Study: What is the purpose of a company's accounting information system?
Read the Topic Learning Resources beneath the black bar below. You should also watch the "Purpose of Accounting" video, the "What are the Two General Types of Accounting" video, and if you want to knock out an hour learning QuickBooks, watch the "Acct 232B QuickBooks 2012" video Resources (approximately 15m without the QuickBooks video)
Take the topic quiz, by clicking here or clicking the "Next" button at the bottom right of this page.
Score at least 4 out of 5 on the quiz before moving on. If you do not score at least 4 out of 5 on the quiz, restudy the material and try again.
I will keep your highest score.
Before jumping in to this topic, you might find the following short video (3m:13s) on the purpose of accounting to be a helpful review. Some of you may find the person's accent on this video easier to understand than my own.Purpose of Accounting
Links to an external site.
What is the purpose of a company's accounting information system?
The purpose of a company's accounting information system is generally three-fold:
1) to identify, analyze and record data into some accessible format
2) to summarize and report the data into useful information and related reports for internal and external decision-making purposes
3) to provide internal controls that "provide reasonable assurance regarding the achievement of objectives in effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations." Committee of Sponsoring Organizations and as issued in May 2013, Internal Control.
To achieve the three-fold purposes above, a company's accounting information system will need to identify, analyze, record, summarize and report useful information to:
1) internal users for decision-making purposes (i.e. managerial accounting Links to an external site.).
2) external users for decision-making purposes (i.e. financial accounting Links to an external site.).
If you would like a review of what managerial and financial accounting are, feel free to watch my (8m:35s) video below or review the transcript of the video located in Module 4. What are the Two General Types of Accounting Video - Slides 1-21
Links to an external site.
What types of accounting information systems exist?
Accounting information systems come in three general types as follows:
- Shoebox accounting system. A manual, paper and pencil accounting system often used by a small mom and pop shop, or some other small business operation to prepare financial statements on an as-needed basis, usually at least once per year for tax purposes but can be more often depending on user's needs..
- Off-the-shelf accounting software: A computer software program, such as QuickBooks Links to an external site., Sage 50 Links to an external site. (formerly known as Peachtree), and Xero Links to an external site., used by the smallest of entrepreneurial ventures all the way up to large non-profit organizations and multimillion dollar corporations, that allows the entry of data and creation of desired reports. Some of these include sophisticated automated features as well.
- Enterprise Resource Planning system (ERP Links to an external site.). A fully integrated, highly-automated, database system, such as SAP Links to an external site., Oracle/ Links to an external site.Peoplesoft or NetSuite Links to an external site., used by mid-sized and the largest of governments, non-profit organizations and multinational corporations.
Regardless of whether an accounting information system is manual, fully automated, or something in between, its three-fold purpose, as referred to above, remains the same.
We won't take the time to fully dig into the details of the three types of accounting information systems here, but I did want to at least make you aware of them.
What is shoebox accounting?
Some small mom & pop businesses use an all manual accounting information system accountants like to refer to as "shoebox accounting". It simply means that whenever their business spends or receives money (identify), they make a note on it as to what it was for (analyze), throw the related document (i.e. a receipt, a cash register tape, a deposit slip, etc.) into a shoebox until the end of the year [or however frequently they feel that they need a set of financial statements, which could be monthly, quarterly, etc.] at which point they bring their shoebox to their accountant, usually a CPA
Links to an external site., to have their tax return [of general-purpose financial statements] prepared (record, summarize, report). Shoebox accounting is usually pretty disorganized and, except for when it is used to prepare and file an annual tax return [of general-purpose financial statements on an as-needed basis], it is pretty useless because it only produces useful accounting information once a year. For example, if the shop owner wanted to know his/her gross margin for the last month, s/he would have to dig into the shoebox and pull out all his/her sales and cost of goods sold documents for the past month and manually add them up and compute the difference. This approach is neither efficient nor effective. That is why people say that small business owners often "fly by the seat of their pants
Links to an external site." meaning that they use their own intuition when making business decisions without the use of many accounting or other information aids. If you want to fly by more than the seat of your pants, I recommend you at least use an off-the-shelf accounting package as described next.
What is "off-the-shelf" accounting software?
A significant step above shoebox accounting is "off-the-shelf" accounting software which allows users to enter transactions directly into a computer (identify, analyze, record) and quickly create necessary documents and desired managerial and financial accounting reports (summarize and report) to use in decision making. One of the drawbacks of many off-the-shelf packages is that much of the data entry must still be manually input; however, as these packages improve, they continue to integrate automated functions that require less and less human interaction. For example, whenever you scan a food item at your grocery store's self-checkout counter, and hear a "beep-BEEP", that is an audible indication that its accounting software recorded the sale and related cost of goods sold. In addition, such software can also be set up to automatically create a purchase order to buy more inventory when its inventory level drops below a certain reorder point. QuickBooks
Links to an external site. is one of the most well-known off-the-shelf accounting software packages. It can be used by small and large businesses alike; however, for extremely large, multinational entities, QuickBooks is usually considered insufficient at which point an ERP system, as discussed below, would need to be implemented. At BYU-Hawaii we teach a course that includes a short introduction to QuickBooks
Links to an external site.. If you are interested in learning more about QuickBooks, and have a little over an hour to spare, feel free to click on the following QuickBooks tutorial which we use to teach that class: Acct 232B QuickBooks 2012
Links to an external site.Because QuickBooks sometimes struggles to handle the accounting for very large entities and the resulting complexities, some software companies have created add-ons to QuickBooks to make it more robust. For example, my brother currently works for a software company Fishbowl Inventory
Links to an external site. that created an integrated QuickBooks add-on that significantly improves its inventory management system, for example click here
Links to an external site. if you would like to read a short-story of how Chung's Gourmet Foods
Links to an external site. was able to use QuickBooks and Fishbowl Inventory to more efficiently and effectively manage its inventory and thereby save it 10's of thousands $.
What is an ERP system?
Now let's take a giant leap forward in sophistication to the big boys of the accounting information system world, SAP
Links to an external site., Oracle/
Links to an external site.Peoplesoft and NetSuite
Links to an external site.. These systems are so sophisticated and their functions are so broad-ranging that they don't even like to refer to themselves as "accounting" information systems but rather as ERP
Links to an external site. systems. The backbone of these systems are sophisticated databases
Links to an external site. with thousands of inter-related tables (SAP is said to have over 140,000 unique tables). ERP
Links to an external site.s are designed to identify, analyze, and record data into the database, and enable the summarization and reporting of that data into useful information for use by decision makers. Sometimes those decision makers could even by an automated software routine that creates and sends out a purchase order when inventory levels drop too low. As you can imagine, ERP
Links to an external site. systems can be quite expensive to purchase, design, install and maintain; however, due to the fact that most of the largest and most complicated entities on earth use ERP
Links to an external site. systems, it seems clear that these organizations have concluded that the benefits of an ERP
Links to an external site. system outweigh its costs.
Summary
All business, non-profit and governmental entities need some type of accounting information system.
Accounting information systems are designed to:
1) to identify, analyze and record data into some accessible format
2) to summarize and report the data into useful information and reports for internal and external decision-making purposes
3) to provide internal controls
The three general types of accounting information systems are:
- Shoebox accounting systems
- Off-the-shelf accounting software systems
- Enterprise Resource Planning systems (ERP Links to an external site.)
Wise business owners should choose to implement an appropriate accounting information system based on their entity's needs.
Good luck on the quiz.