 Accounting System (Definition, Purpose, Function)

Source: Romney 8th ed

It has often been said that accounting is the language of business. If that is the case, then an
accounting information system (AIS) is the intelligence—the information-providing vehicle—of that
language. Accounting is a data identification, collection, and storage process as well as an
information development, measurement, and communication process. By definition, accounting is an
information system, since an AIS collects, records, stores, and processes accounting and other data
to produce information for decision makers.

Source: Hall 7th ed

Accounting System - AIS subsystems process financial transactions and nonfinancial transactions
that directly affect the processing of financial transactions. For example, changes to customers’
names and addresses are processed by the AIS to keep the customer file current. Although not
technically financial transactions, these changes provide vital information for processing future sales
to the customer.
The AIS is composed of three major subsystems:
(1) the transaction processing system (TPS), which supports daily business operations with
numerous reports, documents, and messages for users throughout the organization;
(2) the general ledger/financial reporting system (GL/FRS), which produces the traditional financial
statements, such as the income statement, balance sheet, statement of cash flows, tax returns, and
other reports required by law;
(3) the management reporting system (MRS), which provides internal management with special-
purpose financial reports and information needed for decision making such as budgets, variance
reports, and responsibility reports.

Source: Wild
Accounting information systems collect and process data from transactions and events, organize
them in useful reports, and communicate results to decision makers. With the increasing complexity
of business and the growing need for information, accounting information systems are more important
than ever. All decision makers need to have a basic knowledge of how accounting information
systems work. This knowledge gives decision makers a competitive edge as they gain a better
understanding of information constraints, measurement limitations, and potential applications. It
allows them to make more informed decisions and to better balance the risks and returns of different
strategies.

 Cost-Benefit Principle (Source: Wild)

The cost-benefit principle prescribes that the benefits from an activity in an accounting information
system outweigh the costs of that activity. The costs and benefits of an activity such as producing a
specific report will impact the decisions of both external and internal users. Decisions regarding other
systems principles (control, relevance, compatibility, and flexibility) are also affected by the cost-
benefit principle.

 Characteristics of General and Special Journal

(Source: Romney 8th ed)
General journal - A journal used to record infrequent or nonroutine transactions, such as loan
payments and end-of-period adjusting and closing entries.
Specialized journals - A journal used to record a large number of repetitive transactions such as
credit sales, cash receipts, purchases, and cash disbursements.

(Source: Wild)
A general journal is an all-purpose journal in which we can record any transaction. Use of a general
journal for all transactions is usually more costly for a business and is a less effective control
procedure. Moreover, for less technologically advanced systems, use of a general journal requires
that each debit and each credit entered be individually posted to its respective ledger account. To
enhance internal control and reduce costs, transactions are organized into common groups.
Special journals are efficient tools in helping journalize and post transactions. This is done, for
instance, by accumulating debits and credits of similar transactions, which allows posting of amounts
as column totals rather than as individual amounts. The advantage of this system increases as the
number of transactions increases. Special journals allow an efficient division of labor, which is also an
effective control procedure. It is important to note that special journals and subsidiary ledgers are
designed in a manner that is best suited for each business. The most likely candidates for special
journal status are recurring transactions—for many businesses those are sales, cash receipts,
purchases, and cash disbursements.

 POS are online realtime – meaning timely info (Source: Google)

A POS system, or point-of-sale system, facilitates transactions in retail sales. An example of a well-
known POS system would be a cash register. Modern POS systems are a combination of hardware
and software that often includes a barcode scanner, card reader, cash drawer, and receipt printer.
The customer interface is often a touchscreen. The simplest modern POS systems are a credit card
scanner connected to a tablet.

 Batch processing examples (Source: Romney 8th ed)

batch processing - Accumulating transaction records into groups or batches for processing at a
regular interval such as daily or weekly. The records are usually sorted into some sequence (such as
numerically or alphabetically) before processing.
online, real-time processing - The computer system processes data immediately after capture and
provides updated information to users on a timely basis.
(Source: Wild) The advantage of online processing is timeliness. This often requires additional
costs related to both software and hardware requirements. The advantage of batch processing is
that it requires only periodic updating of databases. Records used to send bills to customers, for
instance, might require updating only once a month. The disadvantage of batch processing is the
lack of updated databases for management to use when making business decisions.

