CH 4

CHAPTER FOUR
ACCOUNTING SYSTEM
A reliable information system is a necessity for any company. Whether companies use pen,
pencil, or computers in maintaining accounting records, certain principles and procedures apply.
The purpose of this chapter is to explain and illustrate these features.
Accounting Information Systems
 Computerized accounting systems

 Manual accounting systems
Manual accounting: requires that all journal entries, invoices and other financial
documents be created by hand.
Computerized accounting: allows users to input information into accounting software
programs.
Example
 Sales journal
 Cash receipts journal
 Purchases journal
 Cash payments journal
 Effects of special journals on general journal
Basic Concepts of Accounting Information Systems

The accounting information system collects and processes transaction data and communicates
financial information to decision makers. It includes each of the steps in the accounting cycle
that you studied in earlier chapters. It also includes the documents that provide evidence of the
transactions, and the records, trial balances, worksheets, and financial statements that result. An
accounting system may be either manual or computerized. Most businesses these days use some
sort of computerized accounting system, whether it is an off-the-shelf system for small
businesses, like QuickBooks or Peachtree, or a more complex custom-made system. Efficient
and effective accounting information systems are based on certain basic principles. These
principles, as described are
(1) Cost-effectiveness,
(2) Usefulness, and
(3) Flexibility. If the accounting system is cost-effective, provides useful output, and has the
flexibility to meet future needs, it can contribute to both individual and organizational goals.
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Computerized Accounting Systems Many small businesses eventually replace their manual
accounting system with a computerized general ledger accounting system. General ledger
accounting systems are software programs that integrate the various accounting functions related
to sales, purchases, receivables, payables, cash receipts and disbursements, and payroll. They
also generate financial statements. Computerized systems have a number of advantages over
manual systems. First, the company typically enters data only once in a computerized system.
Second, because the computer does most steps automatically, many errors resulting from human
intervention in a manual system.
Advantages of computerized accounting system

Cost-Effectiveness
The accounting system must be cost effective. Benefits of information must outweigh the cost of
providing it.
Useful Output
To be useful, information must be understandable, relevant, reliable, timely, and accurate.

Designers of accounting systems must consider the needs and knowledge of various users.
Flexibility
The accounting system should accommodate a variety of users and changing information needs.
The system should be sufficiently flexible to meet the resulting changes in the demands made
upon it.
Choosing A Software Package to identify the right software for your business, you must
understand your company’s operations. For example, consider its needs with regard to inventory,
billing, payroll, and cash management. In addition, the company might have specific needs that
are not supported by all software systems. For example, you might want to track employees’
hours on individual jobs or to extract information for determining sales commissions. Choosing
the right system is critical because installation of even a basic system is time-consuming, and
learning a new system will require many hours of employee time.
Entry-Level Software publishers tend to classify businesses into groups based on revenue and the
number of employees. Companies with revenues of less than $5 million and up to 20 employees
generally use entry-level programs. The two leading entry-level programs are Intuit’s
QuickBooks and Sage Software’s Peachtree. These programs control more than 90% of the
market. Each of these entry-level programs comes in many different industry-specific versions.
For example, some are designed for very specific industry applications such as restaurants,
retailing, construction, manufacturing, or nonprofit.
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The difference between manual and computerized accounting
Manual accounting: requires that all journal entries, invoices and other financial documents be
created by hand.
Computerized accounting: allows users to input information into accounting software programs.
Speed
Computerized accounting produces information much faster than manual accounting.

Accounting software packages, such as QuickBooks and Peachtree, come with built-in databases
that allow users to input data.
Accuracy
Manual accounting systems are prone to mathematical errors and misplaced numbers. With a
computerized accounting system, your company data is automatically calculated based on
numbers you input.
Financial Statements
In a manual accounting system, you have to prepare your company's income statement, balance
sheet and statement of owner's equity by hand. Information from your journal entries helps
formulate your company's financial statements. Computerized accounting systems allow
financial statements to be created from information stored in the database.
Cost
The cost of computerized accounting systems can range from hundreds to thousands of dollars
for large businesses. A computerized accounting system may save on man hours used for
creating financial statements and other reports. For this reason, many small and mid-sized
businesses use computerized accounting software.
Reports
Reports are created in a timely manner when using a computerized accounting system. Reports
generated from computerized accounting software allow managers to run the company in a more
efficient manner. Creating reports in a manual accounting system may lead to more staff
frustration and result in having to work with outdated information
Safety
Accounting records kept on the manual system can be lost or damaged easily, such as by coffee
spills. On the other hand, records kept by a computer are likely to be safer because many systems
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are backed up often. If you lose pages in a paper pad, you may have to recreate the transactions
by conducting research and writing them in again. In a computerized system, you simply restore
the latest backup and add a few transactions that were not saved. In this area, accounting
software is obviously superior to manual systems.
Organization
Data processed through software is organized and easy to find. That's not the case with manual
systems, where you may have to review several pages to find what you need. Accounting
programs organize the information in one place, classified by type. For instance, if you want to
find certain data about a vendor, you can go to the accounts payable section of the software,
usually by clicking a link or tab, and conduct a search for the vendor. If you conduct the same
process on a manual system, you may have to go through several pages and take your time to
find what you're looking for.
Significance
Information technology plays an important role in accounting processes because it improves

financial reporting procedures and prevents errors in financial statements.
Time Frame
Computerized accounting activities help an accountant perform month-end close procedures.

These activities also help company report profit information over a period, such as a month or
quarter.

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CHAPTER FOUR

Accounting Information Systems

 Computerized accounting systems

Basic Concepts of Accounting Information Systems

(2) Usefulness, and

Advantages of computerized accounting system

To be useful, information must be understandable, relevant, reliable, timely, and accurate.

Computerized accounting produces information much faster than manual accounting.

Information technology plays an important role in accounting processes because it improves

Computerized accounting activities help an accountant perform month-end close procedures.

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