ACCOUNTING INFORMATION SYSTEM

Submitted by: Imran AzadRoll no : AD514942

Submitted to : Mr SohailBook : Financial Accounting

Code : 5533Course : MBA

Submitted on: October 20, 2009

Acknowledgement

I would like to say thank you my AllAH who is most merciful and

forgiving who always help me at every stage of my life and give me enough

for which I am not able for.

I want to say thank you to my teacher who give us lots of confidence

to prepare this report. Especially to management of SNL financial who

helped me a lot in preparing this report?

CONTENTS

Introduction to AIS Types of Accounting Information

Financial Accounting Management Accounting Tax Accounting

Accounting System Determining Information Need Cost of producing Accounting Information Function of Accounting System Accounting System Design

Cost Benefit Principle Control Principle Compatibility Principle Flexibility Principle

Introduction of Organization Data collection Method Accounting Information system of Organization Accounting Software & Software Flow of Accounting Information User of AIS Function of AIS SWOT Analysis Recommendations Conclusion Reference

INTRODUCTION

Accounting information system is vital to all organizations and perhaps, every organizations either profit or non profit-oriented need to maintain the AIS. To better understand the term “Accounting Information System” the three words constitute AIS would be elaborate separately. Firstly accounting could be identified into three components, namely “information system”, “language of business” and “source of financial information”. Secondly, information is a valuable data processing that provides a basis for making decisions, taking action and fulfilling legal obligation. Finally, system is an integrated entity where the framework is focused on a set of objectives.

Accounting Information System indicates an integrated framework within an entity that employs physical resources to transform economic data into financial information. It is necessary to conducting the firm’s operations and activities, and providing information concerning the entity to a variety of interested users. The main purpose of Accounting is to provide the information to its user and others who are interested into the business enterprises for example the invertors are interested in the return they will get

TYPES OF ACCOUNTING INFORMATION

There are three main types of accounting information.

FINANCIAL ACCOUNTING

It refers to information describing the financial resources, obligations, and activities of an economic entity (either an organization or an individual). It provide the financial position of a business to describes the financial resources and obligations at a point in time and the term results of operations to describe its financial activities during the year. Financial accounting system is designed to assist investor in taking decision whether to invest in particular organization or not and also used in tax return. In fact financial accounting information is used for so many different purposes that it often is called “general purpose” accounting information.

MANAGEMENT ACCOUNTING

It involves the development and interpretation of accounting information intends specifically to assist management in operating the business. It is also known as managerial accounting. The main objective of management accounting is to assist management to evaluate the performance of individual as well as departments and through management accounting managers set their organizations overall goals. It is the way to decide whether to introduce a new line of products.

TAX ACCOUNTING

Financial accounting is used to file tax return however, the information often is adjusted or recognized to conform to income tax reporting requirements. The most challenging aspect of tax accounting is not the preparation of an income tax return but tax planning. It means to estimate how the financial transactions affect the tax liability of a company and how to reduce the tax burden.

ACCOUNTING SYSTEMS

An accounting system consists of personnel, procedures, technology and records used by an organization for developing of accounting information and to communicate this information to the decision makers.

The design and capabilities of the accounting systems vary form organization to organization. In small businesses, accounting systems may consist of depositor’s record and bank statement or just up to the income tax. And there accounting system may be finished on the manual systems.

Where as in case of large organization they need computers, highly trained personnel, and accounting reports that affect the daily operations of every department. Basic purpose of the accounting information system remains the same that is to meet the organization’s needs for information as efficiently as possible.

There are many factors that affect the structure of the accounting system within a particular organization among the most important are

1. The company’s need for accounting information. 2. The resources available for operation of the system.

DETERMINING INFORMATION NEEDS

Development of accounting information system depends upon the size and nature of business, whether it is publicly owned, and the information needs of the management. The law may prescribe some type of accounting information need. For example, for income tax regulations it is required every business to have an accounting system that can measure the company’s taxable income and explain the nature and source of every item in the company’s income tax return. Organizations who are doing business want to know that how much they have owed from its creditors and how much they have given to their customers. It necessary to follow generally accepted accounting principles for financial reporting which is requirement of federal securities law.

COST OF PRODUCING ACCOUNTING INFORMATION:

Accounting information should be cost-effective that is the value of the information produced should exceed the cost of producing it. Management has no choice but to produce the types of accounting reports required by law. In other cases, however, management may use cost effectiveness as the criterion for deciding whether or not to produce the information.

