What is an accounting information system and How to develop an accounting system for a business
For small businesses an accounting information system or accounts system is primarily the same as for any business, however large or small. Effectively, all good and well designed accounting or management information systems (MIS) will possess the same attributes. Irrespective of whether the MIS is manual (paper based) or a computerised accounting system – the basics will be the same – the requirement to retrieve the accounting information, in the level of detail that the person requesting said information requires.
The "pyramid" approach in accounting
It is widely accepted that an archetypal “pyramid” is what a business should be striving to achieve. By adopting the pyramid approach it should enable a small business owner to take a look at the companys’ performance at many different levels or layers. It facilitates the business owner to “drill down” through to the accounts information that he or she is trying to retrieve.
At the top of the accounting pyramid should be the key performance indicators or KPI’s as defined by the business. These indicators are the barometer of the business and should, if defined correctly, give a clear indication to the management of the business’s performance, across a clear set of targets or goals. The importance of using KPI’s to measure how a company or business is fairing is pivotal to the success of that business. We explore this in greater detail on our key performance indicator page, as an accounting term that Accountsman deemed necessary for inclusion as an accounts phrase in its own right.
The accounting pyramid should be designed so that if any one of the predefined KPI’s requires investigation the small business owners or entrepreneurs should be able to focus on that KPI, through the accounts information system, and investigate further if the particular KPI is not performing according to the predefined target, establish the reasons why and make or take the necessary corrective action. A simple example of a KPI might be the balance on the company’s bank accounts, whether the account is in funds or there exists a borrowing requirement for the business.
Using our KPI example, the balance at the bank – If a company’s bank balance has fallen into its overdraft facility, it could mean (along with many other reasons) that the company’s debtors have been given too much credit and that the credit control function needs reviewing or the converse may be true and the business is not receiving enough credit from its suppliers and is paying its debts too quickly.
The small business owner or management of the company should from the accounting information system be able to determine which is the case.
The accounting information system should record how much is owed to whom (Purchase Ledger or Accounts Payable) and for how long or how much is owed by whom (Sales Ledger or Accounts Receivable), the business should be able to drill down through the accounts system and see which is the case.
The book keeper responsible for the sales ledger will have recorded the information and an aged debtors report will quickly show whether the business is offering too much credit or that, that particular area of the business needs closer attention.
Below the KPI’s level in our accounting information systems pyramid will probably be the management accounting layer. This layer of reporting will go in to greater detail than just KPI’s. The management accounts will probably include a summary profit and loss account, a balance sheet, cashflow statement which may be rounded into 100’s or 1000’s. Beneath the summary reports again more detailed reports will go into a greater level of detail of information as provided by the accounts system, in keeping with the accounting pyramid. Such reports would almost certainly include an overhead analysis report, measuring expenditure against budgets. In larger businesses the overhead analysis report would be further analysised to a departmental or even an individual employee level.
If there is a secret to developing an accounting information system, good practice dictates that at the very bottom of the pyramid the systems for recording financial data are robust, timely, accurate and complete.
Once you have recorded the accounting information at the base level whether through a computerised accounting system or a manual accounts system then if you get that bit right then the design of the management reporting system is made so much easier.