1. Payroll
2. Tax
 Income With holding
 Vat
 Remember, the use of standard cost/forecasting/budgeting is to compare actual
performance with their expectations
The use of standard costs provides a type of access control. By specifying the quantities of material
and labor authorized for each product, the firm limits unauthorized access to those resources. To
obtain excess quantities requires special authorization and formal documentation. (Source: Hall 7th
ed)
The following are the most commonly cited deficiencies of standard accounting systems
INACCURATE COST ALLOCATIONS. Applying standard costing leads to product cost distortions in
a lean environment, causing some products to appear to cost more and others to appear to cost less
than they actually do. Poor decisions regarding pricing, valuation, and profitability may result.
PROMOTES NONLEAN BEHAVIOR.The primary performance measurements used in standard
costing are personal efficiency of production workers, the effective utilization of manufacturing
facilities, and the degree of overhead absorbed by production.
TIME LAG. Standard cost data for management reporting are historic in nature. Data lag behind the
actual manufacturing activities on the assumption that control can be applied after the fact to correct
errors.
FINANCIAL ORIENTATION. Accounting data use dollars as a standard unit of measure for
comparing disparate items being evaluated. Decisions pertaining to the functionality of a product or
process, improving product quality, and shortening delivery time, however, are not necessarily well
served by financial information produced through standard cost techniques. Indeed, attempts to force
such data into a common financial measure may distort the problem and promote bad decisions.

1. Internal control Definition (Source: Romney 8th ed)

 In small vs. big business
Internal controls - are the processes implemented to provide reasonable assurance that the following
control objectives are achieved:
● Safeguard assets—prevent or detect their unauthorized acquisition, use, or disposition.
● Maintain records in sufficient detail to report company assets accurately and fairly.
● Provide accurate and reliable information.
● Prepare financial reports in accordance with established criteria.
● Promote and improve operational efficiency.
● Encourage adherence to prescribed managerial policies.
● Comply with applicable laws and regulations. Internal control is a process because it permeates an
organization’s operating activities and is an integral part of management activities.

Internal control provides reasonable assurance—complete assurance is difficult to achieve and

prohibitively expensive. In addition, internal control systems have inherent limitations, such as
susceptibility to simple errors and mistakes, faulty judgments and decision making, management
overrides, and collusion. Developing an internal control system requires a thorough understanding of
information technology (IT) capabilities and risks, as well as how to use IT to achieve an
organization’s control objectives.
Accountants and systems developers help management achieve their control objectives by
(1) designing effective control systems that take a proactive approach to eliminating system
threats and that detect, correct, and recover from threats when they occur; and
 (2) making it easier to build controls into a system at the initial design stage than to add them
after the fact.
Internal controls perform three important functions:
1. Preventive controls deter problems before they arise. Examples include hiring qualified personnel,
segregating employee duties, and controlling physical access to assets and information.
2. Detective controls discover problems that are not prevented. Examples include duplicate checking
of calculations and preparing bank reconciliations and monthly trial balances.
3. Corrective controls identify and correct problems as well as correct and recover from the resulting
errors. Examples include maintaining backup copies of files, correcting data entry errors, and
resubmitting transactions for subsequent processing.

Internal controls are often segregated into two categories:

1. General controls make sure an organization’s control environment is stable and well managed.
Examples include security; IT infrastructure; and software acquisition, development, and maintenance
controls.
2. Application controls prevent, detect, and correct transaction errors and fraud in application
programs. They are concerned with the accuracy, completeness, validity

 Wild
Internal Control System - Managers use an internal control system to monitor and control business
activities. An internal control system consists of the policies and procedures managers use to
1. Protect assets.
2. Promote efficient operations.
3. Ensure reliable accounting.
4. Urge adherence to company policies.
A properly designed internal control system is a key part of systems design, analysis, and
performance. Managers place a high priority on internal control systems because they can prevent
avoidable losses, help managers plan operations, and monitor company and employee performance.
For example, internal controls for health care must protect patient records and privacy. Internal
controls do not provide guarantees, but they lower the company’s risk of loss.

Internal control policies and procedures vary from company to company according to such factors as
the nature of the business and its size. Certain fundamental internal control principles apply to all
companies. The principles of internal control are to
2. Establish responsibilities.
3. Maintain adequate records.
4. Insure assets and bond key employees.
5. Separate recordkeeping from custody of assets.
6. Divide responsibility for related transactions.
7. Apply technological controls.
8. Perform regular and independent reviews.

