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Fundamental Principles of Accounting Information Systems

Instructor
Mark Koscinski

Mark has a doctorate from Drew University and teaches accounting classes. He is a writer, editor and has experience in public and private accounting.

Expert Contributor
Steven Scalia

Steven completed a Graduate Degree is Chartered Accountancy at Concordia University. He has performed as Teacher's Assistant and Assistant Lecturer in University.

In this lesson, you will learn the importance of accounting information systems. You will also learn the five basic principles behind a good accounting information system. Updated: 05/28/2020

Accounting Information Systems

Your accounting manager has good news and bad news to share with you. The good news is, new product sales are exceeding expectations. The bad news is, your current accounting system simply cannot handle the increase in volume. It will not allow your accounting department to add new products or salespeople. You know it is time to upgrade your capabilities, so you do a little research. Making the right choice depends on understanding the principles behind a good accounting information system.

The Goal

The goal of every good accounting information system is to collect data from transactions, process the data, and produce useful reports to help management make timely decisions. Information is so vital to the success of a business today, management must have at least a rudimentary understanding of accounting information system.

Control Principles

There are five fundamental principles behind every information system. The first is the control principle. Simply stated, all accounting information systems must have proper internal controls. Internal controls are procedures and practices controlling and monitoring business activities. These include procedures such as monthly bank account reconciliations, password controls on computers/software, and securing confidential information. Internal controls safeguard the integrity of the information being input, processed, and output by the information system.

Relevance Principle

The relevance principle requires information to be produced in a timely manner. Information must also be useful and understandable. The accounting function has often been criticized for being 'historical scorekeepers' producing financial information long after the month or quarter has closed. Such information is often useless to management when running a business in real time.

Today, financial information needs to be produced almost immediately for it to be relevant. The faster the information is available, the more useful it is. Reports must summarize information for busy decision makers and offer detail if management wishes to drill down on selected data. Flash reports and dashboards are examples of this principle and are now extremely common. Information is relayed to management almost instantaneously.

Compatibility Principle

The compatibility principle requires the system to conform to the company's activities and internal structure. Accounting software must be capable of functioning in the industry the company operates. For example, a bank will purchase software capable of capturing banking transactions such as teller or ATM transactions rather than purchasing manufacturing enterprise resource planning software.

The management reports generated by the system must mirror the organization structure of the company. Often the reports are hierarchical in nature. For instance, each salesperson should receive an activity report. The regional sales manager should receive regional sales information and the vice-president of sales should receive sales information for the entire company.

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Additional Activities

Fundamental Principles of Accounting Information Systems - A Practical Exercise:

The following exercise is designed to help students apply their knowledge of the fundamental principles of accounting information systems in a real-life context.

Scenario:

You are the Chief Financial Officer of Boomer Bottles, a company that makes sport water bottles. Because the company has grown significantly in the past few years, you decided to get an accounting information system. As you were too busy to do the implementation yourself, you hired Rookie Clumsy, a contractor that apparently specialized in accounting information systems. Truth be told, you wish you would have looked at Rookie's credentials before hiring him - You have experienced a number of issues in the first month after the system was implemented. These issues are listed below.

No.Issue
1The system's servers are poorly configured, thus resulting in very high bandwidth costs. These bandwidth costs are higher than our sales!
2The system freezes when asked to produce a variance report and often only produces it several days later when we are no longer evaluating performance.
3The system does not have a function to add new users, so new employees cannot use the system.
4Rookie did not require password authentication to access the system. As a result, an employee entered the system and canceled an invoice made to her father's company.
5The company's auditors have found that the system is not in line with auditing standards and has refused to issue an SSAE 16 Type II certification as a result.

Required:

For each of these issues, determine which fundamental principle is most relevant.

Solution:

See below.

No.Issue
1Cost-benefit principle
2Relevance principle
3Flexibility principle
4Control principle
5Compatibility principle

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