The Nature Of Accounting Systems

An accounting system is a process whereby a specific output is produced by a given input. In an information accounting system, data is processed to provide information. Data is a collection of unprocessed facts, while information is data or facts that have been processed into a meaningful form.

In the normal course of events, a business undertaking will enter into a large variety of transactions. The details of a particular transaction are referred to as transaction data. The term transaction data therefore refers to the facts that completely describe a specific transaction.

The aim of an accounting system is to record the transaction data and then to process this data to provide information that is ultimately collected in the financial and management reports of the enterprise. There are two stages in the development of an accounting system, namely systems analysis and system design.

A good accounting system must comply with at least the following fundamental requirements. The system must provide decision makers with timely and accurate information relevant to the responsibilities and requirements; the internal control measures must be adequate to ensure the protection of assets and the provision of reliable information and the system must be sufficiently flexible to accommodate changes in the volume of activities and in the operating procedures without requiring drastic modifications.

A thorough knowledge of the activities of the undertaking and its information and control requirements is an essential prerequisite for the development of an effective accounting system that meets the necessary criteria. The procedure of surveying the undertaking’s activities and information and control requirements is known as system analysis.

In the system’s design process the system is designed to comply with the specifications determined by systems analysis. Initial transactions are recorded in source documents and the in journals and finally they are classified and stored in ledger accounts. The processed information is extracted from the ledger accounts for drawing up the financial reports. The design of any accounting system within this framework comprises of, planning the procedures according to which the system will function, the design of the source documents, journals, ledger accounts and final reports and finally the design of the necessary internal control measures.

From a management information point of view it is important that the information needs of a user are determined and that the accounting report meets these needs. Rapid development in the field of computer accounting has led to the effectiveness of the accounting process, enabling more usable, more accurate and more timely output of accounting data. Efficiency increases as the value of the system increases in relation to the cost thereof. Computerised systems have made the accountants job in designing the accounting process that much easier than the manual systems of days gone by.

Importance Of Data In Accounting And Parties Interested In Accounting Information

The term “data” refers to primary details or numerical facts relating to an event or transaction. Data is stored and maintained on a computer or network. Computer Software like HiTech Financial Accounting process this electronic data. Data is also maintained as hardcopy or paper print. Since accounting limits itself only to those transactions and events which are financial in character, therefore, accounting data will consist of facts, financial in nature, relating to transactions and events of a business entity for the accounting period. Moreover, accounting data must be supported by documentary evidence. Thus, documents known as vouchers, support the data. Usually data is disorganized and disjointed in its raw form. It is not capable of being understood. So, accounting processes raw data into finished form of “information” to make it useful and meaningful, capable of being used in decision taking process by the various users of accounting information.

Thus accounting data processed by the accounting cycle produces accounting information. Data is collected, recorded, classified, grouped, valued, tabulated, arranged, summarized in order to present the same in the form of information for its use by the users to enable them to take decisions.

Accounting data Consists of financial transactions and events relating to an entity for the accounting period supported by documentary evidence (vouchers). For example receipts and payments are documented by payee’s receipt purchases by invoice, sales by outwards invoice, returns inwards by credit note; returns outwards by debit note; expenses by bills or payment rolls etc.

Thus the first and the most important function of accounting is to collect the data supported by the vouchers to ensure the authenticity of the same. Accounting processes consist of recording in the books of original entry (journal or sub- journals); classifying (posting into ledger) grouping (putting transactions of similar nature at one place in one account) valuing (finding the value at year end by balancing or valuing) tabulating (preparing list of balances and checking arithmetical accuracy) and preparing financial statements (Trading and Profit and loss account; Balance Sheet) in report form to communicate the information.

Now-a-days computer accounting software can manage this task very efficient in a matter of short time. Accounting information is presented mostly in the form of financial statements like Income statement (Trading and Profit & Loss account) Position statement (Balance sheet). Now-a-days statement of changes in financial position; value added statement; report on Human resources accounting; Social performance report etc. form part of accounting information

Difference between Data and Information


1. Refers to details, facts about any event.

2. Is, generally, disorganized and disjointed in the form.

3. Is in raw-form and is the input of accounting.

4. Cannot be understood or made use of by the users.

5. It does not depend upon information.


1. Refers to only those events which are concerned with entity.

2. Is properly arranged, classified and organized.

3. Is in the finished form and is the output of accounting.

4. Is understood and used by the users of accounting information for taking their decisions.

5. Information is based upon and derived from data.

Parties interested in accounting information

Accounting information is of interest to various persons who are directly or indirectly concerned with an enterprise.


A small business is generally carried on by the sole trader or by the partners. But a large business is usually conducted by an incorporated company which separates management from ownership. Managers’ responsibility is to operate the business efficiently and maximize the return on capital without jeopardizing the fund.

Management needs accounting information in

(1) selecting out of alternative proposals;

(2) controlling acquisition and maintenance of inventories (stock) cash receipts and payments;

(3) planning or budgeting for the future

(4) appraising the performance and

(5) devising remedial measures for the deviations of the actual results from the budgeted targets.


Although owners initiate in contributing fund to the business yet they are the last to receive their claim on equity’s return on their investment. This is true not only in repaying but also in rewarding their capital. After meeting all the charges including employees’ salaries and lender’s interest profit if any can be distributed as a reward on capital. Naturally, the owners are interested in the safety of their capital as also for a reasonable return thereon, which rest on the concern’ s stability and prosperity. Accounting reports (annual) not only appraise the past performance but also assist in assessing future prospects of the entity. Such information is also very important for would-be-owners.


May be short-term viz, suppliers of goods, lenders of temporary advance or long-terms viz. mortgages, debenture holders etc. Although both are interested in the stability and earnings of the debtor firm yet the former specially looks to its short-term solvency i.e. liquidity whereas the latter is interested in long-term solvency of the firm.


Many products now-a-days are subject to excise-duty and sales Lax. Also the government regulates the prices of essential goods e.g.. drugs, vegetables, oil etc. So the Government is interested to know the costing information to administer excise duties and to regulate the prices of products. Government is also interested in the accounting information on the profits for income tax purposes.


Steady employment and stability of business go together. Again trade unions are interested in sharing the profit of the firm in the form of bonus. Therefore, the employees are naturally interested in the accounting information provided by the annual accounting reports.


Price-increase is disfavored in almost all the quarters. Accordingly, a producer endeavors to reduce his product cost as also its selling price. Recently consumer protection associations have been formed to exercise control on the business and industry and also to make them aware of the “Social responsibility” towards society. Thus consumers also need accounting information.


The financial statements, being a mirror of business conditions are of inestimable value for research into business affairs. These statements are therefore of great interest to scholars undertaking research in accounting theory as well as business affairs and practices.

The nature of business income

One of the main objectives of financial accounting is to ascertain whether the business operations have been profitable or not. Accounting enables us to find out whether a business has earned profits or suffered losses during the accounting period.