CHAPTER 2 ACCOUNTINGAS A PROFESSION AND ACCOUNTING

INFORMATION SYSTEM

Pr. SAMLAL Zoubida , MBA, CFA & PHD candidate for HBS program

The Study of Accounting Information Systems

WHAT IS A SYSTEM?

• A System is an entity consisting of interacting parts that are coordinated to achieve one or more common objectives.

SYSTEM

INPUT OUTPUTPROCESS

FEEDBACK

INFORMATION SYSTEM

INPUT OUTPUTPROCESS

FEEDBACK

DATA INFORMATION

• Data are raw facts and figures that are processed to produce information

• Information is data that have been processed and are meaningful and useful to users. The terms “meaningful” and “useful” are value-laden terms and usually subsume other qualities such as timeliness, relevance, reliability, consistency, comparability, etc.

DATA VERSUS INFORMATION

FUNCTIONAL STEPS IN TRANSFORMING DATA INTO INFORMATION

• Data collection - capturing, recording, validating and editing data for completeness and accuracy

• Data Maintenance/Processing - classifying, sorting, calculating data

• Data Management - storing, maintaining and retrieving data

• Data Control - safeguarding and securing data and ensuring the accuracy and completeness of the same

• Information Generation - interpreting, reporting, and communicating information

FUNCTIONS OF AN INFORMATION SYSTEM

INPUT OUTPUTPROCESS

FEEDBACK

INFORMATION SYSTEM

ENVIRONMENT

Customers Suppliers

Regulatory Stockholders CompetitorsAgencies

ORGANIZATION

AIS

Sales/Marketing

Personnel

ProductionInfo

Finance

AIS AS AN MIS SUBSYSTEM

RELATIONSHIP OF AIS & MIS

Sales/Marketing Production AIS Personnel

MIS

Finance

Order entry/Sales

Billing/A.Rec.Cash receipts

Production

General ledger

Payroll

Inventory

Purchasing/A. Pay./Cash disb.

EXAMPLES OF AIS SUBSYSTEMS(MERCHANDISING)

InventorySystem

GeneralLedgerSystem

Order entrySales

System

Billing/A. ReceivableCash Receipts

System

Purchasing/A. Payable/Cash Disb.

System

HumanResource

Management(Payroll)System

RevenueCycle

ExpenditureCycle

ShippingReceiving

Ext/Fin. reportingTax & req. reportingInternal reporting

OBJECTIVES AND USERS OF AIS

• Support day-to-day operations– Transaction processing

• Support Internal Decision-Making– Trend Analyses– Quantitative & Qualitative Data– Non-transactional sources

• Help fulfill Stewardship Role

RESOURCES REQUIRED FOR AN AIS

• Processor(s): Manual or Computerized• Data Base(s): Data Repositories• Procedures: Manual or Computerized• Input / Output Devices• Miscellaneous Resources

ROLES OF ACCOUNTANTS WITH RESPECT TO AN AIS

• Financial accountants prepare financial information for external decision-making in accordance with GAAP

• Managerial accountants prepare financial information for internal decision-making

ROLES OF ACCOUNTANTS WITH RESPECT TO AN AIS

• Auditors - evaluate controls and attest to the fairness of the financial statements.

• Accounting managers - control all accounting activities of a firm.

• Tax specialists - develop information that reflects tax obligations of the firm.

• Consultants - devise specifications for the AIS.

ETHICAL STANDARDS FOR CONSULTING

• Professional competence• Exercise due professional care• Plan and supervise all work• Obtain relevant data to support reasonable

recommendations• Maintain integrity and objectivity• Understand and respect the responsibilities of all

parties• Disclose any conflicts of interest

ACCOUNTING INFORMATION

CHARACTERISTICS OF ACCOUNTING INFORMATION

• Accounting information is composed principally of financial data about business transactions, expressed in terms of money.

• The recorded data must be sorted and summarized before significant reports and analyses can be prepared.

• The “basic raw materials” of accounting are composed of business transaction data.

• Its “primary end products” are composed of various summaries, analyses, and reports.

USERS OF ACCOUNTING INFORMATION

• Accounting provides the techniques for accumulating and the language for communicating economic data to :

– Investors in a business enterprise need information about its financial status and its future prospects.

– The government agencies are concerned with the financial activities of business organizations for purposes of taxation and regulation.

– The individuals most dependent upon and most involved with the end products of accounting are those charged with the responsibility for directing the operations of enterprises.

USERS OF ACCOUNTING INFORMATION

– In the conduct of day-to-day operations, management

relies upon accounting to provide the amount owed to

each creditor and by each customer and the date each

payment is due.

