Application areas for accounting information systems

ADS Accounting information systems
Accounting information systems are used for the financial activities that take place in
any organisation. These include the operation of sales order processing systems, payroll, budgeting and reporting of the financial condition of the organisation. Other functions include the management of capital investment and general cashflow management. Operational accounting systems focus on daily recording of business transactions, that is, the flow of funds through an organisation. All businesses require this basic information. In larger businesses these systems will be linked to other operational functions, such as sales order processing and inventory. Management accounting systems enable planning and control of business finance. These are sometimes referred to as ‘financial information systems’ and will be linked to executive information systems.

Application areas for accounting information systems
Most companies use an integrated accounting system that covers a number of application areas, as shown in Figure 6.18. The essential modules are accounts receivable, accounts payable and the general ledger. Many companies will look to extend these to related areas such as sales order processing and payroll.

• Sales order processing (SOP). This system is particularly important, as it records sales transactions and supplies documents to other areas such as stock control and manufacturing. There might also be links to payroll to calculate such elements as bonus payments to salespeople on receipt of a customer order. The accounts receivable system contains customer information such as sales made, payments made and account balances for overdue payments. These can be used to halt the extension of further credit until the balances have been cleared. The system may also be searched to identify customers who have purchased certain items – a list of them is then used as the basis for a mailing list for promotional purposes. The accounts payable system contains information regarding the firm’s creditors (as opposed to customers for the accounts receivable). The system provides information on which a schedule of supplier payments can be made and thus ensures that payments can be made as late as possible (to optimise cashflow) without losing discounts offered from suppliers for prompt payment.
• Inventory. This system maintains stock levels by recording when stock is used for sales orders. A reorder point (ROP) system will generate an order for stock once the level of a stock item falls below a certain number of units. Other time-based systems will replenish stocks after a predetermined time interval.
•  Payroll. This system processes payments to employees, including deductions for such items as National Insurance and income tax. Many organisations will have electronic  links to banks for direct deposit to employee accounts rather than issuing pay cheques.
•  Budgeting systems. Budgets are an important control tool for management. A predetermined budgeted amount is periodically compared to the actual expenditure and any difference noted as a variance. This comparison of allocations (budgeted amounts) against actuals (amounts spent or received) can be reported to management. The identification of a variance will normally instigate a discussion and may lead to corrective action being taken to eliminate any adverse variance. Budgets for areas or departments can be aggregated or brought together to form a functional or organisational budget statement for higher-level decision making.
•  Cashflow reporting. A major cause of business failure is inadequate cash reserves to keep the organisation functioning. Cashflow reporting is necessary to keep track of the organisation’s cash reserves. Cash is needed for working capital (day-to-day expenses) and for the purchase of long-term assets such as plant or machinery. A cashflow report will contain a running total of the cash balance from information on cash inflows and outflows for each reporting period. An adverse cash position may necessitate the deferring of a planned acquisition. The report can be used as a planning tool by incorporating different cost and revenue scenarios and studying the results.
• Capital budgeting system. The financial system should contain tools that allow for the evaluation of capital spending plans. Major investments are compared to the financial return that the organisation could have gained from placing the cash in a bank account and accruing interest. The investment evaluation may also inform the decision to buy or lease equipment. Financial measures often used to assess an investment include net  present value (NPV), internal rate of return (IRR) and payback period
•  Financial analysis system. Financial analysts use a variety of performance measures to gauge the financial position of an organisation. These include such measures as the current ratio, inventory turnover and earnings per share . An information system can be used to generate these values automatically using figures stored in a  database of such items as current assets and current liabilities.
•  Forecasting systems. By projecting budget statements into the future, an organisation is able to forecast its potential financial state. These forecasts will need to incorporate economic and market forecasts in order that sales and cost data can be estimated. 

Spreadsheets
Owing to their flexibility in numerical analysis and the incorporation of built-in facilities for statistical and numerical analysis, spreadsheets are an ideal medium in which to  conduct financial analysis. For instance, a budget or cashflow forecast can be compiled by the addition of relevant items under income and expenses headings. If a spreadsheet template is constructed, consisting of the headings for the relevant items to be included, it is simply a matter of the user entering the appropriate amounts into the spreadsheet cells.Cashflow forecasts are an essential financial statement in any business. Bank managerscan be forewarned of the probable requirement for overdraft facilities. The forecasts are of particular importance to startup businesses where they can be used to support applications  for additional funding from potential money lenders. Once the cashflow statement has been entered, any values can easily be changed and the spreadsheet cell values will be updated to reflect the new cash position.

Accounting packages
A vast number of accounting software packages are available which can produce invoice statements, monthly budget statements and other financial items needed to run a small or medium-sized organisation. The requirements for accounting information systems will differ from other types of system in which issues such as ease of use and performance will usually be considered important. In accounting systems, accuracy and reliability are paramount.

Financial modelling packages
While accounting packages tend to be restricted to operational systems, financial modelling packages are also available for decision making at the strategic and tactical levels of an   organisation. These provide the following types of facilities for strategic planning:

• corporate financial forecasting models;
• merger and acquisition strategy
•  Facilities for tactical planning include:
• annual budgets – cashflow, capital, tax planning;
•  new product assessments – ROCE (return on capital employed).

They can also be used for operational financial management issues such as:

•  funds management – cash and securities, shares
•  cost accounting and project cost monitoring;
• tax accounting.

Systems to provide these functions tend to be available as modules of the high-end accounting packages. Such software allows the decision maker to hold financial models of the organisation in order to construct ‘what-if?’ analysis. It has the advantage of providing more guidance than a spreadsheet does on building financial models. ADS