REVIEWER IN ACCOUNTING INFORMATION SYSTEM - An AIS helps the different departments within a

company work together.

LESSON: ACCOUNTING AND INFORMATION SYSTEM
- An effective AIS uses hardware and software to
What Is Accounting? effectively store and retrieve data.
- The internal and external controls of an AIS are
- It is the principal way of organizing and critical to protecting a company's sensitive data.
reporting financial information.
- It has been called the “language of business.” SYSTEM
- Accounting and information systems comprise
1. Input
the functional area of business responsible for
2. Process
providing information to the other areas to
3. Output
enable them to do their jobs and for reporting
4. Feedback
the results to interested parties.
- An accounting information system (AIS) is a What is System Decomposition?
system that a business uses to collect, store,
- the process of dividing the system into smaller
manage, process, retrieve, and report its
subsystem parts.
financial data.
- by decomposing the system, we can present the
- This data can then be used by accountants,
overall system as a hierarchy and view the
consultants, business analysts, managers, chief
relationship between subordinate and higher-
financial officers (CFOs), auditors, regulators,
level subsystem.
and tax agencies.
- To that end, an accounting system is used to What is System Interdependence?
identify, analyze, measure, record, summarize,
and communicate relevant economic - a systems ability to achieve its goal depends on
information to interested parties. the effective functioning and harmonious
interaction of its subsystem.
What Is a System? - distinct parts are not self-contained
- they are reliant upon the functioning of the
- A System is an entity consisting of interacting
other parts of the system
parts that are coordinated to achieve one or
- all distinct parts must be functioning or the
more common objectives.
system will fail
- A group of two or more interrelated multiple
components or subsystems that serve a ELEMENTS OF SYSTEM
common purpose
- System or subsystem? 1. Output- First of all, we must determine what
a. A system is called a subsystem when it is the objectives or goals are, what we intend to
viewed as a component of a larger system. achieve. Once we know our aim, we can try to
b. A subsystem is considered a system when it achieve it in the best possible way.
is the focus of attention. 2. Input- Once we know the output, we can easily
determine what the input should be.
Relatedness 3. Process- Here we come to the details of how
the inputs & files are converted into outputs.
- a common purpose relates to multiple parts of
Processes may modify the input totally or
the system, although each part functions
partially depending on the specifications of the
independently from each others, all parts serve
output.
a common objective.
4. Control- Control of the system is the decision-
- if a particular component does not contribute to
maker that controls the activities of accepting
a common goal, then it is not part of the
input processing and producing output.
system.
5. Feedback- The feedback of the output allows it
Purpose to be measured against some standards &
makes adjustments in the processing
- a system must serve at least line purpose, but it
accordingly.
may serve several.
6. Environment- The environment is the source of
- Whether a system provides a measure of time,
external elements that affect the system. It
electrical power, or information serving a
determines how a system must function.
purpose is its fundamental justification.
7. Boundaries and Interfaces- A system should be
Significance of AIS defined by its boundaries- the limits that
identify its components, processes &
- An accounting information system (AIS) is used interrelationships when interfaces with another
by companies to collect, store, manage, system.
process, retrieve, and report financial data.
- AIS can be used by accountants, consultants, What is DATA?
business analysts, managers, chief financial
- Data are raw facts and figures that are
officers, auditors, and regulators.
processed to produce information.
- An AIS helps the different departments within a
company work together. What is Information?
 - The term data refers to any of the facts that are Completeness- No piece of information essential to a
collected, stored, and processed by an decision or task should be missing.
information system.
Summarization- Information should be aggregated in
- Is data that have been processed and are
accordance with the user’s needs. Lower level managers
meaningful and useful to users.
tend to need information that is highly detailed. As
- The terms “meaningful” and “useful” are value-
information flows upward through the organization to
laden and usually subsume other qualities such
top management, it becomes more summarized.
as timeliness, relevance, reliability, consistency,
comparability, etc. Cost-Effective- The quality of doing something well with
- However, when you get more information than no waste of time or money. This means that the costs of
you can effectively assimilate, you suffer from gathering information must not over the budget.
information overload.
- When you’ve reached the overload point, the What Is an Information System?
quality of decisions declines while the costs of - An Information system is a framework in which
producing the information increase. data is collected, processed, controlled and
- Benefits of information may include: managed through stages in order to provide
a. Reduction of uncertainty information to users.
b. Improved decisions - An information system is the set of formal
c. Improved ability to plan and schedule procedures by which data are collected,
activities processed into information, and distributed to
- Costs may include time and resources spent: users.
a. Collecting data
b. Processing data Transactions- a transaction is a business event.
c. Storing data A. Financial transactions- economic events that
d. Distributing information to users affect the assets and equities of the
- Costs and benefits of information are often organization
difficult to quantify, but you need to try when - e.g., purchase of an airline ticket.
you’re making decisions about whether to B. Nonfinancial transactions- all other events
provide information. processed by the organization’s information
Functional Steps in Transforming Data into Information system
- e.g., an airline reservation — no commitment
Data collection/Extraction- capturing, recording, by the customer.
validating and editing data for completeness and
accuracy. An Accounting Information System is a unified structure
that employs physical resources and components to
Data Maintenance/Processing- classifying, sorting, and transform economic data into accounting information
calculating data. for external and internal users.
Data Management- storing, maintaining and retrieving What Is An AIS?
data
- A system is a set of two or more interrelated
Data Control- safeguarding and securing data and components that interact to achieve a goal.
ensuring the accuracy and completeness of the same. - Systems are almost always composed of smaller
Information Generation/Data Transformation- subsystems, each performing a specific function
interpreting, reporting, and communicating supportive of the larger system.
information. - An accounting information system (AIS) consists
of:
Characteristics of Useful Information a. People- involved with an AIS are the system
users. An AIS helps the different
Regardless of physical form or technology,
departments within a company work
useful information has the following characteristics:
together. Professionals who may need to
Relevance- The contents of a report or document must use an organization's AIS.
serve a purpose. This could be to support a manager’s b. Procedures & Instructions
decision or a clerk’s task. We have established that only c. Data
data relevant to a user’s action have information d. Software
content. e. Information technology infrastructure
f. Internal Control
Timeliness- The age of information is a critical factor in
determining its usefulness. Information must be no Accounting Information Systems (AIS) process
older than the time of the action it supports.
- financial transactions; e.g., sale of goods
Accuracy- Information must be free from material - and nonfinancial transactions that directly
errors. However, materiality is a difficult concept to affect the processing of financial transactions;
quantify. It has no absolute value; it is a problem- e.g., addition of newly approved vendors
specific concept. This means that, in some cases,
Management Information Systems (MIS) process
information must be perfectly accurate.
 - MIS describes as a consolidated reporting need to understand the systems that are used
system which is designed specifically to assist to produce a company’s financial statements.
managers in planning, implementing and 5. Tax specialists develop information that reflects
controlling the activities of organization. tax obligations of the firm. Tax professionals
- An integrated system consisting of human and need to understand enough about the client’s
machine which is prepare in organization to AIS to be confident that the information used
produce valuable information for supporting for tax planning and compliance work is
operations, management and decision making complete and accurate.
in an organization. 6. Consultants devise specifications for the AIS.
One of the fastest growing types of consulting
Types of Information System
services entails the design, selection, and
1. Senior- Strategic level managers implementation of new Accounting Information
2. Middle- Management level managers Systems.
3. Data Workers- Knowledge level
Ethical Standards for Consulting
4. Operational- Operational level
1. Professional competence
Objectives and Users of AIS
2. Exercise due professional care
1. Support day-to-day operations 3. Plan and supervise all work
- Transaction processing 4. Obtain relevant data to support reasonable
2. Support Internal Decision-Making recommendations
- Trend Analyses 5. Maintain integrity and objectivity
- Quantitative & Qualitative Data 6. Understand and respect the responsibilities of
- Non-transactional sources all parties
3. Help fulfill Stewardship Role 7. Disclose any conflicts of interest

