Chapter 6: Accounting/Finance Information Systems

Data and Information Flow in Accounting Information System

Accounting information system collects financial data from the operations of the business and transforms them into financial information in the form of financial statements. Within all the operations of the business, accounting information system collects the financial ones, processes them and converts into useful financial information. As we know from accounting classes, acquired financial data are recorden in journals and ledgers before trial balance is prepared and then financial statemtents and other reports are created.

General Structure of Accounting Information System

Every system has input-process-output flow. Accounting information system has its unique data information flow. Moreover, every business has its own unique accounting information system. Though every system share the same properties, there has to be some changes according to the business. These changes may occur from;

• Size of the business
• Hardware used in the system
• The way of doing the operations
• Software used in the system and so on.

Subsystems of Accounting Information System

Accounting information system is composed of three major subsystems. These are;

1. General ledger/financial reporting system
2. Transaction processing system
3. Management reporting system

General ledger/financial reporting system handles the data received from transaction cycles. General ledger system updates the general ledger accounts while financial reporting system prepares financial reports for external users.

Transaction processing system deals with converting economic events into financial transactions; recording financial transactions into journals and ledgers, and communicating financial information to information users.

Management reporting system creates reports for internal users. Budgets, cost of the goods produces, cash flows are created by management reporting system.

The Revenue Cycle

The main objective of the business is to sell products or services to the customers and make profit. In order to get information about sales and sales related activities accounting information system must collect the data during sales related activitiy. Revenue cycle handles sales and sales related activities. In the revenue cycle some events take place. These events are;

1. Receiving customer order
2. Analysing the credit approval for the customer
3. Viewing inventories
4. Accepting order
5. Preparing documents for shipment
6. Billing
7. Recording and monitoring receivables
8. Collecting cash
9. Sales allowances and returns
10. Preparing reports

Every business makes sales but every business has its own way of doing the sales. So, the revenue cycle has to be matched with the business’s way of doing the sales. For example, in a business where no credit sales takes place there is no need for credit approval event in the system. But the business making credit sales, it has to check the credibility of the customer by analysing the financial situation of the customer. Sales transactions has two sides. One side is the physical flow of the goods/services to customer and the other side is the collecting of the cash.

The Expenditure Cycle

Expenditure cycle deals with the purchasing operations that are necessary for the business. These operations include purchasing of raw materials, merchandise inventory, services, fixed assets and payroll payments. But this cycle mainly focuses on purchasing of raw materials, merchandise inventory and services. In the expenditure cycle there are some events take place. These are;

1. Analysing inventories
2. Preparing purchase orders
3. Receiving goods
4. Making payments
5. Purchase returns and allowances
6. Preparing reports

The expenditure cycle has two sides. One side is the physical flow of the goods from supplier to the business and the other side is the flow of cash from the business to the suppliers. Therefore the expenditure cycle also deals with the payment process.

The Fixed Assets Procedures and Payroll Processing

Fixed assets procedures deal with the events of the fixed assets that the business owns. These events are;

1. Acquisition of the fixed assets
2. Maintaining fixed assets
3. Disposal of fixed assets

The purposes of payroll processing system are to calculate the pay due employees, and to maintain cumulative earning records. Payroll processing system collects data from the operations of the business. From the data collected, the payroll is produced for each employee.

The Conversion Cycle

The conversion cycle deals with the production process. It follows the physical workflow of the manufacturing process and produces information about manufacturing activities. On the accounting side of the manufacturing process, information about the costs of the products are needed. So the conversion cycle both handles the manufacturing process and cost accounting system. The differences in manufacturing processes of the businesses also make changes in the conversion cycle. The businesses making batch production or customer order production or continuous production demands differences in the conversion cycle.

General Ledger/Financial Reporting System

Accounting is an information system that collects, records, classifies and summarizes financial transactions of the business. All the subsystems of accounting information system finally conclude their individual cycles in general ledger. This shows that the financial data produced in spesific cycle are sent to general ledger system in order to collect, record, classify and summarize the financial transaction. Financial reporting system then prepares financial statements especially for external users.

Finance Information System

Finance information system supports the finance managers about the financing decisions on financing the assets of the business, controlling them and auditing them. There are fundamental functions of finance information system. These are;

1. Capital budgeting
2. Cash management
3. Credit management
4. Financial analysis
5. Financial forecasts
6. Profit planning