(6) Accounting information systems

Question 1

Principles of accounting information systems

Answer 1

• Cost effectiveness: cost should be <= benefits
• Useful output (qualitative characteristics)
• Flexibility: adapt to changing factors, changing environment

Question 2

Phases in developing an accounting system

Answer 2

1. Analysis: planning and identifying info needs and sources
2. Design: creating forms, documents, procedures, job descriptions and reports
3. Implementation: installing the system, training personnel, and making the system fully operational
4. Follow up: monitoring effectiveness and correcting any weaknesses

Question 3

What is internal control?

Answer 3

Internal control is an essentail part of risk management. It consists of all the processes used by management and staff to:

• provide effective and efficient operations
• comply with laws, regulations and internal policies

Question 4

What do internal controls enable organisations to do?

Answer 4

• safeguard assets from employee theft, robbery and unauthorised use
• enhance the completeness, accuracy and reliability of its accounting records
• reducing the risk of errors (unintentional mistakes) and irregularities (intentional mistakes and misrepresentations) in the accounting process
• permit the timely preparation of financial information

Question 5

What are the 2 types of internal controls?

Answer 5

1. Administrative controls – provide operational efficiency and adherence to policies and procedures prepared by management
2. Accounting controls – methods and procedures used to protect assets and ensure that accounting records are reliable (e.g. segregation of duties)

Question 6

What are the principles of internal control?

Answer 6

• Establishment of responsibility
• Segregation of duties
• Documentation procedures
• Physical, mechanical and electronic controls
• Independent internal verification

Question 7

Limitations of internal control

Answer 7

• cost vs benefits
• human imperfection
• business size

Question 8

What is forensic accounting?

Answer 8

The application of accounting knowledge and skills to issues arising in the context of civil and criminal litigations and investigation

Question 9

Examples of forensic investigation areas include:

Answer 9

• bankruptcy and insolvency
• asset identification and valuation
• divorce and family law
• falsifications and manipulations of accounts
• transaction reconstruction and measurement

Question 10

Describe the transformation of accounting data to accounting information.

Answer 10

business transactions –> source documents –> journals –> ledgers –> trial balance –> reports

Question 11

Accounting information systems involve 3 phases:

Answer 11

1. input
2. processing
3. output

Question 12

Explain the purpose of journals and ledgers.

Answer 12

Journals: purpose is to record transactions/events (CHANGE)

Ledgers: purpose is to calculate account balances (BALANCE)

Question 13

What are subsidiary ledgers?

Answer 13

Subsidiary legders are groups of accounts with a common characteristic.

2 common ones:

• a/c receivable
• a/p receivable
• this account for separate individuals/entities
• the total equals the balance in the general ledger
• it is outside the general ledger and is not used in the trial balance

Question 14

What is a control account?

Answer 14

A control account in the general ledger provides a summary of the details in the subsidiary ledgers

Question 15

What do we do if control and subsidiary accounts are involved?

Hint: 2 changes are required – journalising & posting

Answer 15

1. In journalising, both the control and subsidiary
   ledger accounts must be identified
2. In posting, there must be a dual posting – once
   to the control account and once to the subsidiary
   account

Question 16

What are the advantages of subsidiary ledgers?

Answer 16

1. Show transactions in a single account providing up to date information
2. Free the general ledger of excessive details –individual account details are kept in the subsidiary ledger
3. Provide effective internal control – compare the total of the individual subsidiary ledger accounts with the general ledger control account balance
4. Allows for segregation of duties

Question 17

What are special journals?

Answer 17

Special journals are used to record similar types of transactions that occur regularly

• Sales journal (all sales of inventory on account)
• Purchases journal (all purchases of inventory on account)
• Cash receipts journal (all cash received)
• Cash payments journal (all cash paid)

Question 18

When do we record in the general journal?

Answer 18

When the transactions are not recorded in any of the special journals (i.e. Sales journal, Purchases journal, Cash receipts journal, and Cash payments journal)

Question 19

Describe the Sales journal. Include column headings.

Answer 19

Sales journal records all credit sales of inventory

(Columns from left to right)
Column 1: Date
Column 2: Account debited
Column 3: Invoice no.
Column 4: Ref.

Column 5:
A/C Receivable DR
Sales CR

Column 6:
Cost of Sales DR
Inventory CR

Question 20

Why do we use Special journals for ‘similar transactions;?

Answer 20

1. increases recording efficiency
   - like transactions are grouped together
   - one line per transaction record
2. lowers processing and ledger posting time & costs
   - batch posting of totals to the ledger accounts
3. increases data accuracy and control
   - cross totalling and allows overview and total of like transactions
4. increases flexibility & task separation/specialisation
   - allows flexibility in design of documents and journal
   columns to meet the needs of the business and to improve work flow

Question 21

Describe the Cash Receipts journal. Include column headings.

Answer 21

Used to record all receipts of cash, including:
- cash sales of inventory, cash collected from a/c receivable, etc.

Column headings (left to right):
Column 1: Date
Column 2: Account credited
Column 3: Ref.

Column 4:
Cash DR

Column 5:
Discount allowed DR

Column 6:
A/C receivable CR

Column 7:
Sales CR

Column 8:
Other a/c’s CR

Column 9:
Cost of Sales DR
Inventory CR

Question 22

Describe the Purchases journal. Include column headings.

Answer 22

Used to record all purchases of inventory on account

Column headings (left to right):
Column 1: Date
Column 2: Account credited
Column 3: Ref.

Column 4:
Inventory DR
Accounts payable CR

Question 23

Describe the Cash Payments journal. Include column headings.

Answer 23

Used to record all cash payments, including:
- cash purchase of inventory, cash payment to settle a/c payable, etc.

Column headings (left to right):
Column 1: Date
Column 2: Cheque no.
Column 3: Account debited
Column 4: Ref.

Column 5:
Inventory DR

Column 6:
A/C payable DR

Column 7:
Cash DR

Column 8:
Discount received CR

Column 9:
Other a/c’s DR

Question 24

What is the modifed accounting process?

Answer 24

1. Record a transaction in a journal
2. Post individual amounts to:
   (1) subsidiary ledger accounts
   (2) other accounts
   (3) accounts DR or CR in General Journal
   on a daily basis plus posting references

Finish Step 1 and Step 2 for each transaction.

3. Post special journals’ column totals to general ledger accounts at the end of the month plus posting references

Question 25

What are computerised accounting information systems.

Answer 25

They are computer accounting programs that perform the double entry steps in the accounting cycle i.e. journalising, posting and preparation of trial balance and reports.

Question 26

Explain integrated accounting systems.

Answer 26

• Use of modules: general ledger, inventory, accounts receivable, accounts payable
• Data entered in one module automatically updates information in other modules
• General ledger and accounting reports updated automatically

Question 27

Advantages of computerised accounting information systems

Answer 27

• Ability to process large number of transactions quickly
• Automatic posting of transactions
• Error reduction
• Fast response time
• Flexible and fast report production

Question 28

Disadvantages of computerised accounting information systems

Answer 28

• Use of inappropriate and/or incompatible software and hardware
• Need for reliable back-up procedures
• Lack of computer system skills
• Computer viruses and hackers
• Fraud and embezzlement