ACCOUNTANT’S GUIDE TO COMPUTERS AND INFORMATION TECHNOLOGY Delta Publishing Company 1 Copyright 2005 by DELTA PUBLISHING COMPANY P.O. Box 5332, Los Alamitos, CA 90721-5332 All rights reserved. No part of this course may be reproduced in any form or by any means, without permission in writing from the publisher. 2 CONTENTS Chapter 1 Accounting Information Systems and Packages Chapter 2 The Use of Computer Software in Managerial Accounting Chapter 3 Information Security and Data Protection Chapter 4 The Accountant and Database Management Systems Chapter 5 The Accountant and the Client/Server Environment Chapter 6 The Accountant and Artificial Intelligence Applications Chapter 7 Information Systems and Economic Feasibility Study Glossary 3 CHAPTER 1 ACCOUNTING INFORMATION SYSTEMS AND PACKAGES Learning Objectives: After studying this chapter you will be able to: 1. Understand what accounting information systems are and their components. 2. Select effective accounting software. 3. Explain what information technology compliance software involve 4. Select and utilize write-up software. 5. Evaluate audit preparation software. 6. Use spreadsheets. 7. Understand how to outsource some accounting functions to Web-based accounting. 8. Describe the purpose of extensible business reporting language (XBRL). Accounting information systems record, report, and analyze business transactions and events for the management of the business enterprise. It encompasses six essential accounting systems including order processing, inventory control, accounts receivable, accounts payable, payroll, and general ledger. This chapter discusses several software applications of particular interest to accountants. The discussion includes the major players in the area and some important features to look for when considering a particular type of software. ACCOUNTING INFORMATION SYSTEMS Accounting information systems are the oldest and most widely used information systems in business. Computer-based accounting information systems: • Record and report the flow of funds through an organization on a historical basis and produce important financial statements such as balance sheets and income statements • Produce forecasts of future conditions such as projected financial statements and financial budgets • Operational accounting systems focus on transaction processing systems. They emphasize legal and historical record-keeping and the production of accurate financial statements. • Typically, operational accounting systems include: 1. Order Processing: Captures and processes customer orders and produces data for inventory control and accounts receivable. 2. Inventory control: Processes data reflecting changes in inventory and provides shipping and reorder information. 3. Accounts receivable: Records amounts owed by customers and produces customer invoices, monthly customer statements, and credit management reports. 4. Accounts payable: Records purchases from, amounts owed to, and payments to suppliers, and produces cash management reports. 4 5. Accounts payroll: Record employee work and compensation data and produces pay checks and other payroll documents and reports. 6. General ledger systems: Consolidates data from other accounting systems and produces the periodic financial statements and reports of the business. • Management accounting systems focus on the planning and control of business operations. They emphasize: 1. Cost accounting reports 2. Development of financial budgets and projected financial statements 3. Analytical reports comparing actual to forecasted performance Figure 1 illustrates the interrelationships of several important accounting information systems. Many accounting software packages are available for these applications. FIGURE 1 ACCOUNTING INFORMATION SYSTEMS FOR TRANSACTION PROCESSING AND FINANCIAL REPORITNG ONLINE ACCOUNTING SYSTEMS Accounting information systems are being affected by Internet and client/server technologies. Using the Internet, intranets, extranets, and other network changes how accounting information systems monitor and track business activity. The online, interactive nature of such networks calls for new forms of transaction documents, procedures, and controls. Many companies are using or developing network links to their trading partners through the use of the Internet or 5 other networks for applications such as order processing inventory control, accounts receivable, and accounts payable. ACCOUNTING SOFTWARE There are many factors that must be weighed when selecting a computer software package. Besides determining the software features currently needed and required in the future, the buyer must have a thorough understanding of the firm's existing system, and whether proposed software will integrate with all areas of that system and business. Some of the basic considerations include: features and capabilities, compatibility and integration, ease of customization, ease of use, written documentation and technical support, price, and vendor's reputation and stability. The fundamental task of accounting software is to automate the routine chore of entering and posting accounting transactions. This information is organized in an electronic format so as to produce financial statements and can be accessed immediately to assist in the management of the firm. An accounting software package consists of a series of highly integrated modules. Each module corresponds to a specific accounting function (e.g., payroll, accounts receivable, and accounts payable). In an integrated system, after the details of the transaction are entered in one of the modules, the chart of accounts from the general ledger is "read." The transaction is then automatically posted to the accounts in the general ledger. For example, when a sale on account is entered in the accounts receivable module, a debit is automatically made to the accounts receivable account in the general ledger and an offsetting credit made to the general ledger sales account. Module Descriptions The basic features typically required by a firm and often integrated in an accounting software package include the following: general ledger, accounts receivable and invoicing accounts payable and purchase order processing, inventory, payroll, job costing, and fixed assets. General Ledger The general ledger is the heart of the accounting system. It contains the chart of accounts of the business. A general ledger module should contain a sample chart of accounts which can be customized to a particular business. In addition, it should contain predefined reports that support budget data and prior year comparisons which can be tailored to a firm's specific needs. Other essential features include the capability to generate automatic reversing and recurring journal entries, having at least 13 periods open at one time, and the ability to make prior period adjustments or post entries to another year without closing the current year. Accounts Receivable and Invoicing The accounts receivable and invoicing functions are often combined in the same module. This module allows you to enter sales data and permits extensive sales analysis. It provides customer receivables management by tracking customers' balances, generates invoices and/or monthly 6 statements, as well as aging reports. It should allow for setting up credit limits for each customer, provide for flexible billing options, and the ability to apply partial payments to specific invoices or to the oldest balance. For faster processing, online inquiry should show the complete customer record at a glance including balances and unpaid invoices, and allow you to make changes "on the fly." Accounts Payable and Purchase Order Processing Accounts payable and purchase order processing can also be combined in a single module. The module tracks obligations to vendors and determines a best payments schedule, prints checks, and provides for the distribution to accounts. It should allow for enhanced management of order processing by tracking orders from the start to the receipt of goods. It should be able to detect supply problems and thus permit early planning for alternate sources. To analyze vendor performance, it must track the complete purchase and delivery history of vendors and allow for easy access to this information. Inventory This module automatically tracks inventory as purchases or sales are made, and maintains cost and price data for each inventory item. In an integrated system, the Inventory main file, which stores the product's number, is checked when a sales invoice is created in the accounts receivable module. If sufficient inventory is on hand, the amount of the sale is reduced from the balance. Likewise when inventory is purchased, the inventory quantity is automatically increased. The module should help improve inventory management by alerting the user when to reorder, identifying slow moving items, and analyzing performance by item and category. Payroll The payroll module maintains default information for each employee (e.g., rate of pay and income tax withholding information). The module calculates the wages to be paid, prints checks, and keeps track of deductions, sick and vacation days, and other such information. It maintains information for government reporting (e.g., 941, W-2, unemployment, and state tax forms). For cost control, it should be able to provide for expense distribution or integrate with a costing module. Job Costing A job costing module allows you to track and report on the costs, income, and profitability of individual