 Definitions of (this 3 documents are used to check for possible error in recording also
called 3 way matching)
 Receiving report
  Invoice
 Purchase order (this is the source , so the item received and in the invoice should be
the same as in the PO)
 A purchase order is a document the purchasing department uses to place an order with
a vendor (seller or supplier). A purchase order authorizes a vendor to ship ordered
merchandise at the stated price and terms. When the purchasing department receives a
purchase requisition, it prepares at least five copies of a purchase order. The copies are
distributed as follows: copy 1 to the vendor as a purchase request and as authority to ship
merchandise; copy 2, along with a copy of the purchase requisition, to the accounting
department, where it is entered in the voucher and used in approving payment of the
invoice; copy 3 to the requesting department to inform its manager that action is being
taken; copy 4 to the receiving department without order quantity so it can compare with
goods received and provide independent count of goods received; and copy 5 retained on
file by the purchasing department.
 An invoice is an itemized statement of goods prepared by the vendor listing the
customer’s name, items sold, sales prices, and terms of sale. An invoice is also a bill sent
to the buyer from the supplier. From the vendor’s point of view, it is a sales invoice. The
buyer, or vendee, treats it as a purchase invoice. When receiving a purchase order, the
vendor ships the ordered merchandise to the buyer and includes or mails a copy of the
invoice covering the shipment to the buyer. The invoice is sent to the buyer’s accounting
department where it is placed in the voucher.
 Receiving Report - Many companies maintain a separate department to receive all
merchandise and purchased assets. When each shipment arrives, this receiving
department counts the goods and checks them for damage and agreement with the
purchase order. It then prepares four or more copies of a receiving report, which is used
within the company to notify the appropriate persons that ordered goods have been
received and to describe the quantities and condition of the goods. One copy is sent to
accounting and placed in the voucher. Copies are also sent to the requesting department
and the purchasing department to notify them that the goods have arrived. The receiving
department retains a copy in its files.
 Invoice Approval - When a receiving report arrives, the accounting department should
have copies of the following documents in the voucher: purchase requisition, purchase
order, and invoice. With the information in these documents, the accounting department
can record the purchase and approve its payment. In approving an invoice for payment, it
checks and compares information across all documents. To facilitate this checking and to
ensure that no step is omitted, it often uses an invoice approval, also called check
authorization. An invoice approval is a checklist of steps necessary for approving an
invoice for recording and payment. It is a separate document either filed in the voucher or
preprinted (or stamped) on the voucher

 Program documentation purpose

 Examples of
 Input controls - The phrase “garbage in, garbage out” highlights the importance of input
controls. If the data entered into a system are inaccurate, incomplete, or invalid, the output
will be too. Consequently, only authorized personnel acting within their authority should
 prepare source documents. In addition, forms design, cancellation and storage of source
documents, and automated data entry controls are needed to verify the validity of input data.

Forms Design - Source documents and other forms should be designed to minimize the chances for
errors and omissions. Two particularly important forms design controls involve sequentially
prenumbering source documents and using turnaround documents.
1. All source documents should be sequentially prenumbered. Prenumbering improves control by
making it possible to verify that no documents are missing. When sequentially prenumbered source
data documents are used, the system should be programmed to identify and report missing or
duplicate source documents.
2. A turnaround document is a record of company data sent to an external party and then returned
by the external party for subsequent input to the system. Turnaround documents are prepared in
machine-readable form to facilitate their subsequent processing as input records. An example is a
utility bill that a special scanning device reads when the bill is returned with a payment. Turnaround
documents improve accuracy by eliminating the potential for input errors when entering data
manually.

 Output controls - Careful checking of system output provides additional control over
processing integrity.
Important output controls include the following:
● User review of output. Users should carefully examine system output to verify that it is
reasonable, that it is complete, and that they are the intended recipients.
● Reconciliation procedures. Periodically, all transactions and other system updates should
be reconciled to control reports, file status/update reports, or other control mechanisms. In
addition, general ledger accounts should be reconciled to subsidiary account totals on a
regular basis.
● External data reconciliation. Database totals should periodically be reconciled with data
maintained outside the system.
● Data transmission controls. Organizations also need to implement controls designed to
minimize the risk of data transmission errors. Whenever the receiving device detects a data
transmission error, it requests the sending device to retransmit that data. Generally, this
happens automatically, and the user is unaware that it has occurred.

