unit 5 ict application in accounting

1Professional Development Programme on Enriching Knowledge of the Business, Accounting and Financial Studies (BAFS) Curriculum

Technology Education Section, Curriculum Development InstituteEducation Bureau, HKSARG

August 2008

Unit 5 : ICT Applications in Accounting Course 1 : Contemporary Perspectives on Accounting

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On completion of this unit, you should be able to:On completion of this unit, you should be able to:

(i)(i) Explain what Explain what accounting information systemaccounting information system is.is.(ii)(ii) Understand the importance of an accounting Understand the importance of an accounting

information system in information system in management decision management decision makingmaking..

(iii)(iii) Identify Identify ICT applications ICT applications commonly used in commonly used in accounting.accounting.

(iv)(iv) Describe the Describe the advantages and disadvantages advantages and disadvantages of of using using computerisedcomputerised accounting.accounting.

Learning ObjectivesLearning Objectives

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OrganisationOrganisation of Unit 5of Unit 5

ICT Applications in Accounting

Accounting Information System

Revenue CycleExpenditure CycleProduction Cycle

Financial Reporting CycleResource Management Cycle

General FunctionsComponents

SubsystemsImportance

Information Communication

Technology

Traditional Computer-based Technology

Digital Communication Technology

Advantages and Disadvantages of

Computerised Accounting

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Accounting Information System Accounting Information System (1)(1)

Do you know what accounting information system is?

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Accounting information system (AIS) is a system designed to transform transaction data into accounting information for decision-making.

Business Business TransactionTransaction

Transaction Transaction DataData

Data Data ProcessingProcessing

Accounting Accounting informationinformation

Decision MakingDecision Making

ReportReportAISAIS

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While AIS was previously a paper-based system (or called manual system), most modern businesses now use accounting software to maintain their AIS.

This is known as computerised accounting information system.

AISAIS

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A computerised accounting information system generally comprises computer hardware, accounting software and accounting staff.

Computer Hardware

Accounting Software

AIS AIS -- ComponentsComponents

Accounting Staff

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Generally speaking, the functions of the AIS, whatever the manual AIS system or the computerised AIS system, include data collection, data maintenance, data management, data control and security and information generation.

Computer Hardware

Accounting Software

AIS AIS General FunctionsGeneral Functions

Accounting Staff

Transaction Transaction DataData

Data Control and SecurityData Control and Security

Data Collection

Data Management (like storage, updating and retrieval)

Data Maintenance (like classification, calculation, summarisation and comparison)

Information Generation UsersUsers

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The AIS processes transaction data by means of transaction processing cycles, which are interrelated subsystems of the AIS.

Each cycle is designed to deal with a particular type of transaction. For example, the revenue cycle, which will be explain more later, is designed to deal with sales transactions.

AIS AIS -- SubsystemsSubsystemsComputer Hardware

Accounting Software

Accounting Staff

Transaction Processing Cycles

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The transaction processing cycles1, which vary among companies, of a typical AIS are classified as: revenue cycle, expenditure cycle, production cycle, resource management cycle and financial reporting cycle.

1 Wilkinson, J. W., Accounting and Information Systems, Wiley

Computer Hardware

Accounting Software

Accounting Staff

Transaction Processing CyclesFinancial Reporting

Cycle

Revenue Cycle

Expenditure Cycle

Production CycleResource Management Cycle

AIS AIS -- SubsystemsSubsystems

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The Revenue Cycle is used to process sales transactions and related sales receipts. In particular, the cycle usually possesses the following functions: - authorising sales transactions;- recording sales orders;- verifying customers creditworthiness;- arranging shipment of goods or performance of services;

Computer Hardware

Accounting Software

Accounting Staff

Financial Reporting

Cycle

Revenue CycleExpenditure Cycle

Production Cycle

Finance CycleResource Management Cycle


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- billing customers;- verifying and safeguarding sales consideration;- recording sales transactions and related receipts in the ledgers; and- preparing sales analysis.

Computer Hardware

Accounting Software

Accounting Staff

Financial Reporting

Cycle

Revenue CycleExpenditure Cycle

Production Cycle



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The Expenditure Cycle is used to process purchases/other expenses transactions and related payments. In particular, the cycle usually possesses the following functions:- authorising purchases transactions; - placing purchases orders;- verifying and safeguarding the goods/services received;- verifying the validity of purchase invoices;

Computer Hardware

Accounting Software

Accounting Staff

Financial Reporting

Cycle

Revenue Cycle

Expenditure CycleProduction Cycle



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- authorising payments for the purchases and other expenses;- arranging the payments for the purchases and other expenses;- recording purchases/other expenses transactions and related payments in the ledgers; and- preparing purchases analysis and expenses analysis.

