Explain and give examples of five (5) characteristics that are absolutely essent

Question

Explain and give examples of five (5) characteristics that are absolutely essential to consider when developing and/or improving an Accounting Information System in particular including legal and policy factors.

"Characteristic generally means a feature or quality. Things such as good security, accuracy, etc might be more correct".

It mentioned legal and policy factors because they are the main standards to be considered in an AIS because Accounting is a function which is fully regulated and monitored/auditted/etc.

That means you need to identify the characteristic (1 mark),

explain it thoroughly in relation to accounting in general (3 marks),

give an example of how it is absolutely necessary to consider in developing an accounting information system (4 marks) and

critically comment/analyse by either giving predictions of how it's absence could cause further problems or there could be issues which can enhance the system or quote specific regulations that refer to this characteristic (2 marks).

Explanation / Answer

Ans - The five factors that are absolutely essential to improve accounting information system are :

a) Understandable - Accounting information may be understandable. This is an important characteeristic for small business owners. Many small business owners do not have strong accounting background. Financial transaction that is too technical or cannot be understood by a layman can be ineffective for business owners.Business owners should choose an accountant who can prepare information in an undertandable manner.

b) Usefulness - Business owners need accounting information that is applicable to the business decision at hand.They can request financial statements, accounting schedules or cost benefit analysis. For example, cost allocation reports may not provide sufficient information for business owners who must make a decision on hiring managers.

c) Relevant - Accounting information should relate to a specific time period or contain information regarding individual business functions. Business Owners often conduct a trend analysis when reviewing financial information . The trend analysis compares historical financial information to the company's current accounting period information. Irrevelant historical information can severely distort the trend analysis process. For example reviewing the prouction process for widgets requirs relevant information on the cost of materials for widgets. Cost information on the materials to produce cogs would be irrevelant.

d) Reliability - Accounting information must be reliable so that business owners can be reasonably assured that accounting information presents an accurate picture of the company's financial health. Business owners often use accounting information to secure external financing for their business. Information that is not reliable or accurate may cause lenders and investors to question the business owner's management abilities.

e) Consistent - Consistency refers to how business owners and accountants record financial information in an company's general ledger. Business owners need to ensure that the financial transactions are handled the same way. Inventory purchases are recorde the same way as yesterday, today and tomorrow. This helps companies help create historical records and limit the amount of financial accounts or journal enteries included in the general ledger.

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