OVERVIEW OF AN ACCOUNTING INFORMATION SYSTEM (STUDY OBJECTIVE 2)

The accounting information system comprises the processes, procedures, and systems that capture accounting data from business processes; record the accounting data in the appropriate records; process the detailed accounting data by classifying, summarizing, and consolidating; and report the summarized accounting data to internal and external users. Many years ago, accounting information systems were paper-based journals and ledgers that were recorded manually by employees. Today, nearly every organization uses computer systems for maintaining records in its accounting information system. The accounting information system has several important components, listed next. An example from McDonald's is used to describe each component.

1. Work steps within a business process intended to capture accounting data as that business process occurs. When McDonald's employees greet a customer at the cash register, they have several work steps to complete a sale, some of which are accounting related and some of which are not. Greeting the customer with a smile may be an important step, but it has no impact on accounting records. However, using the touch screen at the cash register to conduct the sale does have an accounting effect: sales amounts in the sales records should be increased and cash amounts in cash records should be increased.
2. The manual or computer-based records to record the accounting data from business processes. As is true of most companies, McDonald's has a system of computers and computer processes to record the appropriate data from the sale process. These systems usually have a combination of manual and computerized steps. For McDonald's, the manual process is that a person must operate the cash register. The remainder of the McDonald's system is computer-based, and the computer records the sale and all related data.
3. Work steps that are internal controls within the business process to safeguard assets and to ensure accuracy and completeness of the data. As mentioned before, the requirement that a manager close and reconcile the cash register at the end of the day is an example of an internal control within the sales processes.
4. Work steps to process, classify, summarize, and consolidate the raw accounting data. For example, sales at each McDonald's franchise must be summarized and consolidated into a single total of sales revenue to be reported on the income statement. At McDonald's, these steps are accomplished by the computer system and the accounting software. In some companies, there may be manual or handwritten accounting records, although currently most organizations use IT systems to conduct some or all of the accounting recording and summarizing processes.
5. Work steps that generate both internal and external reports. McDonald's needs many types of internal reports to monitor the performance of individual franchise locations and regions. In addition, year-end external financial statements such as the income statement, balance sheet, and statement of cash flows must be prepared for external users.

These five components are part of any accounting information system but are likely to be applied differently in different business organizations. Exhibit 1-1 shows an overview of an accounting information system. The circles represent the many business processes that occur in the organization—revenue, expenditure, conversion, and administrative processes. As those processes occur, data are captured and become input into the accounting information system. The accounting information system classifies, summarizes, and consolidates the data. As input and processing occur, data must be stored to or retrieved from data storage. From this stored data and processing, several types of output are prepared. Some of the output would be documents such as purchase orders, invoices, and customer statements; other output would be checks to vendors and employees. The output reports are feedback that managers within the organization use to monitor and control the business processes. The number of computerized versus manual work steps may vary across organizations, but every organization should have each of these component pieces. In some organizations, the processes may be manual steps performed by employees, and the accounting records may be paper journals and ledgers. At the other extreme are companies where many or all of these work steps are performed by computers, and the accounting records are in computer files. In most cases, there is a combination of manual and computerized work steps.

The accounting system internal controls are not pictured in Exhibit 1-1, but there should be internal controls throughout the accounting information system.

Exhibit 1-1 Overview of an Accounting Information System

As defined earlier, internal controls are the set of procedures and policies adopted within an organization to safeguard its assets, check the accuracy and reliability of its data, promote operational efficiency, and encourage adherence to prescribed managerial practices. Internal controls are described later in this chapter and covered in detail in the Control Environment section (Chapters 3 through 7) of this book.