An accounting information system (AIS) collects, records, stores, and processes account- ing data to produce information that is useful for decision makers. Businesses must have a way to collect and store data for a large number of transactions and then use that data to produce reports that investors, creditors, and managers can use to make decisions. Exhibit B-1 shows examples of business transactions and activities that are completed when using an accounting information system.
Learning Objective 1 Describe an effective accounting
information system
Accounting Information System (AIS) A system that collects, records, stores, and processes accounting data to produce information that is useful for decision makers.
1 Describe an effective accounting information system
2 Journalize and post sales and cash receipts in a manual accounting information system using special journals and subsidiary ledgers
3 Journalize and post purchases, cash payments, and other transactions in a manual accounting information system using special journals and subsidiary ledgers
4 Describe how transactions are recorded in a computerized accounting information system
Appendix B Learning Objectives
ExhibitB-1 | Business Transactions and AIS Activities
Sell merchandise inventory
Purchase of goods or services
Payroll
Receipt of customer order
Check availability of merchandise inventory Approval of credit sale
Shipment of inventory to customer Processing of sales invoice Receipt of customer payment
Request for purchase of goods or services Approval of vendor
Receipt of goods or services Processing of vendor invoice Payment for goods or services Approval of new employees Collection of time records
Preparation and payment of payroll Preparation and payment of payroll taxes Business Transactions AIS Activities
Effective Accounting Information Systems
An effective accounting information system provides the following:
• Control
• Compatibility
• Flexibility
• Relevance
• Positive cost/benefit relationship
Control
An accounting information system must provide adequate controls of the business’s assets and data. Internal controls can safeguard a business’s assets and reduce the likelihood of fraud and errors. For example, a business needs procedures for making cash payments. An accounting information system creates the structure to encourage adherence to manage- ment’s procedures.
Compatibility
A compatible system works smoothly with the business’s employees and organizational structure. A small business doesn’t need a big accounting information system. It could handle its accounting with an entry-level software package such as QuickBooks® or Sage® 50 Accounting (formerly called Peachtree). But a large company needs a different system—
one that can manage multiple branches and track revenues and expenses in all divisions of the business.
Flexibility
An accounting information system must be flexible to accommodate changes in a business over time. Businesses might start selling some new products, or they might expand to new locations. This will require a more complicated accounting information system.
Relevance
An effective accounting information system provides information that is relevant. In other words, it improves decision making and reduces uncertainty. The information produced must be useful to the business in achieving its overall goals.
Positive Cost/Benefit Relationship
Control, compatibility, flexibility, and relevance can be expensive. A business needs a sys- tem that gives the most benefit for the least cost. A relatively inexpensive system, such as QuickBooks, may be the most economical way for a business to do its accounting. Or it may be necessary for a business to invest a large amount of cash in a more complicated system. In addition, the business must consider the cost of training employees to use the system and time spent on entering data into the system. The business must invest only in an accounting information system in which the benefits received outweigh the cost of the system.
An accounting information system can be either manual (completed using paper and pencil) or computerized. All the previously discussed features are needed whether the accounting information system is computerized or manual.
Components of an Accounting Information System An accounting information system has three basic components:
• Source documents and input devices
• Processing and storage
• Outputs
Source Documents and Input Devices
Most businesses now are using computerized accounting information systems to create electronic source documents and capture the data in electronic format. Examples include an electronic invoice and an electronic receiving report.
Source documents also provide control and reliability in an accounting information system. Standardized source documents that require specific data to be input ensure that each transaction is recorded accurately and completely. In addition, prenumbered source documents provide necessary control in a system by automatically assigning a sequential number to each new transaction.
Processing and Storage
Once data has been input into the system, it must be processed. In a manual account- ing information system, processing includes journalizing transactions and posting to the accounts. A computerized system, on the other hand, uses software to process transactions.
This software reads and edits transaction data. It allows businesses to process transactions without actually requiring employees to journalize and post to the accounts.
A business’s data must also be stored. In a manual system, data are contained in paper documents that are often stored in filing cabinets and off-site document warehouses.
Computerized systems now allow businesses to keep data on a main computer, called a server, that often allows employees to access information from anywhere in the world.
The protection and security of a business’s data have become increasingly important.
Businesses must be aware of threats to their data such as hacking (unauthorized access) and malware (viruses and spyware). Companies are spending increasingly large amounts of cash to ensure that their data and information are secure.
Outputs
Outputs are the reports used for decision making, including the financial statements. In a manual system, reports and financial statements must be created using Word documents, Excel spreadsheets, PowerPoint presentations, or other software applications. In a com- puterized system, the accounting software can generate reports instantaneously that can be easily formatted and used to make business decisions.
Server The main computer where data are stored, which can be accessed from many different computers.
McCormick & Company, Incorporated is a global leader in flavor that manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products. The company’s brands include McCormick, Lawry’s, and Club House. In addition, the company also markets authentic ethnic brands, such as Zatarain’s, Thai Kitchen, and Simply Asia. (You can find McCormick &
Company’s annual report at http://phx.corporate-ir.net/phoenix.
zhtml?c=65454&p=irol-sec&control_symbol=#14157537.) How do companies, such as McCormick & Company, rely on information technology systems?
In the annual report, McCormick & Company state that the com- pany relies on its information technology systems to operate its
business efficiently. Information technology systems allow compa- nies to manage their business data, communications, supply chain, order entry and fulfillment, and other business processes.
What would happen if McCormick & Company’s information technology systems fail to perform adequately?
McCormick & Company state, in its annual report, that a failure in its information technology system could disrupt its business and could result in transaction errors, processing inefficiencies, and the loss of sales and customers. Ultimately, the failure could cause McCormick & Company’s business and results of operations to suffer.
TYING IT ALL TOGETHER