 Distributed data processing

A system in which computers are set up at remote locations and then linked to a centralized
mainframe computer.
An alternative to the centralized model is the concept of distributed data processing (DDP). The topic
of DDP is quite broad, touching on such related topics as end-user computing, commercial software,
networking, and office automation. Simply stated, DDP involves reorganizing the IT function into small
information processing units (IPUs) that are distributed to end users and placed under their control.
IPUs may be distributed according to business function, geographic location, or both.
 Advantages - The most commonly cited advantages of DDP are related to cost savings,
increased user satisfaction, and improved operational efficiency.
 Cost reductions.Improved cost control responsibility. Improved user satisfaction. Backup.
  Disadvantages - The loss of control is one of the most serious disadvantages of DDP. Other
potential problems include the inefficient use of resources, the destruction of audit trails,
inadequate segregation of duties, an increased potential for programming errors and systems
failures, and the lack of standards.
 Mismanagement of organization-wide resources. Hardware and software incompatibility.
Redundant tasks. Consolidating incompatible activities. Hiring qualified professionals.
Lack of standards.

 Systems development team - consists of stakeholders, users, managers, systems

development specialists, and various support personnel.

 Information Resource Management (IRM) is a program of activities directed at making effective
use of information technology within an organization. These activities range from global corporate
information planning to application system development, operation, and maintenance and support
of end-user computing.
 An integrated information system is a combination of software that combine different
databases from various sources with data integration tools, visualization and models. For a
complex area such as aquaculture, a single software becomes insufficient, or very complex and
therefore very uncertain or undecidable.
 An information security management system (ISMS) is a set of policies and procedures for
systematically managing an organization's sensitive data. The goal of an ISMS is to minimize risk
and ensure business continuity by proactively limiting the impact of a security breach.

 When studying volume of transactions you should consider

 Actual count
 Distribution within various periods

 Reliability
 Relevance
 Verifiability
 Timeliness
 Predictive value

 Credit memorandum - A seller’s credit memorandum informs a buyer of the seller’s credit to the
buyer’s Account Receivable (on the seller’s books).
 Turnaround documents - Records of company data sent to an external party and then returned
to the system as input. Turnaround documents are in machine-readable form to facilitate their
subsequent processing as input records. An example is a utility bill.
 Source documents - Documents used to capture transaction data at its source – when the
transaction takes place. Examples include sales orders, purchase orders, and employee time
cards.

 Advantages of using computer based accounting systems (Source: Google)

1. Automation - To make sure that all calculations are correct and accurate it is important to use
something other than pen and paper. The systems we provide also take care of all procedures
automatically so that invoices are created and manual accounting is taken care of efficiently.
2. Data Access - Using the software becomes easier and gives you easier access to data files when
you need them. You no longer have to search through endless piles of paper and files to find a
certain date, data file or piece of information as they are all there for you at the click of a button.
3. Accuracy - An accounting system is designed to be completely accurate right down to the final
detail. Although your maths skills may be 10/10 it is always safer to use a computerised system to do
the calculations for you. It also automatically does additions, subtractions and calculations once you
have submitted data making the whole process quicker.
4. Reliability - Of course they are reliable systems to use. They are smarter than any accountant can
ever be and take care of tasks when you tell it to. You can count on your computerised system to take
control of your accounts when you don’t have the time to.
5. Speed - A computer is always going to be faster than a human being and when it comes to
accounts they are faster than ever before. Statements, reports, analysis and everything you need can
be created at the push of a button so you can get access to your accounts in quick time.
6. Security - The latest technology can be saved and stored off site so there is no threat of intrusions
and stealing of data. The systems can always be restored from old data files and backups are vital to
make the most of clever accounting. With password protected areas and certain accounts for different
parts of the business you can control who has access to the systems for extra safety.
7. Scalable - No matter how large your company grows you can always count on a computerised
system to grow with you. Everything is straight forward and the data systems will always store your
files efficiently unlike stacks of paper would.
8. Visuals - It is always easier to look at your accounts and customer’s accounts on a computer rather
than trying to read handwriting that is impossible to read. You can arrange them in a way that suits
you and quickly view reports and data sheets in quick time.
9. Cost Effective - Using a computerised system is a lot cheaper than other forms of data filing due to
it being overall more efficient. As the work is automatically done and all reports are kept in one area,
everything is completed quicker and will save time massively. You also save money on various
accountant’s fees, report creations, paper filing and still make sure your accounts are in perfect order.

