The accounting information system comprises the processes, procedures, and systems that capture accounting data from business processes; record the accounting data in the appropriate records; process the detailed accounting data by classifying, summarizing, and consolidating; and report the summarized accounting data to internal and external users. Many years ago, accounting information systems were paper-based journals and ledgers that were recorded manually by employees. Today, nearly every organization uses computer systems for maintaining records in its accounting information system. The accounting information system has several important components, listed next. An example from McDonald's is used to describe each component.
These five components are part of any accounting information system but are likely to be applied differently in different business organizations. Exhibit 1-1 shows an overview of an accounting information system. The circles represent the many business processes that occur in the organization—revenue, expenditure, conversion, and administrative processes. As those processes occur, data are captured and become input into the accounting information system. The accounting information system classifies, summarizes, and consolidates the data. As input and processing occur, data must be stored to or retrieved from data storage. From this stored data and processing, several types of output are prepared. Some of the output would be documents such as purchase orders, invoices, and customer statements; other output would be checks to vendors and employees. The output reports are feedback that managers within the organization use to monitor and control the business processes. The number of computerized versus manual work steps may vary across organizations, but every organization should have each of these component pieces. In some organizations, the processes may be manual steps performed by employees, and the accounting records may be paper journals and ledgers. At the other extreme are companies where many or all of these work steps are performed by computers, and the accounting records are in computer files. In most cases, there is a combination of manual and computerized work steps.
The accounting system internal controls are not pictured in Exhibit 1-1, but there should be internal controls throughout the accounting information system.
As defined earlier, internal controls are the set of procedures and policies adopted within an organization to safeguard its assets, check the accuracy and reliability of its data, promote operational efficiency, and encourage adherence to prescribed managerial practices. Internal controls are described later in this chapter and covered in detail in the Control Environment section (Chapters 3 through 7) of this book.