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 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.
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.
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.
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.
The flexibility principle requires an accounting information system to accommodate organizational change. In today's fast paced business world, companies that do not adapt eventually fade away. For instance, the information system must be able to add new products and sales people, establish new divisions or subsidiaries and deal with mergers and acquisitions. It must be scalable as the company hopefully grows.
Finally, the cost-benefit principle requires the benefits from the information produced outweigh the cost of producing the information. There is no sense in developing a report management will not use to make decisions. Alternatively, expending hours of time creating a report to manage petty cash might be counter-productive.
The accounting information system collects, processes, and produces useful information for the decision-makers of the company. There are five fundamental principles behind all properly designed accounting systems. The control principle states proper internal controls must be in place to safeguard the integrity of information. Relevance principle demands the production of information in a timely manner enabling management to make real time decisions. Compatibility principle requires system conformity to industry standards. Flexibility principle ensures quick system adaptability to accommodate corporate change and growth. Cost-benefit principle requires the benefits from the information produced outweigh the cost of producing the information. Information systems designed with these five principles in mind should serve the needs of your company.
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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.
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.
|1||The system's servers are poorly configured, thus resulting in very high bandwidth costs. These bandwidth costs are higher than our sales!|
|2||The system freezes when asked to produce a variance report and often only produces it several days later when we are no longer evaluating performance.|
|3||The system does not have a function to add new users, so new employees cannot use the system.|
|4||Rookie 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.|
|5||The 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.|
For each of these issues, determine which fundamental principle is most relevant.
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