Financial Information Systems
This article focuses on the financial accounting process and the benefits of automating the process. The financial accounting process is defined and each step of the financial accounting cycle is explained. The accounting department is a key player in an organization's ability to be successful. This department is responsible for providing information to internal and external entities so that they can make effective financial decisions that will benefit the organization. These decisions will have a profound effect on the organization so it is imperative that the data collected is accurate.
Keywords Accounting Information System; Audit Trail; Financial Accounting; Generally Accepted Accounting Principles (GAAP); Managerial Accounting; Matching Principle; Periodicity Principle; Source Document; Trial Balance
Finance: Financial Information Systems
The accounting department is a key player in an organization's ability to succeed. This department is responsible for providing information to internal and external entities so that they can make effective financial decisions that will benefit the organization. These decisions will have a profound effect on the organization so it is imperative that the data collected is accurate. One way to ensure that the data is accurate is to install an accounting information system (AIS).
An accounting information system (AIS) is a system that records an organization's financial data and transactions. This information consists of the organization's revenues and expenditures as well as other financial transactions. A business will implement an AIS in order to accumulate data so that those responsible for making decisions have a supply of information over a period of time.
Components of Accounting Information Systems
Most accounting information systems have two components — financial and managerial accounting. The objective of financial accounting is to provide information to external decision makers, whereas, the objective of managerial accounting is to provide information to internal decision makers. Although both areas need to use an organization's accounting records, there are differences between the two areas of accounting.
Choosing the Appropriate System
An organization's management team has the ability to create any type of internal accounting system. However, cost may be a key factor in deciding what type of system will be selected. The type and amount of information that needs to be stored is another factor in selecting the most appropriate information system.
The Foreign Corrupt Practices Act
Both financial and managerial accounting is bound by the Foreign Corrupt Practices Act. This act is a "U.S. law forbidding bribery and other corrupt practices, and requiring that accounting records be maintained in reasonable detail and accuracy, and that an appropriate system of internal accounting be maintained" (Horngreen, Stratton, & Sundem, 2002, p. 7). In summary, Drury (1996) stated that managerial accounting focuses on the provision of information to people within the organization so that they can make better decisions, whereas, financial accounting emphasizes the need of an organization having the ability to provide financial information to stakeholders outside of the organization.
One of the main objectives of financial accounting is to be able to process an organization's financial transactions in an effective manner in order to produce accurate financial statements, such as income statements and balance sheets (Moscove & Simkin, 1981). Managerial accounting has three main areas of operation: Cost accounting, budgeting and systems study.
Financial accounting focuses on preparing financial statements for external decision-makers such as banks and government agencies. The primary purpose of the field is to review and monitor an organization's financial performance and report the results of the evaluation to potential stakeholders. Financial accountants are expected to create financial statements based on Generally Accepted Accounting Principles (GAAP). Financial accounting exists in order to: Produce general purpose financial statements, provide information to decision makers in the accounting field, and meet regulatory requirements.
The Financial Accounting Audit Trail
The basic inputs of the financial accounting structure are transactions that measure money. Organizations should be able to conduct an audit trail of their accounting transactions. This audit trail will show the flow of data that moves through the accounting information system. The financial accounting audit trail consists of inputs, processing and outputs. Inputs consist of documents such as sales invoices and payroll time cards, whereas, the outputs are final documents such as financial statements and other external reports. Processing will go from the input phase to the output phase. Steps taken in between these two points include: Recording journal entries, posting the entries to a general ledger, and preparing a trial balance from the general ledger account balances. Processing these transactions is considered to be a part of an organization's accounting cycle, which has nine steps.
The Nine Steps of the Accounting Cycle
According to Moscove & Simkins (1985), the nine steps in the accounting cycle are:
- Prepare transaction source documents. Any type of transaction that causes a change in assets, liability, or owners' equity must be accounted for through documentation. Business transactions are the result of source documents being created. For example, the sales invoice represents a transaction source document (also referred to as an original record). Source documents are visual representation that a transaction exists. Many corporations will have a policy indicating that a financial transaction cannot be entered into its accounting information system until the proper source documents are prepared and approved. Other common forms of source documents include purchase invoices, receiving reports, bills of lading, employee time cards, and voucher checks.
- Sourcing documents allow an organization to collect its transaction data for subsequent entry into the accounting information system. In addition, transaction source documents act as the starting point in an organization's audit trail flow of data through its information system's accounting cycle.
- Recording business transactions in a journal. Once the accounting data has been collected, it is recorded in the organization's journal. Many organizations will maintain a journal within an accounting information system in order to keep a chronological record of the activities that have occurred throughout its lifecycle. There are large amounts of transactions that need to be processed. Therefore, many organizations will switch from a manual system to a computerized financial information system. The computerized system can provide a more efficient approach to tracking the various categories that will occur when the company is performing business transactions. Some of the most common categories...
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