Accounting Basics - Chapter 7 Flashcards
Cost Principle
The control principle prescribes that an accounting information system have internal controls. They are methods and procedures allowing managers to control and monitor business activities. (1) They include policies to direct operations toward common goals, (2) procedures to ensure reliable financial reports, (3) safeguards to protect company assets, and (4) methods to achieve compliance with laws and regulations.
Relevance Principle
Decision makers need relevant information to make informed decisions. It prescribes that an accounting information system reports useful, understandable, timely, and pertinent information for effective decision making. The system must be designed to capture data that make a difference in decisions. To ensure this, we must consider all decision makers when identifying relevant information disclosure.
Compatibility Principle
Accounting information system must be consistent with the aims of a company. The comaptibility principle prescribes that an accounting information system conform with a company’s activities, personnel, and structure. It also must adapt to company’s unique characteristics. The system must not be intrusive but must work in harmony with and be driven by company goals. ex) Most start up companies require only a simple info. system.
Flexibility Principle
Accounting information system must be able to adjust to changes. The flexibility principle prescribes that an accounting information system be able to adapt to changes in the company, business environment, and needs of decision makers. Technological advance, competitive pressures, consumer tastes, regulations, and company activities constantly evolve. A system must be designed to adapt to these changes.
Cost Benefit Principle
The cost benefit principle prescribes that the benefits from an activity in an accounting information system outweigh the cost of that activity. ex) The costs and benefits of an activity such as producing a specific report will impact the decisions of both EXTERNAL and INTERNAL users. Decisions regarding other system principles (control, relevance, compatibility, and flexibility) are also affected by the cost benefit principle.
Components of accounting systems
Accounting information system consists of people, records, methods, and equipment.
Goals of accounting information systems
the systems are designed to capture information about a company’s transactions and to provide output including financial, managerial, and tax reports. All accounting info. system have these same goals, and thus share some basic components. ex) computerized system components usually provide more accuracy, speed, and efficiency and convenience than those of manual systems.
the FIVE basic components of accounting information systems are:
Source documents, input devices, information processors, information storage, and output devices. They could be arranged as a series of steps; two way communication occurs between many of these components.
Source documents
Provide the basic information processed by an accounting system. Ex) includes bank statements and checks, invoices from suppliers, billings to customers, cash register files, and employee earnings records.
Paper based to paperless source documents
Source documents can be paper, although they increasingly are taking the form of electronic files and web communication. A growing number of companies are sending documents directly from their systems to their customers’ and suppliers’ systems. The Web is playing a major role in this transformation from paper based to paperless systems.
Garbage in, Garbage out
Accurate source documents are crucial to AIS. Input of faulty or incomplete information seriously impairs the reliability and relevance of the information system. We commonly refer to this as GARBAGE IN, GARBAGE OUT. Information systems are ser up with attention on control procedures to limit the possibility of entering faulty data in the system.
Input devices
capture information from source documents and enable its transfer to the systems’ information processing component. These devices often involve converting data on source documents from written or electronic form to a form usable for the system. ex) journal entries, keyboards, scanners, and modems are some of the most common input devices in practice today. ex2) bar code readers capture code numbers and transfers them to the organizations’ computer for processing. Ex3) Scanner captures writing smaples and other inputs directly from source documents.
Who inputs data?
Controls are used to ensure that only AUTHORIZED individuals input data to the systems. Controls increase the system’s reliability and allow information to be traced back to its source.
Information processors
Are systems that interpret, transform, and summarize information for use in analysis and reporting. An important part of an information processor in accounting systems is professional judgment. Accounting principles are never so structured that they limit the need for professional judgment. Other parts of an information processor includes journals, ledgers, working papers, and posting procedures. Each assists in transforming raw data to useful information.
Improving computer technology
Increasingly computer technology (both computing hardware and software) is assisting manual information processors. This assistance is freeing accounting professionals to take on increased analysis, interpretive and managerial role. ex) web based application service providers (ASPs) offer another type of information processor.
Information storage
the accounting system component that keeps data in a form accessible to information processors. After being INPUT and PROCESSED, data are stored for use in future analyses and reports. 2) the database must be accessible to prepares of periodic financial reports, 3) auditors rely on this data base when they audit both financial statements and a company’s controls. Companies also maintain files of source documents.
Modern storage
Older systems consisted almost exclusively of paper documents, but most modern systems depend on electronic storage devices or increasingly, cloud storage.
Advances in information storage enable accounting systems to increasingly store more detailed data. This means managers have more data to access and work with in planning and controlling business activities.
Online and Offline access
Information storage can be online, meaning that data can be accessed whenever, and from wherever it is needed.
Off line storage means access often requires assistance and authorization. ex) Information storage is increasingly augmentd by Web sources such as SEC databases, benchmarking services, and financial and product markets. Ex2) audit technology allows external auditors 365 day real time access to client records from remote locations.
Output devices
the means to take information out of an accounting system and make it available to users. Ex) common output devices are printers, monitors, projectors, and web communications.
Output devices provide users a variety of items including graphics, analysis reports, bills to customers, checks to suppliers, employee paychecks, financial statements, and internal reports.
When requests for output occur, an information processor takes the needed data from a database and prepares the necessary report, which is then sent to an output device. A special type of output is an ELECTRONIC FUNDS TRANSFER (EFT).