Computer Hardware

Accounting Software

Accounting Staff

Financial Reporting

Cycle

Revenue Cycle

Expenditure CycleProduction Cycle



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The Production Cycle, mainly found in manufacturing companies, is used to provide information related to the conversion of raw materials into finished goods. In particular, the cycle usually possesses the following functions:- performing the production planning;- managing the inventory level;- maintaining and controlling the production operations;

Computer Hardware

Accounting Software

Accounting Staff

Financial Reporting

Cycle

Revenue Cycle

Expenditure Cycle

Production Cycle



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- maintaining the cost records for work-in-process; - recording the resources used in production and completion of finished goods in the ledgers; and- preparing inventory analysis and production analysis.

Computer Hardware

Accounting Software

Accounting Staff

Financial Reporting

Cycle

Revenue Cycle

Expenditure Cycle

Production Cycle



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The Resource Management Cycle concerns with the capital asset management. The cycle involves fund management, facilities management and personnel management. In particular, the cycle usually possesses the following functions:

Computer Hardware

Accounting Software

Accounting Staff

Financial Reporting

Cycle

Revenue Cycle

Expenditure Cycle

Production Cycle



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Fund Management- authorising acquisition and use of the funds;- acquiring funds from various sources, like sales of goods, bank loans, shares issuance and debenture issuance;- using funds to meet obligations due;- safeguarding and controlling funds on hand; and- recording the acquisition and use of funds in the ledger.

Computer Hardware

Accounting Software

Accounting Staff

Financial Reporting

Cycle

Revenue Cycle

Expenditure Cycle

Production Cycle



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Facilities Management- identifying the needs of acquiring fixed assets;- preparing the capital investment proposals;- authorising the acquisition, use or disposal of fixed assets;- placing orders;- verifying and safeguarding the fixed assets received;- verifying the validity of suppliers invoices;

Computer Hardware

Accounting Software

Accounting Staff

Financial Reporting

Cycle

Revenue Cycle

Expenditure Cycle

Production CycleResource Management Cycle


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Facilities Management- authorising payments for the acquisition;- arranging the payments for the acquisition;- safeguarding and controlling the fixed assets; - maintaining the records concerning fixed assets; and- recording the acquisition and disposal of the fixed assets in the ledger.

Computer Hardware

Accounting Software

Accounting Staff

Financial Reporting

Cycle

Revenue Cycle

Expenditure Cycle

Production Cycle



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Personnel Management- establishing pay status of staff;- measuring the services rendered by the staff, for example: timekeeping;- authorising the payments for the services rendered by the staff;- arranging the payments for the services rendered by the staff; and- recording the staff costs in the ledger.

Computer Hardware

Accounting Software

Accounting Staff

Financial Reporting

Cycle

Revenue Cycle

Expenditure Cycle

Production Cycle



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The Financial Reporting Cycle is the process of transforming data generated by the aforesaid transaction cycles into accounting information like trial balance, income statements and balance sheets.

Computer Hardware

Accounting Software

Accounting Staff

Financial Reporting

Cycle

Revenue Cycle

Expenditure Cycle

Production Cycle



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Importance of AIS Importance of AIS (1)(1)

After understanding the key components and features of the AIS, could you figure out why the AIS is important in management decision making?

ManagementManagement

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The AIS provides relevant and timely accounting information to the management for strategic and tactical planning. In particular, the AIS processes the transaction data and generates reports to the management for further analysis and decision making.


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Can you think of any examples that the management uses the output of AIS to make decision?


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For example, the management of a retail store is required to make a decision on the amount of year-end bonus to be paid to Steven, a salesman.

The management:- determines that the total amount (5% of profit) of bonus entitled by all

salesmen basing on the profit ($10 million) for the year is $500,000 ($10 million x 5%); and

- evaluates the performance of Steven based on the sales analysis reportand finds that Steven contributes 3% of total sales for the year; and

- determines that the amount of year-end bonus to be paid to him is $15,000 ($500,000 x 3%).


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ICT Applications in Accounting ICT Applications in Accounting (1)(1)

Do you know what Information Communications Technology (ICT) is and how it is applied in accounting?

