited
and from which disbursements are made.
 Accounting Procedures Manual
 The accounting procedures manual is a record of the policies and procedures for handling
financial transactions. The manual can be a simple description of how financial functions
are handled (e.g., paying bills, depositing cash and transferring money between funds)
and who is responsible for what.
 The Accounting Cycle
 The accounting cycle may be represented schematically as follows:
financial transactions -> analyze transaction -> record transaction in journals -> post
journal information to general ledger -> analyze general ledger account and make
corrections -> prepare financial statements from general leger.

Maintaining the Integrity of an Accounting System

The key tasks for maintaining the integrity of an accounting system include the following

 Trial Balance
In a manual system all balances from the general ledger are tallied on a monthly basis to make
sure that debit balances equal credit balances.
 Bank Reconciliation
Each month you will need to reconcile the balance in your checkbook with the balance in your
account according to your bank. This process has three basic steps:

1. Compare deposits and checks as they are recorded in the checkbook with those
reflected in the bank statement. Adjust any discrepancies.
2. Adjust for bank charges or interest earned into the checkbook balance.
3. Subtract un-cashed checks from the bank s balance and add in checks you have
deposited which are not yet reflected in the bank's balance.

PRINCIPLES OF AN ACCOUNTING INFORMATION SYSTEM

In designing and developing an efficient and effective accounting information system (or simply
referred to as an accounting system), it is important that certain basic principles be followed.
These principles or design features make accounting systems run efficiently. A good and an
effective system whether computerized or manual-includes the following features: control,
compatibility, flexibility, a favorable cost/benefit relationship, and useful output.
Control
Managers need control over operations. Internal controls are the methods and procedures used to
authorize transactions and safeguard assets.
Compatibility
A compatible is one that works smoothly with the business’s operations, personnel, and
organizational structure. A compatible accounting information system conforms to the needs of
the business.
Flexibility
Changes in the business often call for changes in accounting system. A well-designed system is
flexible if it accommodates changes without needing a complete overhaul.
Favorable Cost-Benefit Relationship
Achieving control, comparability, and flexibility costs money. These costs reduce a company’s
net income, so managers often must settle for less than the perfect accounting system. They
strive for a system that offers maximum benefits at a minimum cost-that is, a favorable
cost/benefit relationship.
Useful output
To be successful, information must be understandable, relevant, reliable, timely, and accurate.
Designers of accounting systems must consider the needs and knowledge of the various users so
that the systems out put (reports and statements) will be useful.
PHASES OF AN ACCOUNTING SYSTEM DEVELOPMENTS

Analysis
Planning and identifying
information needs and sources.

Follow-up Design
Evaluating and monitoring,
Creating forms, documents,
effectiveness and efficiency,
procedures, job descriptions, and
and correcting any weaknesses
reports.

Implementation
Installing the system, training,
personnel, and making the system
wholly operational.

Figure 1.2 Phases in the development of an accounting system.

Factors Influencing Design of AIS

Organizational Culture Strategy

AIS
Figure 1.3 Factors Influencing Design of AIS

Manual accounting system is an accounting system that performs data processing manually. (It
will be cost effective only for small firms)

On the other hand, computerized accounting makes use of computers to handle raw data,
manipulate the data, and report the results quickly and accurately

Advantages of computerized accounting system include:

- It enables to handle complex and large transactions easily;
- It increases efficiency, accuracy, speed, and timeliness;
- It reduces cost in relation to record keeping (cost per transaction
- It handles large volume of data;
- It enables efficient storage, computation, retrieval, and auditability;

Disadvantages of computerized accounting system include:

- High initial cost investment to plan, install, test, and implement the computer system
properly;
- Thus, it may not be cost-effective for small firms with lesser volume of data to process
- Initial implementation may be time taking;
- It requires specialized skill;
- Slow acceptance may there be by employees, clients, creditors, and auditors.

The advantages of computerized accounting will be the disadvantage for manual system and
vice versa.