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Tam Dong

ACCOUNTING SYSTEMS

Definition: According to the Bussiess Dictionary, Accounting System is an organized set of manual and computerized accounting methods, procedures, and controls established to gather, process, record, analyize, classify, and summarize into financial statements and reports to (1) help company's managements to make sound business decisions, (2) provide the investors the tools to make their decisions in order to invest or not in the company, (3) help auditors, government authorities to regulate and monitor the firms' accounting reporting. An accounting system can be represented by the following:

  • When a business transaction occurs, which is evidenced by a hardcopy document or a soft copy document such as a purchase order or a sales invoice. Accountants will enter these transactions at the beginning of the accounting period into different journals, which are spreadsheets used to record all business transactions.
  • The three popular journals used to record day-to-day transactions are sales journals, cash receipts journals, and cash disbursements journals. In addition to these journals, there is another called "general ledger" where all special entries are recorded at the end of an accounting period.
  • While a journal records transactions as they happen, a ledger groups transactions according to their type, based on the accounts they affect. The general ledger, as a "master file", is a collection of all balance sheet, income, and expense accounts used to keep a business's accounting records. At the end of an accounting period, all journal entries are summarized and transferred to the general ledger accounts.
  • Also, a trial balance is required to be done at the end of the accounting period. Trial balance used to add up all the account balances in a company's general ledger. As the rule of the accounting, the sum of the debit balances must equal the sum of the credit balances. If total debits don't equal total credits, it means there must be errors exists somewhere in the accounting entries.
  • At the end of the year-end, accounting department will use these journals and trial balance report to prepare financial statements which include (1) the statement of balance sheet, (2) the statement of income statement, (3) a statement of retained earnings, (4) a statement of cash flows).
 
Components of the Accounting System: There are seven components of an accounting system as the following:
  • Account payable
  • Account receivable
  • Order entry
  • Inventory control
  • Cost accounting
  • Payroll
  • Fixed assets 
Accounting Software 
 
We are living in an era where everything will be done online. Today, an accountant does not need to enter all the transactions by hand but instead, there are so many software that support the accounting system include:

Accounting Software


 
 It is also important to understand the difference between Financial Accounting and Managerial Accounting.

1. Financial Accounting: 

The main purpose of financial accounting is to prepare financial reports that provide information about a firm's performance to external parties such as stockholders, investors, creditors, auditors, tax collectors. According to http://www.accountingcoach.com/online-accounting-course/financial-accounting.html, companies issue financial statements on a routine basis, could be quarterly reporting or annual reporting. The financial statements are considered external because its main parties of interest are people outside of the company, such as primary recipients being owners/stockholders, as well as certain lenders and creditors. If a company is publicly traded meaning its stocks are accessible to the public, however, its financial statements (and other financial reportings) tend to be widely reached secondary parties such as competitors, customers, employees, labor organizations, and investment analysts.

It's important to differentiate financial accounting from managerial accounting in which the purpose of financial accounting is not to report the value of a company. Rather, its purpose is to provide relevant, reliable information for investors and outsiders to assess the value of a company for themselves.


Because external financial statements are used by a variety of people in a variety of ways, financial accounting has common rules known as accounting standards and as generally accepted accounting principles (GAAP). In the U.S., the Financial Accounting Standards Board (FASB) is the organization that develops the accounting standards and principles. Corporations whose stock is publicly traded must also comply with the reporting requirements of the Securities and Exchange Commission (SEC), an agency of the U.S. government.


2. Managerial Accounting: 

Unlike financial accounting, the purpose of managerial accounting is for internal decision making and does not have to follow any rules issued by standard-setting bodies and authorities. Important topics covered in managerial accounting include cost behavior, cost management, product costing for manufacturers, budgeting, amounts needed for decision making, transfer pricing, capital budgeting, etc.

The picture below is taken from wikipedia illustrates an enterprise financial management chart:

http://upload.wikimedia.org/wikipedia/commons/2/20/IFAC_Definition_of_MA.jpg


YouTube Video


Here is another video that well explained the difference between financial accounting and managerial accounting:

Contrast Financial Accounting and Managerial Accounting


In this section, I would like to give some differences between Financial Accounting and Managerial Accounting Software. Although they are similar to each other, there are some differences including:

Major Differences with Financial Accounting Software and Managerial Accounting

  • Financial reports in financial accounting software are targeted the company's outsiders, while managerial accounting reports are more for the planning, directing and decision making. In other words, only for internal use purposes.

  • The reports from financial accounting software are based on summaries of financial consequences of the past activities of a company, while the reports from managerial accounting are based on the decision making of the future based on cost behavior history.

  • Financial accounting software emphasizes the accuracy, reliability, while managerial accounting focuses only on items that matter for the decision making process.

  • Financial accounting software focus on the precision of its reports, and managerial accounting focuses on the timeliness of its reports more than its precision.

  • Financial accounting software are used to summary of data for the entire company without breaking down departments into individual group; In contrast,  the reports in managerial accounting will break things down into categories. For example, there will be reports based on departments, products, customers, and employees.

  • It is mandatory that financial accounting has to follow GAAP, while managerial accounting is not.

  • Financial accounting software must follow the guidelines prepared by the Generally Accepted Accounting Principles (GAAP), and managerial accounting does not need to follow these guidelines.
WHY Management Information System (MIS) IS IMPORTANT TO ACCOUNTING?

It is very important for accountants to understand the information systems of their clients in order to properly audit/test the internal controls of the company. MIS majors would be very helpful in this regard. That's why accounting majors or business majors are required to take MIS courses. As an accountant, one can attest to the fact that one of the most important areas in any company is the management information system. Accountants must report accurate, reliable, and timely information that allows management to make informed and important decisions. In addition, the MIS major prepares students to enter the business world and work with computer based information system utilizing microcomputers, web applications, and computer networks. The program is particularly well suited for students who enjoy working with microcomputers and prepackaged computer software, including word-processing, spreadsheets, database management systems, distributed and e-commerce systems.

Job Opportunities for Accounting and MIS:
 
There more job opportunities for someone who knows both Accounting and MIS. Job opportunities can be found in the Big 4 Public Accounting firms (PwC, Ernst & Young, Deloitte, and KPMG), government, private accounting firms, banking, manufacturing, etc..
  • IT auditing
  • IT consultant 
  • AIS
  • MIS Internal Control
  • Audit Program 
  • MIS Accountant
  • Accounting System Analyst and so forth...
RECOMMENDED MAJORS:
 
Those who are interested in Accounting as well as Information System, an appropriate major could be Accounting Information System (AIS) according to SJSU COB: "AIS bridges the gap between two disciplines critical to business operations.  This course of study teaches students to design and deploy information technology to improve the accounting systems of an organization.  Graduates could serve as a liaison between accounting and financial system users and information systems technical staff in the corporate or accounting consulting firm arenas." This is one of the most successful programs that is offered at San Jose State University. College of Business

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