– The accountant is able to establish an information

network to assist each group in forming judgments and

making decisions regarding future actions.

ACCOUNTING AS A PROFESSION

RELATIONSHIP OF ACCOUNTING TO OTHER FIELDS

• Everyone engaged in business activities, from the youngest employee to the manager and owner, comes into contact with accounting.

• The higher the level of authority and responsibility, the greater is the need for an understanding of accounting concepts and terminology.

• The importance of understanding accounting is not limited to the business world.

• Many employees with specialized training in non-business areas also make use of accounting data and should understand accounting principles and terminology.

PROFESSION OF ACCOUNTANCY

• Accountancy is a profession with stature comparable to that of engineering or law.

• Accountants who render accounting services on a fee basis, and staff accountants employed by them, are said to be engaged in public accounting.

• Accountants employed by a particular business enterprise or not-for-profit organization, as chief accountant, controller, or financial vice-president, are said to be engaged in private accounting.

PUBLIC ACCOUNTING

• The practice of public accounting is generally restricted to licensed CPA’s.

• This act created the Board of Accountancy which was given the power among other, to issue the certificate of Certified Public Accountant, abbreviated as CPA.

PRIVATE ACCOUNTING

• The scope of activities and duties of private accountants varies widely. Private accountants are frequently called management accountants.

• If they are employed by a manufacturing concern, they may be call industrial or cost accountants. The chief accountant in a business may be call controller. Various governmental units and other not-for-profit organizations also employ accountants.

• Internal auditors are accountants who review the accounting and operating procedures prescribed by their companies. Accountants who specialize in internal auditing may be granted the Certified Internal Auditor (CIA) certificate.

RELATIONSHIP OF ACCOUNTING TO OTHER FIELDS

• For example, an engineer responsible for selecting the most desirable solution to a technical manufacturing problem may consider cost accounting data to be the decisive factor.

• Lawyers use accounting data in tax cases and in lawsuits involving property ownership and damages from breach of contract.

• Governmental agencies rely on accounting data in evaluating the efficiency of government operations and for appraising the feasibility of proposed taxation and spending programs.

FIELDS OF ACCOUNTING

SPECIALIZED ACCOUNTING FIELDS

FINANCIAL ACCOUNTINGIt is concerned with the recording of transactions for a business enterprise or other economic unit and the periodic preparation of various reports from such records.

Corporate enterprise must employ such principles in preparing their annual reports on profitability and financial status for their stockholders and the investing public.

SPECIALIZED ACCOUNTING FIELDS

AUDITING

It is a field of activity involving an independent review of

the accounting records. In conducting an audit, public

accountants examine the records supporting financial reports

of an enterprise and express an opinion regarding their fairness

and reliability.

COST ACCOUNTING

It emphasizes the determination and control of costs. It is

concerned primarily with the costs of manufacturing

processes and of manufactured products, but increasing

attention is being given to distribution costs.

SPECIALIZED ACCOUNTING FIELD

MANAGEMENT ACCOUNTING

It employs both historical and estimated data in assisting management in daily operations and in planning future operations. It deals with the specific problems that confront enterprise managers at various organizational levels.

TAX ACCOUNTING

It encompasses the preparation of tax returns and the consideration of the tax consequences of proposed business transactions or administrative courses of action.

SPECIALIZED ACCOUNTING FIELDS

ACCOUNTING SYSTEM

It is the special field concerned with the design and

implementation of procedures for the accumulation and

reporting of financial data. The systems accountant must

devise appropriate “checks and balances” to safeguard

business assets and provide for information flow that will be

efficient and helpful to management.

BUDGETARY ACCOUNTING

It presents the plan of financial operations for a period and,

through records and summaries provides comparisons of

actual operations with the predetermined plans.

SPECIALIZED ACCOUNTING FIELDS

INTERNATIONAL ACCOUNTING It is concerned with the special problems associated with the

international trade of multinational business organizations.

NOT-FOR-PROFIT ACCOUNTINGIt specializes in recording and reporting the transactions of various governmental units and other not-for-profit organizations such as church, charities, and educational institutions.

BOOKKEEPING AND ACCOUNTING

BOOKKEEPING is the recording of business data in a

prescribed manner. A bookkeeper may be responsible for

keeping all the records of a business or only a minor segment,

such portion of customer accounts in department store.

ACCOUNTING is primarily concerned with the design of the

system of records, the preparation of reports based on the

recorded data, and the interpretation of the reports.

Accountants often direct and review the work of bookkeeper.

CASE STUDY- Price Waterhouse Coopers