Financial Accounting: An Integrated Statements Approach, 2nd Edition

BUSINESS INFORMATION SYSTEMS

In prior chapters, we discussed how businesses report their financial condition and

changes in financial condition through financial statements. We described and il-

lustrated how small businesses and individuals often use the cash basis of accounting,

while large, publicly held companies use the accrual basis of accounting. In those

chapters, we used the integrated financial statement framework for recording and

summarizing transactions and generating the resulting financial statements. While this

framework may be used for a small number of transactions, it is not very efficient for

recording millions of transactions daily by large corporations such as Home Depotor

Wal-Mart.

In this chapter, we focus on how accounting information systems are designed to

efficiently record a large number of transactions. We show how basic controls in the

accounting system provide assurance that transactions are accurately recorded. We be-

gin by describing generic business information systems.

Abusiness information systemcollects and processes data and distributes the

information to stakeholders. All business information systems share common elements

that include data sources, data collection, data processing, database management,

information, and stakeholders. These elements of business information systems are

shown in Exhibit 1.

In designing a business information system, the end users of the information must

first be identified and their information needs determined. Stakeholders can be classi-

fied as internal users, such as managers and operational employees, and external users,

such as creditors, stockholders, regulatory agencies, suppliers, and customers. The in-

formation needs of internal users vary widely throughout the business in both form

and content. In contrast, external users require information in standardized formats,

such as tax forms, regulatory filings, and financial statements.

Once the information needs of users have been determined, the business informa-

tion system must be designed to collect the necessary data and process the data into

the required information. For example, a business’s personnel information system re-

quires data to be collected, such as anticipated and actual work schedules, training

needs, accrued vacation time, sick leave, pay scales, and workmen’s compensation re-

quirements. Controls should be designed into the collection process to ensure that the

data are accurate, timely, and complete. Likewise, controls should be designed into the

information system so that errors in processing data are prevented and detected. For

example, the personnel system should include a processing control that would prevent

an employee from accruing vacation time beyond the total allowable by the business.

In practice, businesses have a variety of information systems. Examples of such

systems include sales order, transportation, human resources, purchasing, and ac-

counting systems. Each system should be linked to the other systems for operational

efficiency and effectiveness. In the remainder of this chapter, we focus on accounting

information systems.

152 Chapter 4 Accounting Information Systems

Describe the nature of

business information

systems.

1

Business Information System

Data

Processing

Database Information

Management

Data

Collection

Stakeholders/

Users

Data

Sources

Exhibit 1

Business Information

Systems