Accounting information systems collect and process transaction data and communicate the financial information to interested parties. There are many types of accounting information systems and, as a result, they vary greatly. A number of factors influence these systems such as the type of business, the size of the business, the volume of data, the type of data management needs, and other factors.
Electronic Data Processing (EDP) Systems
Most businesses, except for the smallest, use computerized systems, also called electronic data processing (EDP) systems. These systems handle every step in the accounting process from recording the financial transaction to preparing the financial statements. Businesses are constantly improving their systems technology in order to remain competitive and to stay in compliance with the Sarbanes-Oxley Act of 2002. Even the smallest businesses may choose to use systems like Quickbooks.
Basics of Business Transactions and Business Processes
In order to understand how these accounting information systems work, you have to understand the basic accounting terms "business transactions" and "business processes." Most importantly, you need to understand how business transactions and processes come together to generate financial reports. With regard to accounting information systems, business transactions can be divided into several types of business processes:
1. Revenue and Return Processes, Systems, and Controls
The business transactions that fall under these business processes are large volumes of daily sales, returns, and cash inflow transactions.
2. Expenditure and Return Processes, Systems, and Controls
The business transactions that fall under these business processes are large volumes of expenditure, returns, and cash outflow transactions. Payroll and fixed asset purchase transactions are also in this category.
3. Conversion Processes, Systems, and Controls
The business transactions under this category are raw materials and work-in-progress transactions.
4. Administrative Processes, Systems, and Controls
The business transactions that are administrative are investments, borrowing, and capital transactions.
All of these business transactions result in T-accounts set up in the General Ledger processes, systems, and controls. From the general ledger, both internal and external financial statements are developed. Internal financial reports might be an aging schedule for accounts receivable or a sales inventory status report. External financial reports would be the income statement, balance sheet, and statement of cash flows.
Types of Accounting Information Systems
There are multiple types or categories of accounting information systems. What a business firm uses depends on the type of business, the size of the business, the needs of the business, and the sophistication of the business.
Manual accounting information systems are used mostly by very small businesses and home-based businesses. If a system is entirely manual, it would require the following: source documents, general ledger, general journal, and special journals or subsidiary journals you might need.
Legacy systems are often in existing business firms and were used before information technology got as sophisticated as it is today. Even though legacy systems may appear to be old-fashioned, they have some definite advantages to the firm. They contain valuable historical data about the firm. The firm personnel tend to know how to use the system and understand it. A legacy system has usually been customized to the specific needs of an individual firm. You won't find this kind of customization in generic accounting software packages.
Unfortunately, legacy systems also have significant disadvantages. Often, they have no documentation. It is usually hard to find replacement parts because hardware and software may become obsolete. Even the computer language that legacy systems use is usually an older language. Most legacy systems have been built from scratch.
Replacement of Legacy Systems
You can completely replace your legacy system with a new, up-to-date system. That is quite an expensive solution. You can also update your legacy system. You can use a procedure called screen scraping, which is a technique that takes the data displayed on the computer screen and translates it so a newer application can read it. You can also set up an enterprise application integration system. This type of system networks the different applications in your legacy system, such as inventory, payroll, and others.
If you are an SMB, unless you are the smallest, home-based variety, you will want your accounting information system to be up-to-date in order to keep you competitive within your industry. There are many options to choose from.