CHAPTER 7 … Accounting Information Systems

Objective 1: Describe an effective accounting information system

A. An accounting information system is the combination of personnel, records, and procedures that provide financial data. The system may be computerized or manual.

1. While a manual system can easily handle a simple business with few transactions each period, a computerized system will handle a heavy transaction load with ease.

2. Businesses computerize and specialize in order to process large amounts of transactions with accuracy and speed. Specialization refers to the process of grouping similar transactions.

B. While the design of the system varies from business to business, depending on the type of business, various features are common to all systems.

C. The system should provide control, compatibility, flexibility and a good cost/benefit relationship.

1. An effective system utilizes internal controls to help safeguard assets and eliminate waste.

2. The system design must be compatible with operations, personnel, and the organizational structure.

3. The system should be flexible enough to accommodate changes in the organization without having to be completely redone. It should be structured so that all phases of the information system function together effectively.

4. The cost of the system should not outweigh its benefits; managers desire a system that gives maximum benefits at minimum cost.

D. A computerized accounting information system has two basic components:

1. Hardware—the electronic equipment such as computers, disk drives, monitors, and printers. In larger businesses, the hardware can be networked so that information can be shared; a server stores the programs and data.

2. Software—the set of programs that tells the computer what tasks to perform. Accounting software may be integrated within the company’s management information system or database, the storehouse of computerized information.
Objective 2: Understand both computerized and manual accounting systems

A. In both a computerized and a manual accounting system there are three stages of data processing. Exhibit 7-1 illustrates these steps.

1. Inputs are data from source documents. Similar transactions are grouped together to make recording easier.

2. Processing in a manual system includes journalizing, posting, and preparing financial statements. A computerized system performs some of these tasks for the operator.

3. Outputs are reports, such as the financial statements that are used for decision making. Exhibit 7-2 provides an overview of a computerized accounting system.

B. The design for both types of accounting systems is similar:

1. Both begin with the chart of accounts.

a. Both systems assign account numbers to the various accounts. These account numbers identify which accounts are assets, liabilities, and so on.

b. In a computerized system, account number ranges are used to translate accounts and their balances into financial statements and other reports. (Refer to Exhibit 7-3 for an example of a chart of accounts for a computerized system.)

2. Each transaction must be classified before it can be processed or recorded.

a. In a manual system, similar transactions are grouped together and recorded in a special journal (i.e., credit sales are recorded in the sales journal and credit purchases are recorded in the purchases journal).

b. Computerized systems are organized by function or task. The appropriate journal is selected from a menu. See Exhibit 7-4 illustrating the main menu in a computerized accounting system.

(1) In a menu-driven system, the main menu is accessed first, then that menu directs the user to submenues until the desired function is reached.

(2) Posting in a computerized system is automatic and can be performed continuously, called on-line processing, or in groups, called batch processing.

3. Reports are the final stage of data processing.