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ICT is the uses of digital technology to help individuals, businesses and organisations to use information.

ICT covers products which store, retrieve, manipulate, transmit or receive digital data, e.g. personal computers, digital camera, palm and email.

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ICT is categorised into:- the Traditional Computer-based Technologies; and - the Digital Communication Technologies.

Traditional Traditional ComputerComputer--based based

TechnologiesTechnologiesDigital Digital

Communication Communication TechnologiesTechnologies

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In office, the application of the Traditional Computer-based Technologiesallows us to do what we are typically using to do with a personal computer, like:- word processing (eg Microsoft Word);- performing calculation with spreadsheet (eg Microsoft Excel);- conducting a presentation (eg Microsoft Powerpoint); and- managing data (eg Microsoft Access).


TechnologiesTechnologies

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In accounting, the application of Traditional Computer-based Technologies allows us to manage a businesss accounting records with accounting application software.


TechnologiesTechnologies

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A wide range of accounting application software is available for businesses of various nature and sizes, like:- ACCPAC;

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A wide range of accounting application software is available for businesses of various nature and sizes, like:- ACCPAC;- MYOB;

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A wide range of accounting application software is available for businesses of various nature and sizes, like:- ACCPAC;- MYOB; and- DacEasy.

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The Digital Communication Technologies refers to the technologies of data communication by electronic means. This is often achieved via networks of sending and receiving equipment, wires and satellite links.

Typical examples of the application are Internet and Intranet.

Digital Digital Communication Communication TechnologiesTechnologies

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Via an internal network, generally referred to as a Local Area Network (LAN), a user can share accounting application software and accounting data with other users at the same location.

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Via an external network, generally referred to as a Wide Area Network (WAN), a user can communicate with other users outside their internal network.

For example, a user in Country A can access accounting data input by another users located in Country B via WAN. Another example is that the public places orders and makes payments to supermarkets via Internet.

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Advantages and Disadvantages of Advantages and Disadvantages of ComputerisedComputerised Accounting Accounting (1)(1)

Can you state the advantages and disadvantages of computerised accounting (ie using the ICT in accounting) ?

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In the early stage of computerisation, the main benefits of computerisedaccounting came from the reduction in the number of accounting personnel needed to process routine transactions as repetitive accounting work could be processed by computers in batches.

Advantages

Reduce repetitive routine manual accounting work

Reduce cost and human resource for maintaining the accounting information system

Enhance the efficiency in the preparation of financial statements and the decision making of management

Enhance the consistency and reliability of the accounting system and its output

Allow users to access the accounting informationsystem simultaneously

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Besides, the efficiency and reliability of computerised accounting considerably improve the efficiency of financial reports preparation and the accuracy of accounting data.

Advantages






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Furthermore, the innovation and popularisation of Digital Communication Technologies allows different users, in the same or different locations, to input and access accounting data simultaneously.

Advantages






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Disadvantages

High initial costThe application software may not totally fit the

needs of a business

High risk of attacks by hackers and fraudsters


However, computerised accounting has also thrown up a number of recurring problems to users. First of all, the initial setup cost and staff training cost for a computerised accounting information system are expensive.

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Disadvantages


needs of a business



Businesses usually acquire ready-made accounting application software to computerise their accounting information systems. However, the features of the software may not totally fit the operation needs of the businesses.

The businesses have to adapt their operations to fit in with the software, or to seek for special modifications to the software, which is an expensive option.

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Disadvantages


needs of a business



To enable the public to transmit orders and make payments directly to suppliers system electronically, some businesses have opened up their systems and allow the public to access them. However, this makes the systems vulnerable to attacks by hackers and fraudsters.

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RecapitulationRecapitulation

Now, you have come to the end of the unit.

Let us recapitulate the essential points of the following inthe next five slides:

What accounting information system (AIS) is Components of a computerised AIS Functions of the AIS Transaction processing cycles of AIS Information Communications Technology (ICT), its

category and applications in accounting ICT applications in accounting advantages and

disadvantages

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Recapitulation Recapitulation -- AIS AIS (1)(1)

Accounting information system (AIS) is a system Accounting information system (AIS) is a system designed to transform transaction data into accounting designed to transform transaction data into accounting information for financial decisioninformation for financial decision--making. making.

Components of a Components of a computerisedcomputerised AIS:AIS: computer hardware, computer hardware, accounting software and accounting software and accounting staff. accounting staff.

