The Accounting Cycle

Accounting Cycle

An important aspect of accounting systems is that they produce information in specific cycles. Firms are required to produce reports that reflect the financial condition of the firm at the end of every quarter. Accounting systems are based on these requirements. For the most part, managers operate from quarterly reports, with intermediate monthly reports for some items. Because of the volume of data in the detail, most companies keep only current statistics and summary reports on file. Older data is shuffled off the system to make room for the current numbers. As a result, managers may not have easy access to detailed data from prior years.

Double-Entry Systems

An important objective of accounting systems is to maintain the integrity of the financial data. The goal is to prevent mistakes and discourage fraud. Double-entry accounting provides a method to locate mistakes in data entry. If an amount is entered incorrectly, the account totals will not balance. Because many transactions involve outside organizations, mistakes can be caught by sharing data. Every month firms receive a statement from the bank. The totals can be compared to changes in the firm’s cash account. Similarly, companies typically send receipts when they receive payments from each other. Auditors periodically send verification requests to suppliers and customers to make sure the data was recorded correctly. EDI strengthens this approach, because transaction data is transmitted in computer form among the companies.

Inventory

Most organizations need to control inventory carefully. Retail stores find it hard to sell items that are not in stock. Manufacturing firms need to receive and process parts as cheaply as possible. Inventory control consists of knowing exactly what items are available and where they are located. The system also needs to determine when to place new orders. It must then track the orders to make sure each item is delivered to the appropriate location at the right time. With EDI, the inventory control system can monitor current sales and automatically place orders with the supplier.

Manufacturing firms use these systems to implement just-in-time inventory control. The computer system monitors the current production requirements, keeps track of deliveries, and electronically sends orders to the suppliers. The suppliers then deliver the parts just as they are needed on the production line.

Automated inventory control systems also help identify and prevent theft. By recording all movement of items from receipt to sales to shipping, management knows exactly how many items exist.