In recent years, the development and installation of computer-based accounting systems have increased greatly the types and amount of accounting information that can be produced in a cost effective manner.

BASIC FUNCTIONS OF AN ACCOUTNING SYSTEM:

The main function of accounting information is to assign quantitative value of the past, present and future economics events or activities. But every accounting information system performs the following functions.

i. Interpret and record the effects of business transactions.

ii. Classify the effects of similar transactions in a manner that permits determination of the various totals and subtotals useful to management and used in accounting reports.

iii. Summarize and communicate the information contained in the system to decision makers.

ACCOUTNING SYSTEM DESIGN:

Accounting systems summarize financial data about a business and organize it in useful forms. Most businesses use computerized accounting systems to provide timely and useful information to decision makers. There are four main principles of designing Accounting system.

Cost Benefit PrincipleControl Principle Compatibility Principle Flexibility Principle

COST BENEFIT PRINCIPLE:The cost-benefit principle holds that the benefits

derived from an accounting system and the information it generates must be equal to or greater than the system’s cost. Costs may either be tangible or intangible. Tangible costs include personnel, forms, and equipment. Intangible costs include the costs of wrong decisions.

CONTROL PRINCIPLE:

The control principle requires that a system provide internal control features in order to protect a firm’s assets and assure its data are reliable.

COMPATIBILITY PRINCIPLE:

The compatibility principle states that the design of an accounting system must be in harmony with the organizational and human factors of the business.

FLEXIBILITY PRINCIPLE

The flexibility principle holds that an accounting system must be flexible enough to allow the volume of

transactions to grow and organizational changes to be made.

The wide varieties of people that involve in the company’s operation get the benefits from the implementation of accounting information system. We can say that it is a source of providing information to the users, management, consultant, evaluators and provider of accounting and tax services. It depends upon the company’s need which kind of accounting information system adopted for information purpose. It can be manual or computer software oriented. Examples of software there are many software available in market like Peachtree, Quick book etc.

Case Study of “AIS

in a

Selected

organization”

Organization visited

Hattar Textile

Mills

INTRODUCTION TO ORGANIZATION:

Hattar Textile Mills (PVT) Ltd. has been serving the textile industry since 1994. Unit started operating in 1994 with 14,400 spindles, with further expansions; presently it is running with a total capacity of 30,000 spindles. Today Hattar Textile Miles has evolved into leading manufacturers of yarn. We are one of the oldest and leading polyester and viscose yarn manufacturers in Pakistan. With our extensive experience in manufacturing yarn, we have been able to progress and achieve our increased targets every year. Customer’s satisfaction in our top priority. Through many years of experience in production and trade, we have maintained long term relationships with our clients. Today Hattar Textile mills is vertically integrated; we have complete facilities to produce the best possible products of your requirements.

DATA COLLECTION:

To collect data I have personally visited the organization and with the permission of their Technical Director I have granted a permission to visit Accounts and IT Departments and they have given me opportunity to interview different employees of these departments so that I will understand about my topic in a practical way all of the data I am going to present is given to me by Head of Accounts Department of Hattar Textile Mill. And information I am going to present in my report is based on question and answer replies by employees as well as head of department. ACCOUNTING SYSTEM ADOPTED BY THE ORGANIZATION:

Hattar textile mills record accounting information taking base accrual base accounting system. As mostly there purchase

transaction are on credit and sale transaction are on cash bases. So thy have to adopt accrual base accounting system. It makes them able to maintain their actual position in an appropriate way. They also are using some manual books and sheets to check the accuracy of the financial transactions posted by the lower staff and for satisfaction and authentication of their accounting procedures.

ACCOUNTING SOFTWARE & SYSTEM:

Hattar textile mill has there on IT setup. They have customized and develop there own software according to there need and requirements. This accounting software is design on Visual Fox Pro. They also are using some manual books and sheets to check the accuracy of the financial transactions posted by the lower staff. They use different manual books and mostly data is updated in software only evidence is saved for future purpose. This software contains different modules which give them different kinds of reports. These modules are as:

Cash Book Journal Ledger Stock register Cash bank vouchers Journal Vouchers Purchase day book Sales invoices Sales day book Material ledger

FLOW OF ACCOUNTING INFORMATION:

Hattar textile industry is involved in polyester and viscose yarn manufacturing and mostly all the information is recorded from the sale and purchase of material. And also different kind of expenses. Flow of accounting data or information in this organization is quite simple first the physical evidence is being generated with the supported documents and then they will be transferred to the accounts department for further processing here I would like to explain it by giving the example of the purchase and sale.

