Question

How do an organization’s business processes and lines of business affect the design of its Accounting Information Systems (AIS)? Give several examples of how differences among organizations are reflected in their AIS?

Give an example of how an AIS can improve decision making, and describe the multistep activities involved in the process.

Answer 1

An organization’s AIS must reflect its business processes and its line of business.

For example:

• Government agencies need procedures to track separately all inflows and outflows from various funds, to ensure that legal requirements about the use of specific funds are followed.
• Financial institutions do not need extensive inventory control systems.
• Construction firms typically receive payments at regular intervals, based on the percentage of work completed. Thus, their revenue cycles must be designed to track carefully all work performed and the amount of work remaining to be done.
• Service companies (e.g., public accounting and law firms) do not sell physical goods and, therefore, do not need inventory control systems. They must develop and maintain detailed records of the work performed for each customer to provide backup for the amounts billed. Tracking individual employee time is especially important for these firms because labor is the major cost component.
• Manufacturing companies will need a set of procedures and documents for the production cycle; non-manufacturing companies do not.
• Passenger service companies (e.g., airlines, bus, and trains) generally receive payments in advance of providing services. Therefore, extensive billing and accounts receivable procedures are not needed; instead, they must develop procedures to account for prepaid revenue.