Deliverable 1 - Managerial Decision Making

We are most likely familiar with software and have used many different types of software programs and packages that run on our PCs and laptops. What you may not realize is that our computers are basically useless without this software. Without software you would not be able input, process, store and output any data.

Software generally fall into two categories: system and application software. System software is designed and used to manage the hardware resources. The best example is your PC’s operating system (Windows, MacOS or Linux for example).

Application software, on the other hand, is designed and used with a particular application in mind, to meet the specific needs of the user. Some good examples are MS Word or MS Excel. Accounting software falls into this software category.

While some small companies still use a manual accounting system, the fact of the matter is that a manual system is just too slow, cumbersome and error prone to accommodate the information needs of the managers of the business. An accounting application package automates and streamlines the accounting cycle. It also provides critical information to management, basically with a few keystrokes.

Typical accounting applications will include the following capabilities:

1. Chart of Accounts

2. General Ledger

3. Accounts Payable and Purchase Orders

4. Accounts Receivable and Invoicing

5. Payroll

6. Financial Statements

7. Cash Management including Bank Reconciliation

8. Flexible Reporting

9. Integration with other company applications

All of this automation is not without its perils. A company’s accounting data is its life blood and is at risk if not stored and protected properly. In accounting, we often talk about internal controls of accounting processes, and accounting software is no different. A company must protect its computerized accounting data with a system of strong internal controls.

Internal controls of the accounting system will consist mainly of policy and procedures put in place by management to prevent fraud, control risk, comply with laws and regulations, protect resources from waste and theft and promote operational efficiencies.

Probably the most important internal control of any system, manual or automated, will be segregation of duties. In the accounting applications, there must be a proper segregation of duties among departments and employees, with policies that dictate who is authorized to perform particular activities.

Another important area of controls has to do with system security. This relates to users and passwords, audit trails, balancing, discrepancies, data verification, back up and regular system updates.

While accounting applications have a great number of advantages for a business, the typical accounting software application is not without its limitations:

1. Cost – Accounting applications can be very costly. We are not just talking about acquisition cost either. There are costs of maintaining the system. Specialized employees may be required. Annual software update fees.

2. Fraud risk – Information stored electronically is at risk to computer hacking or manipulation. It is always bad to have your data stolen, but imagine the disaster if it is changed or corrupted.

3. Downtime or loss of service – Computers are great when they are running. When they are down or out of service, what do you do?

4. Proper “fit” - Unless a company develops their own accounting application, they must purchase an “off the shelf” program. These are often one size fits all type programs and may not be customizable enough for a company.

5. Data validity –Almost all systems require some manual input, which is subject to human error. Companies often focus only on the output of the system and do not realize the importance of having valid data going into the system.

6. Complexity – While most applications try to be as user friendly as possible, there will always be a learning curve with any system.

What will distinguish accounting software from other financial packages is that it is geared toward the financial aspects of the business and is more narrowly focused. A larger company may have an Enterprise Resource Planning (ERP) package that has an accounting application as a part of the ERP.