Task Team of FUNDAMENTAL ACCOUNTING
School of Business, Sun Yat-sen University
Lesson notes
Lesson 8 Accounting Information System
Learning objectives
1. Describe the principles of properly designed accounting systems.
2. Describe and illustrate the principles of internal control of accounting information systems.
3. Describe and illustrate the use of t special journals and subsidiary ledgers to process
accounting data more efficiently.
4. Describe the use of electronic data processing (EDP) systems to process accounting data.
Teaching hours
Students major in accounting: 3 hours
Others:
2 hours
Teaching contents:
An accounting information system (AIS) is the system of records that a business keeps to
maintain its accounting system. This includes the purchase, sales and nominal ledgers and cash
books of the business. In a more general sense, it includes the entire network of communications
used by a business organization to provide needed information. While this was previously a
paper-based process, most modern businesses now use computerized accounting systems.
Fundamental Principles of AIS
Because of differences in businesses, in the number of transactions to be processed, and in
the uses made of accounting data, accounting systems will vary from business to business.
However, a number of broad principles apply to all systems, which are:
Cost-Effectiveness Balance. The information value of the reports produced should be at least
equal to the cost of producing them.
Flexibility to meet future needs. The accounting system not only must be tailored to meet the
specific needs of each business, but also must be flexible enough to meet the changing demands
from new government regulations, changes in accounting principles, organizational changes
necessary to meet practices of competing businesses, changes in data processing technology, or
other factors.
Adequate internal control. The system should aid management in controlling operations.
Effective reporting. When financial reports are prepared, the requirements and knowledge of
the user of accounting information should be recognized.
Task Team of FUNDAMENTAL ACCOUNTING
School of Business, Sun Yat-sen University
Adaptation to organization structure. The accounting system must be tailored to the
organizational structure of each business
Internal Controls of AIS
The objectives of an accounting information system may differ from entity to entity, but most
information systems have as an objective the provision of reliable information on a timely basis.
Internal controls are a serial procedures that are designed to provide management with some
degree of assurance that the information provided by the accounting information system is reliable
and provided on a timely basis. These procedures include:
Competent personnel and rotation of duties. It is necessary that all accounting employees be
adequately trained and supervised to perform their jobs. It is also advisable to rotate clerical
personal periodically from job to job.
Assignment of responsibility. To motivate employees work efficiently, their responsibilities
must be clearly defined.
Separation of responsibility for related operation. To decrease the possibility of inefficiency,
errors, and fraud, responsibility for a sequence of related operations should be divided among two
or more persons. For example, no one individual should be authorized to order merchandise,
verify the receipt of the goods, and pay the supplier.
Separation of operation and accounting. Responsibility for maintaining the accounting
records should be separated from the responsibility for engaging in business transactions and for
the custody of the firm's assets.
Proofs and security measures. Proofs and security measures should be used to safeguard
business assets and assure reliable accounting data.
Independent review. To determine whether the other internal control principles are being
effectively applied, the system should be periodically reviewed and evaluated by internal auditors
independent of the employees responsible for operations.
The accounting process
The accounting process is a series of activities that begins with a transaction and ends with
the closing of the books. The major steps of the accounting process are as follows:
Identify the transaction or other recognizable event;
Prepare the transaction's source document such as a purchase order or invoice.
Analyze and classify the transaction.
Task Team of FUNDAMENTAL ACCOUNTING
School of Business, Sun Yat-sen University
Record the transaction by making entries in the appropriate journal, such as the sales journal,
purchase journal, cash receipt or disbursement journal, or the general journal.
Post general journal entries to the ledger accounts.
The above steps are performed throughout the accounting period as transactions occur or in
periodic batch processes. The following steps are performed at the end of the accounting period:
Prepare the trial balance to make sure that debits equal credits.
Correct any discrepancies in the trial balance. If the columns are not in balance, look for math
errors, posting errors, and recording errors.
Prepare adjusting entries to record accrued, deferred, and estimated amounts.
Post adjusting entries to the ledger accounts.
Prepare the adjusted trial balance.
Prepare the financial statements.
Components of an AIS
An accounting system is comprised of accounting records and a series of processes and
procedures assigned to staff, volunteers, and/or outside professionals. The goals of the accounting
system are to ensure that financial data and economic transactions are properly entered into the
accounting records and that financial reports necessary for management are prepared accurately
and in a timely fashion.
