Accounting information system
An accounting information system should provide for the orderly assembly of accounting information and appropriate analysis to enable financial statements to be prepared. What constitutes an adequate accounting system will depend on the size, nature and complexity of the enterprise.
In its simplest form, for a small business dealing primarily with cash sales and with only a few suppliers. the accounting system may only need to consist of an analyzed-cash book and a list of unpaid invoices. In contrast, a company manufacturing several different products and operating through a number of dispersed locations may need a complex accounting information system to enable information required for financial statements to be assembled.
The accounting information system of an organization can also be better understood in terms of accounting software used to run the accounting functions, the types of information, financial analysis and accounting reports that can be obtained from the accounting system and the internal controls set up to prevent fraud.
Accounting Software used in Accounting Information System
A typical accounting information system for small business is supported by computerized or non-computerized cash book, general ledger, accounts payable (creditors ledger), accounts receivable (debtors ledger), inventory control, order entry and billing. Almost all businesses have already use computer software to computerized its accounting information system. There is no shortage of proven computerized accounting systems available in the market.
Financial Reports and Analysis from Accounting Information System
The Balance Sheet, Income Statement, Debtors Aging, Creditors Aging, Inventory Valuation are the typical monthly and annual accounting reports that can be obtained from the accounting information system. Some organization uses these accounting reports in a strategic manner and performed financial ratio analysis on the accounting statements. These ratios can explained better the financial health of the organization such as cash liquidity, collection days from debtors, return on investment. The ratios can also be compared against industry averages for benchmarking financial performance.
Types of Internal Controls in Accounting Information System
Control checks and balances must be present in an accounting information system to prevent fraud. It is important for management to establish financial controls to ensure adherence to management policies, safeguard the assets and secure as far as possible the completeness and accuracy of the records. Depending upon the size and nature of the business concerned, an accounting system will frequently need to incorporate internal controls to provide assurance that :
- All the transactions and other accounting information which should have been recorded have in fact been recorded
- Errors or irregularities in processing accounting information will become apparent
- Assets and liabilities recorded in the accounting system exist and are recorded at the correct amounts.
Types of internal controls
There are eight types of internal controls. The list provides a useful starting point if you are asked what internal controls you might expect to see in an accounting information system.
An example of each type of internal control is given below along with further amplification where appropriate:
Organization – A plan of organization is indicative of this type of control. An effective plan would require:
- separation of a company’s operations into appropriate divisions and sub-divisions;
- appointment of persons to assume responsibility;
- establishment of clear lines of responsibility between each division and subdivision and the board of directors;
- overall co-ordination of the company’s activities.
Segregation of duties- In particular there should be a division of responsibilities for:
- authorizing or initiating the transaction;
- the physical custody and control of assets involved;
- recording the transaction.
No one person should be in a position both to misappropriate an asset and to conceal his act by falsifying the records. For example, in a sales system the duties of receiving money from debtors and writing up the sales ledger should be separated. If not, money could be misappropriated and the records falsified to cover this. However, this segregation of duties could be avoided by collusion as you have seen above.
Physical – For example, cash should be locked away and stock held securely.
Authorization and approval – In a purchases system there should be present authority limits. For example an order up to the value of $1,000 could be approved by a department head, up to $5,000 by any one director, and beyond this by the Board as a whole.
Arithmetical and accounting – Such controls include checking the casts on a purchase invoice, performing a bank reconciliation, control accounts reconciliation, and taking out a trial balance.
Personnel – As with organization controls one specific example is difficult to give as such controls cover the whole business. Personnel procedures should ensure only suitably qualified staff are recruited and adequate training is given.
Supervision – By responsible officials on a day to day basis. Perhaps each department could have its own supervisor.
Management – Note that these controls include a review of management accounts and comparison with budgets, and the internal audit function.
Control over Accounting Records in the Accounting Information System
- The accounting records must be sufficient to show and explain the company transactions and must be such as to disclose with reasonable accuracy, at any time, the financial position of the company at that time.
- The accounting records must, in particular, contain entries from day to day of all sums of money received and expended by the company, and the matters in respect of which the receipt and expenditure takes place.
- In addition, where the company deals in goods, the accounting records must contain statements of stock held by the company at the end of each financial year of the company.
An integrated computerized accounting software system to produce relevant timely information and a sound system of internal financial controls are the two primary requirements for an effective and comprehensive accounting information system.
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