Introduction to the context of accounting
Introduction to the context of accounting

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Introduction to the context of accounting

2 Accounting information systems

A system can be defined as a group of elements that are formed and interact to achieve goals or objectives. You spend all your life with systems – your home, your work, your family, the school you attended. An organisation is a system in which a number of people work together to achieve particular objectives.

Within each system there are smaller systems. The one everyone knows is the solar system. Within it, each of the planets is, itself, a system. Taking Earth, each country is a system, and so on. Another one you will recognise is you – you yourself are a system, full of subsystems such as your respiratory system and your nervous system. Within a business, there are sub-systems called departments which, themselves, can be broken down into smaller systems right down to individual employees.

All systems are themselves located within an environment – even the solar system, which has the universe as its environment. Input enters a system from something located in its environment. (The space shuttle entering the earth's atmosphere from outer space is an example of an input to the earth from its environment.) A system processes its input and then sends its output to something located in its environment. A business receives inputs to its system in the form, for example, of raw materials from suppliers, payments from customers, etc. It then converts the inputs into goods and services and sends its outputs (goods and services) into its environment (to its customers). It records these activities in its accounting information system.

Figure 1 shows examples of the data inputs and information outputs from an accounting information system.

Figure 1
Figure 1 A simple accounting information system

Businesses continue to exist because managers take decisions about what they should do. In order to take a decision, a manager needs information. The information is provided to the manager from an information system. It is an item of output from the information system. The decision taken by the manager is input back into the information system. Changes are then made to information held within the information system, and then output from the information system to the recipient(s).

For example, a manager who is in charge of ordering raw materials will be told by the information system how much raw material is held by the organisation and how much will be needed. The manager then decides how much raw material to order and who to order it from. That decision is entered into the information system by the manager, the order is sent to the supplier by the information system and the information system is updated to show that an order has been placed.

Business organisations have a number of systems, all of which must work together in an effective and efficient way. There are systems for purchasing, production, marketing, human relations, etc. The accounting system is just one of the systems within an organisation, They also have an information system. The information system receives data from its environment, processes it, and then sends the converted data into its environment in the form of information.

The accounting information system is part of the organisation’s information system. Whereas the information system will process a mixture of quantitative (i.e. numerical) and qualitative (i.e. non-numerical) data, the accounting information system focuses almost entirely on processing quantitative data. The accounting system is just one of the systems within an organisation, all of which must work together in an effective and efficient way.

Activity 3

Think of an organisation you know and spend one minute listing examples of the input to its accounting information system.

Answer

Input to the accounting information system means any entry of data made to it. That data recorded can refer to both things going into and out of the organisation.

You might have thought of things like details of goods purchased for resale (e.g. price, quantity, date received); goods purchased to be used in the organisation (e.g. machinery and computer equipment); details of cash received from customers (e.g. the amount received, date received); details of cash paid for wages, purchases, rent, rates, telephones, electricity, and so on. The actual list is very much longer. Just about anything that can be quantified coming into an organisation or going out of it will be recorded as input to the accounting system.

Activity 4

Think again of the same organisation you know and spend one minute listing examples of the output from its accounting information system.

Answer

You might have thought of things like reports showing the total cost of everything sold and the total revenue from their sale; reports showing the profit made on a sale and/or for all sales over a period of time; payslips, totals of the amount spent on wages, or of the cost of all the equipment belonging to the organisation, and so on. It can also include data or information sent from the accounting system to another of the organisation’s information systems.

As with inputs to the accounting information system, the actual list of outputs is very long indeed. Some of the output is organised in a commonly agreed format so that anyone looking at the output will understand it. Other output is presented in a way that suits an individual or group of people who will use the information to take decisions of one type or another.

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