Traditionally, the accounting system includes the following components:
Source documents
The source document is the original record of a transaction. During an audit, source
documents are used as evidence that a particular business transaction occurred. Examples of
source documents include:
Cash receipts
Credit card receipts
Cash register tapes
Cancelled checks
Customer invoices
Supplier invoices
Purchase orders
Time cards
Deposit slips
Notes for loans
Task Team of FUNDAMENTAL ACCOUNTING
School of Business, Sun Yat-sen University
Payment stubs for interest
At a minimum, each source document should include the date, the amount, and a description
of the transaction. When practical, beyond these minimum requirements source documents should
contain the name and address of the other party of the transaction.
When a source document does not exist, for example, when a cash receipt is not provided by
a vendor or is misplaced, a document should be generated as soon as possible after the transaction,
using other documents such as bank statements to support the information on the generated source
document.
Once a transaction has been journalized, the source document should be filed and
made retrievable so that transactions can be verified should the need arise at a later date.
Special journals
Special journals are accounting records or devices designed to record a specific type of
transaction in a highly efficient manner. Because a special journal is used only to record a specific
type of transaction, the journal may be located at the transaction site and maintained by employees
other than accounting personnel. Thus special journals reduce the time, effort, and cost of
recording routine business transactions.
Transactions
Sales on credit
Purchases on credit
Cash receipts
Cash Payments
Special Journal (Abbrevviation)
Sales Journal (S)
Purchases Journal (P)
Cash Receipts Journal (CR)
Cash Payments Journal (CP)
The sales journal is used only for recording sales of merchandise on account; sales of
merchandise for cash are recorded in the cash receipts journal. Sales of non-merchandise assets
are recorded in the cash receipts journal or the general journal, depending upon whether the sale
was made for cash or on account. The purchase journal is designed to allow for the recording of
everything purchased on account. Cash payments journal records all transactions in which cash is
paid.
Subsidiary Ledgers and General ledger
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
Task Team of FUNDAMENTAL ACCOUNTING
School of Business, Sun Yat-sen University
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.
General ledger is the principal ledger, which contains all of the balance sheet and income
statement accounts. Each subsidiary ledger is represented in the general ledger by a summarizing
account, called a controlling account. The balance in the controlling accounts must equal the sum
of the balances in the subsidiary ledgers
Computerized AIS
A system that uses an electronic computer to process accounting data may be termed an
electronic data processing (EDP) system or computerized accounting information system. An
electronic data processing system processes accounting data in much the same way as does a
manual system but with greater speed and accuracy. For example, electronic cash registers are
being used with the computer to process both cash and credit sales. For cash sales, the data entered
by the salesclerk in the electronic cash register provide the basis for the computer to update the
accounting records, including the cash receipts journal and the general ledger accounts. For credit
sales, the sales clerk enters the customer's account number and other relevant data in the electronic
cash register. The computer then updates the customer's account in the subsidiary ledger and the
other accounting records. Printouts of the updated general ledger and subsidiary account balances,
the sales journal, and customers statements of account can be obtained when needed.
In recent years, microcomputers and minicomputers have made electronic data processing
affordable to small and medium-size businesses. Some small businesses have been able to gain the
use of electronic data processing through computer service centers, which provide computer
services on a fee-basis.
Summary
As the system of records that a business keeps to provide financial information, Accounting
information system (AIS) has based its design on some fundamental principles. An accounting
system is comprised of accounting records and a series of processes and procedures assigned to
staff, volunteers, and/or outside professionals, which traditionally includes source documents,
special journals, subsidiary journals and general journals. In recent years, because of the
Task Team of FUNDAMENTAL ACCOUNTING
School of Business, Sun Yat-sen University
development of IT industry, manual-based accounting information system has been replaced by
computerized AIS.
Key points
1. The principles applying to all accounting information systems.
2. Comparing of manual accounting data processing methods and computerized data processing
methods.
Reading material
1. Philip E. Fess and Carl S. Warren, Accounting Principles, South-Western Publishing Co.,
1987.
2. Burrowes, Ashley W. Core Concepts of Accounting Information Systems. Issues in
Accounting Education, May2005, Vol. 20 Issue 2.
3. Sutton, Steve G., The role of AIS research in guiding practice.,International Journal of
Accounting Information Systems, Mar2005, Vol. 6 Issue 1.
4. Hutchison, Paul D., White, Craig G., and Daigle, Ronald J., Advances in Accounting
Information Systems and International Journal of Accounting Information Systems: first ten
volumes (1992–2003)., International Journal of Accounting Information Systems, Oct2004,
Vol. 5 Issue 3.
5. Lin, Fengyi, A Unified Accounting Information Framework To Modeling Bank Accounting
Systems, Journal of Applied Business Research, Fall2004, Vol. 20 Issue 4.