Functions of the AIS:Functions of the AIS: data collection, data collection, data maintenance, data maintenance, data management, data management, data control and security and data control and security and information generation.information generation.

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Recapitulation Recapitulation -- AIS AIS (2)(2)

Transaction processing cycles of AIS: Transaction processing cycles of AIS: revenue cycle, revenue cycle, expenditure cycle, expenditure cycle, production cycle, production cycle, resource management cycle, and resource management cycle, and financial reporting cycle.financial reporting cycle.

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Recapitulation Recapitulation -- ICT ICT (1)(1)

Information Communications Technology (ICT) is the uses of digitInformation Communications Technology (ICT) is the uses of digital al technology to help individuals, businesses and technology to help individuals, businesses and organisationsorganisations to use to use information.information.

ICT is ICT is categorisedcategorised into:into: the Traditional Computerthe Traditional Computer--based Technologies, which allows us to based Technologies, which allows us to

do what typically we are using to do with a personal computer atdo what typically we are using to do with a personal computer athome or at work; and home or at work; and

the Digital Communication Technologies, which allows us to the Digital Communication Technologies, which allows us to communicate by electronic means. communicate by electronic means.

ICT applications in accounting:ICT applications in accounting: manage a businessmanage a businesss accounting records with accounting s accounting records with accounting

application software; andapplication software; and share of accounting application software and accounting data by share of accounting application software and accounting data by

different users.different users.

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ICT applications in accounting:ICT applications in accounting: Advantages:Advantages:

Reduce repetitive routine manual accounting work.Reduce repetitive routine manual accounting work. Reduce cost and human resource for maintaining the Reduce cost and human resource for maintaining the

accounting information system.accounting information system. Enhance the efficiency in the preparation of financial Enhance the efficiency in the preparation of financial

statements and decision making of management.statements and decision making of management. Enhance the consistency and reliability of the accounting Enhance the consistency and reliability of the accounting

system and its output.system and its output. Enhance the accessibility of the accounting information system.Enhance the accessibility of the accounting information system.

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ICT applications in accounting:ICT applications in accounting: Disadvantages:Disadvantages:

High initial cost.High initial cost. The application software may not totally fit the needs of a The application software may not totally fit the needs of a

business.business. High risk of attacks by hackers and fraudsters.High risk of attacks by hackers and fraudsters.

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ReferencesReferences

Wilkinson, J. W. (2000), Accounting and Wilkinson, J. W. (2000), Accounting and Information Systems, Wiley, 4th Edition, Information Systems, Wiley, 4th Edition, Chapter 1, 3, 11Chapter 1, 3, 11--13. 13.

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Further ReadingsFurther Readings

Stair and Reynolds (2006), Principles of Stair and Reynolds (2006), Principles of Information Systems: A Managerial Information Systems: A Managerial Approach, Thomson Publishing, 7th Edition, Approach, Thomson Publishing, 7th Edition, Chapter 6 & 9. Chapter 6 & 9.

James A Hall (2004), Accounting Information James A Hall (2004), Accounting Information Systems, SouthSystems, South--Western College Publishing, Western College Publishing, 4th Edition, Chapter 2, 4 4th Edition, Chapter 2, 4 -- 8. 8.

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Further ReadingsFurther Readings

ERP ERP / / , , , 2003 , 2003

/ / , , , , , 1999 , 1999

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End of the UnitEnd of the Unit

This is the end of Unit This is the end of Unit 55. . Please go to the Unit Please go to the Unit Assessment before Assessment before attempting the next unit.attempting the next unit.

EndEnd--ofof--unit Assessmentunit Assessment

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Additional Learning ResourcesAdditional Learning Resources

If you would like to experience a If you would like to experience a computerisedcomputerised accounting system,accounting system,you may download the free trial version of you may download the free trial version of DacEasyDacEasy and MYOB and MYOB from the following links:from the following links:

MYOB:MYOB:hhttp://www.myob.com.hk/eng/products/premier_free_trials.aspxttp://www.myob.com.hk/eng/products/premier_free_trials.aspxDacEasy:DacEasy:http://www.daceasy.com.hk/v14/demo/download.htmhttp://www.daceasy.com.hk/v14/demo/download.htm

unit 5 ict application in accounting

Documents

manual system

accounting course

computerised ais system

manual ais system

paperbased system

ais processes transaction

securitydata control

disadvantages advantages