lesson 2

• Accounting Information System


  The system that collects and processes transaction data and disseminates financial information to interested parties
• Accounting Information System


  • May either be manual or computerized
  • Includes each step in the accounting cycle
  • Includes documents that provide evidence of the transactions and events, and the records, trial balances, worksheets, and financial statements
• Manual Accounting System is necessary to understand how it works because:
• Reasons why understanding Manual Accounting System is necessary

  • It is still used in the business world since most small business begins operations with manual accounting systems and are later converted to computerized systems as the business grows
  • To understand how computerized accounting systems operate
• Principles of Accounting Information Systems

  • Cost Effectiveness
  • Usefulness
  • Flexibility
• Cost Effectiveness


  The accounting system must be cost-effective. The benefits of information must outweigh the costs of providing it.
• Usefulness


  The information must be relevant, faithfully representative, comparable, verifiable, timely, and understandable, and satisfy the test of materiality. Designers of accounting systems must consider the needs and knowledge of various users.
• Flexibility


  The accounting system should accommodate a variety of users and changing information needs. The system should be sufficiently flexible to meet the resulting changes in the demands made upon it.
• If the accounting system is cost-effective, provides useful output, and has the flexibility to meet future needs, it can contribute to both individual and organizational goals.
• Developing an Accounting System

  1. Carefully planned

  2. Designed

  3. Installed

  4. Managed

  5. Refined
• Four Phases of Accounting System (life cycle of an accounting system)

  1. Analysis

  2. Design

  3. Implementation

  4. Follow-Up
• Analysis


  The starting point is to determine the information needs of internal and external users. The system analyst then identifies the sources of the needed information and the records and procedures for collecting and reporting the data. If an existing system is being analyzed, its strengths and weaknesses must be identified.
• Design


  New system must be built from the ground ups. The forms and documents designed, methods and procedures selected, job descriptions prepared, controls integrated, reports formatted, and equipment selected. Redesigning an existing system may involve only minor changes or a complete overhaul.
• Implementation


  Implement new or revised systems requires that documents, procedures and processing equipment be installed and made operational. Also, personnel must be trained and closely supervised throughout a start-up period.
• Follow-Up


  After the system is up and running, it must be monitored for weakness or breakdowns. Also, its effectiveness must be compared with design and organizational objectives. Changes in design or implementation may be necessary.
• An accounting system must have adequate controls built into it, including mechanisms which will protect and safeguard the assets of the business and ensure that the information provided by the system is faithfully represented, relevant and timely so that it meets the decision-making needs of both management and external users.
• Internal Control System


  The primary functions of those who are managing and running the business are to ensure that the assets of the business are used efficiently, always protected, and have adequate controls in place.
• When the business becomes larger, the owner may have to rely on others to help manage and control business operations such as putting in place systems to assist in ensuring assets are used and protected.
• Risk Management


  Involves identifying and putting in place processes that will lessen the risk faced by the business.
• Internal Control


  Consists of all processes used by management and staff to provide and ensure effective and efficient operations, and compliance with laws, regulations, and internal policies. As well as, required to protect assets and enhance the reliability of accounting records.
• Policies of Internal Control

  • Safeguarding assets from theft, robbery, and unauthorized use
  • Enhance completeness, accuracy, and reliability of its accounting records by reducing the risk of errors (unintentional mistakes) and irregularities (intentional mistakes and misrepresentations) in the accounting process, and permit the timely preparation of financial information
• Two Aspects of Internal Control

  • Administrative Controls
  • Accounting Controls
• Administrative Controls


  Provide operational efficiency and adherence to policies and procedures prepared by the management of the business.
• Accounting Controls


  Methods and procedures used to protect assets and to ensure that the accounting records are reliable, such as procedures for ensuring transactions are recorded as necessary and ensuring that the record-keeping for assets is kept separate from those who have physical custody of the assets.
• Principles of Internal Control

  • Establishment of responsibility
  • Segregation of duties
  • Documentation procedures
  • Physical, mechanical and electronic controls
  • Independent internal verification
• Establishment of Responsibility


  Two essential characteristics are the assignment of responsibility to specific individuals and the appointment of supervisors to monitor compliance with procedures.
• Segregation of Duties


  The responsibility for related activities should be assigned to different individuals. The responsibility for keeping the records for an asset should be separate from the physical custody of that asset.
• Documentation Procedures


  Documents provide evidence that transactions and events have occurred. Procedures should be established for documents, including pre-numbering to prevent transactions from being recorded more than once or not being recorded.
• Physical, Mechanical and Electronic Controls


  Use of physical, mechanical and electronic controls is essential to safeguard assets and enhance the accuracy and reliability of records.
• Independent Internal Verification


  Involves the review, comparison and reconciliation of data prepared by employees, including checking procedures facilitated by segregation of duties, monitoring by the employee's supervisor, verification by an internal auditor, and rotation of duties.