PURCHASE ORDER:

Following procedure is being granted to purchase a certain material first of all purchase order is given to the purchase department by the production department then purchase department visit to market and collect different quotations for the required material and provide to management and which ever is best is selected to arrange required stock. After completing documentation like Weight Slips (Gross weight both company and party), Builty (Transport Company evidence), Calculation of weights (Both net and gross weights), GRN (Goods Receiving Notes) material is hand over to production department.

These all documents are transfer to the accounts department for further processing here they get the bill of the certain material from the vendor and then make a PVR (Purchase Voucher) with all of these supporting documents and then posted them in to the ledger of material as well as all other effects are given in other heads like vendor freight is posted into its expenses account and material purchase with its net quantity is booked. SALE ORDER:

Mostly purchased order for production is placed after booking order from any vender willing to purchase material or convince by sales to purchase. Mostly sales or made on cash or on partial payments. All required information is submitted to accounts e.g. sales order, cash or check payment against sale and reaming balance. Then accounts department update information against this information and generate client invoice in case of debit balance.

FINANCIAL STATEMENTS:

All revenues and expenses are recorded to produce financial reports which make management; clients, vendors and government enable to take decision. Vendor is concerned with sales and out flow of material produce and management is concerned with profits and how to increase it and government is concerned with tax.

Hattar Textile mills produce following statements for internal and external use.

Trial BalanceProfit / Loss StatementBalance SheetCash Flow

USERS OF AIS:

As shown in Figure who is user of AIS such as the Financial Accountants, Management Accountants and Finance Manager are the internal users of the system. Also, the management team that consists of Finance General Manager, Chief Operating Officer and Managing Director are the internal users of the system. On the other hand, the external users consist of government agency (i.e. Inland Revenue), external auditors and creditors. Indeed, wide variety of people within and outside the organization uses accounting information for decision-making.

Information Flow of Hattar textile Mills

FUNCTION OF AIS:

The main function of AIS is to assign quantitative value of the past, present and future economics events. At Hattar Textile Mills, AIS through its computerized accounting system produces

HEAD OFFICEManagement Team

HEAD OFFICEFinance

Department

InlandRevenue

External Auditors

Suppliers

Bank

Sub-Contractor

s

Sales Team

Client

the financial statements namely income statements, balance sheets and cash flow statement. The system will process the data and transform them into accounting information during input, processing and output stages that will be used by a wide variety of users such as internal and external users. AIS perform several key functions throughout these three stages such as data collection, data maintenance, data Accounting Information Systems (AIS) and Knowledge Management.

SWOT ANALYSIS

Strengths:

Proper evidence. Free of cost software. Flexibility of the accounting system uses by them. Accounting system is computerized and working is

easy. Management properly checks authentication. Secure software system.(User accounts with limited

permission)

Weaknesses:

Time consuming, as Financial Statements are not auto generated.

Limited usages to staff.

Opportunities:

As they have own IT department so they have opportunity to create software according to their needs.

Proper look after of the accounting system is possible.

Threats:

Other companies of same field have more appropriate software’s.

Secrecy leakage.

RECOMMENDATIONS

Though they have computerized accounting software but there are some drawbacks I have observed into that accounting system and there are my recommendations for Quality Feeds so that they can improve their accounting system.

Edition and deletion power must be given to only one employee.

Use IT department and insert the Financial Statement generation features into your accounting software.

CONCLUSTION:

The wide varieties of people that involve in the company’s operation get the benefits from the implementation of AIS. The system assists the operational managers to come out with monthly reports for the top managerial level (i.e. tactical and strategic) plan, control and decide resources allocation. In addition, the paper showed that the AIS add value to information processed within the company. AIS could speed up information process and overcome traditional human weaknesses. As a result, the system supports the resource management and help Hattar textile Mills pursue its projection of continuing business profit. The use of AIS indicates the growth of tacit and explicit knowledge. Indeed, the successful implementation of an accounting information system can be described as a series of complex, interconnected activities necessitating participants to have technical and managerial skills to sort out prospective problems.

REFERENCE

I have consulted following references to prepare this

report.

a. Book by Williams, Haka, Bttner, Carcello

b. Get idea form class lecture

c. Instruction form teacher

d. www.wikipedia.com . (For any kind of information

and definition)

e. Group discussion

f. Personal visit to organization for data collection

and understanding their accounting system.