ACCOUNTING INFORMATION SYSTEM

Accounting Information System

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Accounting Information System

Accounting information system is a system of records, usually computer based, which combines accounting principles and concepts with the benefits of an information system and which is used to analyze and record business transactions for the purpose to prepare financial statements and provide accounting data to its users. Some accounting information systems are still manual, i.e. accounting records are made with a pen, paper and manual entries into accounting books.

How are such systems used?

These systems can be customized to meet the needs of a business. For example, information technology professionals responsible for business processes and information technology professionals responsible for the accounting information system can work together to develop and implement such a system so that it automatically gets information from other sources already in use by the business. Also, the systems can be set up to feature certain functions that are important to the business and eliminate functions minor to the business.  Information can be automatically fed, or manually fed into a business accounting information system at whatever pace and however often it is necessary.

What are the benefits of using accounting information system?

Businesses use accounting information systems to make their accounting activities easier, quicker, and more accurate, since accounting records are analyzed and financial statements are prepared within the system, which allows to safe time of employees and avoid mistakes.  Since many accounting information systems are equipped with error-reducing mechanisms and gather information regarding transactions electronically and automatically, data entry and computing errors are rare. Also, as mentioned above, since such systems are often automatically populated with transaction information, many accounting processes are less cumbersome and time-consuming when using such system.

Of course implementation of such system requires investment and time to be spent on the implementation, however future benefits are much higher that the expenses incurred. Also to consider whether business needs accounting information system and what kind of system is required thorough analysis of business and accounting processes has to be made to determine precise requirements.

Components of the accounting system

Think of the accounting system as a wheel whose hub is the general ledger (G/L). Feeding the hub information are the spokes of the wheel. These include

Accounts receivable

Accounts payable

Order entry

Inventory control

Cost accounting

Payroll

Fixed assets accounting

These modules are ledgers themselves. We call them subledgers. Each contains the detailed entries of its specific field, such as accounts receivable. The subledgers summarize the entries, then send the summary up to the general ledger. For example, each day the receivables subledger records all credit sales and payments received. The transactions net together then go up to the G/L to increase or decrease A/R, increase cash and decrease inventory.

We'll always check to be sure that the balance of the subledger exactly equals the account balance for that subledger account in the G/L. If it doesn't, then there's a problem.

Differences between manual and automated ledgers

Think of the G/L as a sheet of paper ...