Components of an Accounting Information System
Accounting Information Systems
An accounting information system is a vital tool for any organization. The system will support the organization in making critical strategic and business decisions. Having a system that captures, records, processes, and records financial data for an organization will also reduce errors in billing and shipping. This paper analyzes the six main components of an accounting information system.
An accounting information system is a program that is used within an organization for the collection, recording, storing, and processing accounting data in order to produce information that will assist in decision making Hall, 2011.
The management makes use of an accounting information system to better understand the organization’s financial position. This will assist them in making strategic and business decisions for the organization. The system contains a set of integrated components, which interact with each other in order to achieve a goal. This system is mostly computer based, and it tracks all accounting activities, which ensures that there is accuracy in all financial transaction of the organization. The system also makes financial data to be readily available to those authorized to access it, and keeps the data secure Gelinas, Dull, & Wheeler, 2010.
Reports produced from the system are normally used for internal purposes by the management, and externally by creditors, investors, or tax authorities.
Accounting information systems were previously developed by the organization, which made them hard to develop and maintain. Nowadays, these systems are built and sold as software packages by companies like Sage, SAP, Microsoft, and Oracle. This makes the systems easy to use and less expensive to maintain as the companies will configure them to suit the organization’s business processes. The need to have connectivity with other business systems led to the merging of accounting information systems into larger, and more centralized systems like enterprise resource planning (ERP). This ensured there was connectivity and consolidation of the systems.
Without integration, an organization will have to develop interfaces that allow the systems to interact with each other. Incorporating the accounting information system as a module in an ERP ensures that interaction is in-built, and all the modules can access the same data. This ensures that data is streamlined, and there is little room for errors.
An accounting information system comprises of six main components namely people, software, data, procedures and instructions, internal controls and information technology infrastructure.
As a component of accounting information systems, people refer to the system users. These are the professionals who have to use the organization’s accounting information system. They include accountants, business analysts, consultants, auditors, chief financial officers, and managers. The system will also help to interlink the different departments within an organization. According to Romney and Steinbart (2010)
this will ensure that all the functional departments within an organization can access the system, and there will be a centralized system that manages the organization’s accounting. The employees will be required to use the system and input all customer orders, and inventory requests, which will allow for easy receipting and control of the accounting function. The accounting information system is developed with people in mind. It should make their work easier, and improve their productivity. It should not hinder them in any way.
For example, the organization’s management can set goals for sales in the system. This will require the sales staff to make orders from inventory, which will notify the accounting department of new payables. After the sales are made, the sales people will enter the customer orders in the system. Accountants will then invoice the customers and notify the warehouse. The warehouse will access the system and assemble the orders, which the shipping department will send. The customer service department will use the system to check on the progress of customer orders and shipments. The system also has capabilities for generating reports that the management will use for decision making. From the system, the manager will also see the costs for manufacturing, inventory, and shipping.
Anyone who is authorized to access the system can get information regarding their specific needs or requirement. People who need information from the organization like consultants, auditors, and tax authorities will use the system in order for them to access the relevant information. Consultants can use the information in an accounting information system when analyzing the performance of the company to determine its effectiveness. Auditors will use the accounting information system to analyze the organization’s financial condition, compliance with the law, and the organization’s internal controls.
As a component of accounting information systems, software is the computer program that is used for storing, retrieving, processing, and analyzing the organization’s financial data. Before the advent of computers, accounting information systems used to be systems that were paper-based. Nowadays, organizations are using computer software for all their accounting purposes. There is a range of programs that are suited for small and medium sized organizations, which means that an organization should analyze its needs to establish the correct system that will suit and satisfy its requirements Ingram & Albright, 2006.
Security, reliability, and quality are the key components for an effective accounting information system program. As the organization’s management will use information from the program to make strategic decisions, there is need for a high quality of information in order to make sound decisions. The accounting information system enables the organization’s top management to access the relevant reports required for decision making. The management can also query the system as it has in built search facility. Using this software feature will enable them to search for specific information.
The software programs are normally customized in order to meet the specific requirements of the organization. Organizations that do not find software that meets their unique needs will have to develop the program in-house. This development means that the organization’s users will have to provide substantial input. Publicly traded companies have to use programs that meet strict regulations. These regulations establish auditing procedures and internal controls for the program, and the organizations have to adhere to these regulations.
The financial information relevant to the organization is contained in the accounting information system. All business data which impacts the organization’s finances should be entered into the system Larson, Wild, & Chiappetta, 2004.
This will ensure that all data is processed, and preparation of accounting statements and reports is easier. The data that makes up an accounting information system include customer billings, sales orders, purchase requisitions, vendor invoices, inventory data, general ledger, payroll, tax information, and timekeeping.
Keeping this data in the system enables an organization to manage its reporting, recordkeeping, analysis, decision making, and auditing activities. The data should be relevant, complete, and accurate for it to benefit the organization. Therefore, all data entry activities should be verified and validated. This will ensure that the data captured in the system is correct and contains no errors. Validating the data prevents any mistakes from occurring since the data is used for sensitive and crucial decision making.
Accounting information systems process highly sensitive data for an organization. The data entered into the system is used in assisting the organization’s management to make strategic and business decisions. Entering correct data into the system is a priority as this ensures that reports produced contain the correct data and indicate the correct situation. The data entered into the system is used for various purposes. Therefore, its accuracy will ensure that billings, account statements, financial information, and tax information are correct.
Not all data should be entered into the system. This is because data that is not part of the financial records of the organization like manuals, presentations, and memos have no effect on the organization’s finances. The documents might have some relationship with the organization’s finances, but they have no bearing on the overall finances of the organization.
Procedures and instructions
The procedures and instructions for an accounting information system include all the methods that the system will use to collect, store, retrieve, and process data Albright & Ingram, 2003.
The methods used can be either manual or automated depending on the organization’s preference. The data will normally come from internal and external sources. Internal sources will be employees, and external sources from customers placing orders. Employees will enter customer information and purchases. Customers will place orders either online or via email, which have to be captured into the system for processing. Procedures and instructions are hard coded into the accounting information system, and the same should be taught to employees using instructions, training, and help documentation. The documentations will allow employees to understand how data is captured, processed, and retrieved within the system. Employee training should be conducted once the system is introduced, or as it is been installed. Training will allow employees to familiarize themselves with the system, and start using the system. There should be a trained professional who assists the employees during the initial phase of using the system. The professional will guide employees in case of any difficulty, and demonstrate…