An Introduction To Accounting

AIS is a system that collects and store accounting data, after that process the data into useful information used by the decision makers (internal and external users). The information produced by AIS can help decision maker to manage their business more efficiently strategically. However, accounting information system can be manual using the traditional way of recording business transactions manually using paper-and-pen. Today the term AIS referred to as compound computer base system that merges the ability of information technology together with traditional accounting principles and practices.

Accounting information systems consist of six components:

People: users who work on the systems

Procedures and instructions: the process of collecting, managing and storing the data

Data: data which is related to the company and its business.

Software: application that processes the business data

Information technology infrastructure: the physical devices like personal computer and systems

Internal controls and security measures: which is employed to secure the data

In the beginning, AISs were mainly developed “in-house” as legacy systems. These kinds of solutions are difficult to develop and require a high cost to maintain. In the present day, AIS are sold as prebuilt software packages from vendors. The most popular vendors for AIS are Microsoft, Sage, Group, SAP and Oracle where they customize the software to mach organizations’ business processes.

Modern AIS follows a multitier architecture, which separate the application processing and data management in different layer from the presentation to the user. The presentation layer manages how the information is displayed and used by functional users of the system (through client application, web browser or mobile device). All the data in the system is stored and packed by a centralized database. this includes transactional data generated from the core business processes such as inventory, purchases etc. when a transaction occur from business event the data is collected and stored into the system database where it can be processed into useful information used by decision makers.

A big benefit from computerize accounting information system is that they automate and make financial reporting more efficient. Accurate and summarized, timely information is a major tool for organizations decision making and financial reporting. The accounting information system pull imports data from the system database, process and transform it and eventually produces information and reports which can be easily consumed and analyzed by the users, managers and decision makers. These systems are required to ensure that the reports are timely and relevant so that decision makers are able to quickly and efficiently base on the information provided in the reports. Consolidation is one of the greatest characteristic of reporting as user does not have to go through a massive number of transactions. For example, at the end of the accounting period an accountant consolidates all payments by running a report on the system. The system application layer reclaims the data stored in the system database and produces a report with the total payments made to the vendors for that particular period. With large corporations which have huge volume of transactional data, generating a report without AIS can take day or even weeks.

Case study background

River Adventures is a fifteen years old company located in Cheddar, Somerset, owned and managed by Robin Forsythe. Until recently river adventures business has been highly seasonal offering 2 different kayaking instruction for beginners and Intermediate level as well as kayak and rafting trips down the river Axe in Somerset. They usually rent equipment to participant if they required. However, the company is facing an exciting challenge which will alter the size, the type of service offered and the seasonality of the business

Financial management and business processes field

Robin operating his business very informally using manual procedures in all areas. He always predicts the expenses for each course based on his working experience. He also manages the purchasing activities of the company and issue invoices for participants on the course. At the end of the year he determines his profit by his total revenue minus the total expenses during the year. Robin set the prices by consider his profit from the previous year, assess his competitors price and make adjustment for inflation.

Robin employs an office administrator along with a number of kayak instructors and raft guides. The administrator manages Account Payable and Cash Receipts and records them in the Income Journal. He also maintains simple general ledger and payroll register for tax purposes only, and no use of this accounting data is made for financial planning or for operations control. River adventures advertise through leading outdoor magazine, he also advertises about the coming season’s program on popular kayak retail notice board.

Problem

Robin is not pleased with the arrangement of his business and he concern about how he will keep track on expenditure and revenues as the business get bigger. Robin feels that there is unnecessary wastage of the company resources as there is not real control over the cost of meals provided to the beginner’s course. In addition he notice that recently there is diminishing in the stock of camping as well as small items are also being lost. Robin has suspicion about the operation of marginally attended classes, but no analysis has been done to confirm his suspicion. Robin believes there is lack in his marketing activities and he can easily attract more customers by improving his marking activities.

Business opportunity

Robin know about 40% of kayaking course participants continue kayaking. As such his customer base reflects a target market for direct sales of kayaking and other equipment. He would like to expand his sales into a full scale direct mail/internet business. Doing so would enable him to provide year-round work for some kayaking personnel.

Users of Financial Information

Accounting information system objective is to identify record and communicate the economic events of an organization to the intended users. Accountant use this information to formulate reports and communicate financial information to the users. The type of information the user requires is dictated by the type of decisions they make. The information provided by the financial statements includes an organization resources and claims against those resources, as well as shareholders equity and changes in assets and liabilities. Financial information differs between the internal and external users. Accountants must understand the characteristics of information required by the different users of financial statements.

“In developing financial reporting standards, standard setters presume that those who use the resulting information will have a reasonable knowledge of business and economic activities and be able to read a financial report” (Financial Accounting Standards Board, 2006, p. 2). The aim of communicating financial information to user is to let accountants to address the needs and interest of users. There are many different users of financial information and this include: equity investors, suppliers, creditors, customers, employees, governments and their agencies and members of the public. Those users are identified as internal and external users of financial information.

Internal Users

Managers use financial information to plan, organize and operate their business. Managers include marketing managers and production supervisors. Managers should be able to understand financial information to answer such questions as “Is the cash flow sufficient to pay their liabilities?” and “Which product contributes higher profit to the company?” accountant produce internal reports to management for comparison and forecasting needs purposes; such examples include comparisons of operating alternatives, projections of long-term financial sustainability, and forecasts for annual cash needs.

External Users

There are quite a few types of external users of financial information and this includes lenders investors and tax authorities. Invertors (owners) use financial information to determine whether to buy, hold or sell their shares. Whilst suppliers and lenders view financial statement to assess the health of an organization and to ensure timely repayment of credit. Other external users include equity investors, customers, creditors, employees, general public and governments and their agencies and regulatory bodies.