FINANCIAL ANALYTICS AND CONTROL- Unit - I ~ Part 1

UNIT I: Information Systems and Data Governance

INTRODUCTION

An accounting as an information system (AIS) is a system of collecting, storing and processing financial and accounting data that are used by decision makers. An accounting information system is generally a computer-based method for tracking accounting activity in conjunction with information technology resources.

The resulting financial reports can be used internally by management or externally by other interested parties including investors, creditors and tax authorities. Accounting information systems are designed to support all accounting functions and activities including auditing, financial accounting & reporting, -managerial/ management accounting and tax. The most widely adopted accounting information systems are auditing and financial reporting modules.

WHAT ARE ACCOUNTING INFORMATION SYSTEMS?

What do the following have in common?

(1) A shoebox filled with a lawyer’s expense receipts,

(2) The monthly payroll spreadsheet in the computer of an auto-repair shop,

(3) The Peachtree accounting system for a small chain of dry cleaning stores, and

(4) The enterprise resource planning (ERP) system of a large manufacturer?

The answer is that they are all examples of AISs. How can such a wide range of accounting applications each qualify as an AIS? The answer is that this is the essence of what AISs are—collections of raw and stored data (that together typically serve as inputs), processing methods (usually called ‘‘procedures’’), and information (outputs) that serve useful accounting purposes. Do such systems have to be computerized? The first example—the shoebox—suggests that they do not. Can they be complicated? The last example—an ERP system—illustrates one that is.

 

Accounting Information Systems—A Definition

Definition: An accounting information system is a collection of data and processing procedures that creates needed information for its users. Let us examine in greater detail what this definition really means. For our discussion, we’ll examine each of the words in the term ‘‘accounting information systems’’ separately.

Accounting. We probably have a pretty good understanding of accounting subjects because you have already taken one or more courses in the area. Thus, you know that the accounting field includes financial accounting, managerial accounting, and taxation. AISs are used in all these areas—for example, to perform tasks in such areas as payroll, accounts receivable, accounts payable, inventory, and budgeting. In addition, AISs help accountants to maintain general ledger information, create spreadsheets for strategic planning, and distribute financial reports. Indeed, it is difficult to think of an accounting task that is not integrated, in some way, with an AIS.

Information. Although the terms data and information are often used interchangeably, it is useful to distinguish between them. Data (the plural of datum) are raw facts about events that have little organization or meaning—for example, a set of raw scores on a class examination. To be useful or meaningful, most data must be processed into useful information—for example, by sorting, manipulating, aggregating, or classifying them.

Accounting Information Systems and Their Role in Organizations Information technology (IT) refers to the hardware, software, and related system components that organizations use to create computerized information systems. IT has been a major force in our current society and now influences our lives in many personal ways—for example, when we use digital cameras to take pictures, access the Internet to make a purchase or learn about something, or e-mail friends and family. It is perhaps less clear that computer technology has also had profound influences on commerce. In this information age, for example, fewer workers actually make products while more of them produce, analyze, manipulate, and distribute information about business activities. These individuals are often called knowledge workers. Companies find that their success or failure often depends upon the uses or misuses of the information that knowledge workers manage.

The information age has important implications for accounting because that is what accountants are—knowledge workers. In fact, accountants have always been in the ‘‘information business’’ because their role has been, in part, to communicate accurate and relevant financial information to parties interested in how their organizations are performing. The information age also includes the increasing importance and growth of e-business, conducting business over the Internet or dedicated proprietary networks and e-commerce (a subset of e-business) which refers mostly to buying and selling on the Internet. In many ways, accounting is itself an information system—that is, a communicative process that collects, stores, processes, and distributes information to those who need it. For instance, corporate accountants develop financial statements for external parties and create other reports (such as accounts receivable aging analyses) for internal managers. But users of accounting information sometimes criticize AISs for only capturing and reporting financial transactions. They claim that financial statements often ignore some of the most important activities that influence business entities. For example, the financial reports of a professional basketball team would not include information about hiring a new star because this would not result in journal entries in the franchise’s double-entry accounting system. Today, however, AISs are concerned with nonfinancial as well as financial data and information. Thus, our definition of an AIS as an enterprise-wide system views accounting as an organization’s primary producer and distributor of many different types of information. The definition also considers the AIS as process focused. This matches the contemporary perspective that accounting systems are not only financial systems.

 

Enterprise Resource Planning (ERP)

Enterprise Resource Planning (ERP) systems help companies streamline their accounting needs through integration of data. It provides you with a better view of all areas of the business, and this enables you to make faster and more accurate decisions that affect the operations of your company.

Insight into financial data promotes cost efficiency and improves the financial productivity of the organization. This post will share with you some of the benefits you will have for using an ERP system for your accounting department.

Managing accounting needs

The accounting department of any organization is essential. There are many areas you can manage through an ERP system, and here are some of them: 

• You can use an ERP system to estimate the capital requirements and for management of cash.
• You can accurately come up with a budget.
• Allocation of costs for various activities such as labor, raw material, and transportation.
• Management of payments, including those made to the vendors and paying wages to staff.

Tracking capabilities

ERP system gives you an opportunity to use it as a financial management system. It improves financial activities such as customer payment schedules, credit management, and revenue tracking.

It’s easy to manage billing, revenue, and payments as it has a high level of tracking capabilities and it’s an automated system, Even better, you can use an ERP system to track profits made by the organization, invoicing, cost analysis, and budgeting.

Quality data and financial information

With ERP technology, the accounting department has easy access to the data. Organizations have well-organized processes and resources, enabling them to maintain good financial measures. Financial information is also secured and it gives you an opportunity to co-author, manage, and edit when you have authority to access it.

Organizations that use separate systems for accounting and sales activities, they have to manage the data manually. On the other hand, for an integrated ERP system for accounting, there is an automatic transfer of data. Therefore, you don’t have to manage data manually, making it faster, accurate, and consistent. 

Automated data

Organizations with automated systems are able to grow their businesses because they have the flexibility to concentrate on their core operations. An ERP system ensures that your accounting is automated.

It simplifies operations related to accounts receivable, accounts payable, improves cash flow problems, and cash management. It becomes pretty easier to manage the entire organization by generating information and compiling it.

You can use financial management modules that will keep track of accounting data that are in line with the international standards. For this reason, you have options of choosing a framework in different languages, charts of accounts, and currencies.

ERP system helps you to collect financial data from various departments to create reports and financial statements. This is the reason why the system is invaluable as it makes the processes easier to perform. 

Fewer errors

There is always a chance that a person can make a mistake while manually capturing data. By losing focus and losing key entries, it can cause problems on your accounting. Incorrect accounting data will affect the quality of financial analyses and financial reports. This mistake can have bad consequences on your finances including the tax complications.

An ERP system for accounting prevents such errors from happening because the system is automated. This gives you accurate information on the financial situation of your company.

A full ERP system is also GAAP compliant. GAAP refers to the accounting standard that offers a standardized method for recording financial transactions. Therefore, a full ERP system assists you to practice financial reporting that are acceptable by various accounting standards such as GAAP.