Accounting Cycle Description Paper
An organization’s accounting information system includes collecting information then dividing the information into cycles. This paper will identify the five accounting cycles and specifically how Riordan Manufacturing uses the expenditure cycle. The strengths and weaknesses of the internal controls related to the expenditure cycle will be examined. This paper will explain how to integrate the expenditure cycle into an enterprise-wide accounting information system. The various types of information systems necessary to achieve this integration will be illustrated. Lastly, this paper will demonstrate the flow of accounting information through Riordan Manufacturing.
The five accounting cycles are the revenue, expenditure, financing, fixed-asset, and conversion cycles. Each has its specific function within the accounting system. Almost every company uses the first four accounting cycles, not all will use the conversion cycle. As a company grows, it is important for management and employees to understand the reasons for each accounting cycle and ways the information needs to flow. The accounting cycles build upon each other. Without the revenue cycle, none of the other cycles would come into play. Once a company has revenue producing activities, the expenditure cycle is necessary to pay the bills incurred in producng the goods required for the revenue cycle.
The financing cycle is necessary to give the company availability to purchase the necessary buildings and machinery for production along with making sure there are funds for the shareholders. The fixed-asset cycle records depreciation on the buildings and machinery along with the disposal of said items. The conversion cycle is important to manufacturing companies who use cost accounting to determine production costs. Table 1 (UOP, 2009), explains each phase of the accounting cycle and what documents and ledger accounts are affected by that cycle.
Source: University of Phoenix Week 1 “Read Me First”
Riordan Manufacturing uses the expenditure cycle by generating purchase orders and receiving reports to track their purchases. Riordan then uses these documents to request payment for the purchases. Riordan uses HRIS to keep track of employee hours, pay rates, vacation and holiday time then uses this information to generate payroll checks. The company also has sales personnel who submit expense reports for reimbursement of expenses incurred during sales calls. Riordan Manufacturing uses purchasing and payroll records to determine the amount of taxes necessary to pay for sales tax, FICA, FUTA, SUTA and any other taxes due.
In order to meet goals and objectives, organizations such as Riordan Manufacturing, establish internal controls. Internal control is the plan of organization and methods a business uses to safeguard assets, provide accurate and reliable information, promote and improve operational efficiency, and encourage adherence to prescribed managerial policies, laws, and regulations (UOP, 2009). In looking specifically at the expenditure cycle, Riordan Manufacturing has both strong and weak internal controls.
Strengths include internal controls in operations and quality control. To ensure consistency of operations and quality control, Riordan Manufacturing manages receipts of raw materials, tracks product, and accounts for finished goods inventories. Internal controls include the sales department completing the sales orders and entering them into customer shipping and billing system. Shipping then loads the sales orders and inventory clerk updates the inventory system based on those shipping documents. Another example is the production reports. They include a project name, document history including the revision date, approvals, and distribution. Project history data is archived in an approved location.
However, weaknesses in Riordan Manufacturing’s human resource department are abundant. Employee files are kept by individual managers instead of by human resources in a central employee file area under lock and key. Changes to personal information such as name, marital status, and exemptions are submitted by employee managers which should be requested by employees not their managers. A third-party provider keeps its own records of employees on workers’ compensation but Riordan does not. Excel spreadsheets which include training and development records, applicant information, and individual compensation decisions are kept in unsecure areas and accessible to anyone
In order to integrate the expenditure cycle into an enterprise-wide accounting information system, Riordan management should examine the human resource department method of handling employee records. For instance, in an enterprise-wide system, the accounting information system should focus on four objectives including strategic, operations, reporting, and compliance. In order for a business process management system to be implemented, the managers of the company need to evaluate certain criteria of the human resource department which can affect the expenditure cycle. First, management needs to identify the objectives of the human resource department in regards to employee records. This has a direct impact on the strategic objective of the enterprise-wide system.
Secondly, the input function needs to be reevaluated. For instance, since the company has four different branches, all input data should be on one method of input. This analysis and pending action would increase the operations function. Thirdly, output time would radically increase for all four branches. The types of output Riordan should consider are the compliance and reporting objectives of the enterprise-wide system. Furthermore, to have the expenditure cycle implemented, this would decrease the amount of time that Riordan is taking to report expenses.
Necessary Information Systems for Integration
The various types of information systems necessary to achieve this integration would include analyzing the following: hardware, software, data, people, and procedures (Bagranoff, Simkin, and Strand, 2008.) Three types of controls necessary to keep in mind include preventive, detective, and corrective. The company has already established computer hardware for each of the four branches. In order to determine a software accounting program, the company needs to establish policies and procedures in regards to source documents. This has a direct impact on the data that is accumulated for the company.
In order for payroll processing to take effect, personal action forms and employee payroll deduction authorization forms should be established. Riordan should consider a SOX Assurance and Compliance Application. Additionally, only managers should have access to company records. All records, electronic or hard copy should be kept in one central location, thus the use of privacy management information software. Furthermore, policies and procedures for all departments should be retained with a records management system.
Flow of Accounting Information
The flow of accounting information regarding inventory begins with a log of raw materials and shipping documents which are supervisor approved and taken to an inventory clerk who enters the information into the inventory system. Once entered into the inventory system, accounting personnel can pay supplier invoices. An inventory usage form is provided by the manufacturing staff to the inventory clerk to be entered into the inventory system which tracks raw materials and subassemblies. Manufacturing also provides the inventory clerk with an inventory form accounting for subassemblies and final products when added into the inventory system. In the final product shipping process, sales orders are created and entered into the customer shipping and billing system. Shipping prepares the loads according the sales order information generated and ships accordingly. Then accounting can prepare the invoice after matching the sales order with the inventory system which illustrates the goods shipped.
Each of the three operating entities of Riordan Manufacturing has their own accounting system. Therefore the systems are not compatible which makes the consolidation of information at the corporate office difficult and labor intensive. Much information is conveyed via email and spreadsheets. Employee personal information changes are requested through a written form and are entered into the system by the payroll clerk.
The five accounting cycles in an organization’s accounting information system and specifically how Riordan Manufacturing incorporates the expenditure cycle into its system was explained. Strengths and weaknesses of Riordan’s internal controls related to the expenditure cycle were commented on. This paper explained how the expenditure cycle could be integrated into an enterprise-wide accounting information system. The various types of information systems necessary to achieve this integration were illustrated. Finally, the flow of accounting information through Riordan Manufacturing was demonstrated.
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