 Picking ticket - A document that lists the items and quantities ordered and authorizing the
inventory control function to release that merchandise to the shipping department.
 Packing slip - A document listing the quantity and description of each item included in a
shipment
 Bill of lading - A legal contract that defines responsibility for goods while they are in transit.

 Purpose of
 Passwords provide the first line of defense against unauthorized access to your computer
and personal information.
 Internal file labels generally refer to labels that are expressed in a machine-readable
language. They provide identity to information or data in a storage medium.

 Types of software programs

  EDI systems - Electronic data interchange is the concept of businesses electronically
communicating information that was traditionally communicated on paper, such as purchase
orders and invoices.
 POS systems - A point-of-sale (POS) terminal is a hardware system for processing card
payments at retail locations
 CRM systems - A Customer Relationship Management (CRM) system helps manage
customer data. It supports sales management, delivers actionable insights, integrates with
social media and facilitates team communication. Cloud-based CRM systems offer complete
mobility and access to an ecosystem of bespoke apps.

 Steps in revenue cycle

 Checking Order
 sales order - The document created during sales order entry listing the item numbers,
quantities, prices, and terms of the sale.
 electronic data interchange (EDI) - The use of computerized communications and a
standard coding scheme to submit business documents electronically in a format that can
be automatically processed by the recipient’s information system
 Checking credit limit
 A credit limit is the maximum allowable account balance that management wishes to
allow for a customer based on that customer’s past credit history and ability to pay.
 Approval of credit manager if above credit (routine bases from various sources with
data integration tools, visualization and models. For a complex area such as
aquaculture, a single software becomes insufficient, or very complex and therefore
very uncertain or undecidable. approval is usually granted for regular customers)
 Checking inventory availability
 In addition to checking a customer’s credit, salespeople also need to determine whether
sufficient inventory is available to fill the order, so that customers can be informed of the
expected delivery date.
 If there is not sufficient inventory on hand to fill the order, a back order authorizing the
purchase or production of those items must be created. In manufacturing companies,
creating a back order involves notifying the production department to initiate the
production of the requested items. In retail companies, the purchasing department would
be notified about the need to order the required items.
 Deliver inventory (if not available, back order is sent to production department)

 Examples of
 A validity check compares the ID code or account number in transaction data with similar
data in the master file to verify that the account exists. For example, if product number 65432
is entered on a sales order, the computer must verify that there is indeed a product 65432 in
the inventory database.
 A completeness check (or test) verifies that all required data items have been entered. For
example, sales transaction records should not be accepted for processing unless they include
the customer’s shipping and billing addresses.
  A reasonableness test determines the correctness of the logical relationship between two
data items. For example, overtime hours should be zero for someone who has not worked the
maximum number of regular hours in a pay period
 A field check determines whether the characters in a field are of the proper type. For
example, a check on a field that is supposed to contain only numeric values, such as a U.S.
Zip code, would indicate an error if it contained alphabetic characters.

 Primary objectives of
 The revenue cycle’s primary objective is to provide the right product in the right place at the
right time for the right price.
 The primary objective in the expenditure cycle is to minimize the total cost of acquiring and
maintaining inventories, supplies, and the various services the organization needs to function
 Conversion cycle. The objective is to create a product that meets customer requirements in
terms of quality, durability, and functionality while simultaneously minimizing production costs.

 Reconciliation is effective for errors such as

 Incorrect amount recorded
 Missing invoice
 Controls for cash

 Inherent risk - The susceptibility to significant control problems in the absence of internal control.
 Control risk - Risk that a material misstatement will get through the internal control structure and
into the financial statements
 Detection risk - Risk that auditors and their audit procedures will fail to detect a material error or
misstatement.

 Independent check samples

 Bank reconciliation
 Periodic comparison of subsidiary ledger totals to control totals

 Identification is the claim of a subject of its identity.

 Authorization is the process of restricting access of authenticated users to specific portions of
the system and limiting what actions they are permitted to perform
 Authentication is the process of verifying the identity of the person or device attempting to
access the system. The objective is to ensure that only legitimate users can access the system