Resources Required for an AIS

1. Processor(s): Manual or Computerized LESSON: TRANSACTION PROCESSING

2. Data Base(s): Data Repositories
3. Procedures: Manual or Computerized
4. Input/Output Devices A Financial Transaction is an economic event that
5. Miscellaneous Resources affects the assets and equities of the firm, is reflected in
its accounts, and is measured in monetary terms.
Reasons for Studying Accounting Information Systems
A Financial Transaction is a similar type of transactions
- Career accountants will be users, auditors, and
are grouped into three transaction cycles:
developers of AIS
- Modern-day AIS are complex because of new Expenditure cycle
technologies
- The expenditure or purchasing cycle is a series
- Concepts studied in AIS are integrated into
of business activities that involve acquiring
every other accounting course
goods and services from external vendors or
Information-Oriented Professionals suppliers.
- Its purpose is to successfully complete
- An array of professionally trained persons from
procurement, including selecting a vendor,
different fields of study have focused on
negotiating terms and conditions, placing an
providing information to users
order, receiving the goods or services, and
- These professionals include system and
making payments to the vendor.
managerial accountants and auditors, system
- Purchases/accounts payable involve the
analysts and industrial engineers
acquisition of physical inventory.
- Professional certifications are increasing. These
- Cash disbursements authorize payment and
include Certified Computing Professional,
disburse funds.
Certified Information Systems Auditor, Certified
- Payroll monitors labor usage and disburses
Managerial Accountant, Certified Fraud
paychecks to employees
Examiner, etc.
- The cycle inludes:
Roles of Accountants With Respect to an AIS 1. Need for goods
2. Selecting vendor
1. Financial accountants prepare financial 3. Negotiating terms
information for external decision-making in 4. Placing order
accordance with GAAP 5. Receiving goods
2. Managerial accountants prepare financial 6. Making payments
information for internal decision-making
3. Accounting managers control all accounting Conversion cycle
activities of a firm.
- is one of the transaction cycles used by
4. Auditors evaluate controls and attest to the
accounting systems that records one economic
fairness of the financial statements. Auditors
 event the consumption of labor, material, and Physical component- acquisition of goods
overhead to produce a product or service.
Financial component- cash disbursements to the
- The production system involves planning,
supplier.
scheduling, and controlling the manufacturing
process. Conversion Cycle:
- The cost accounting system monitors the flow
of cost information related to production. Production system- planning, scheduling, and control of
- Stages of the Cash Conversion Cycle the physical product through the manufacturing
1. Revenue and cost of goods sold (COGS) process.
from the income statement. Cost accounting system- monitors the flow of cost
2. Inventory at the beginning and end of the information related to production.
period.
3. Accounts receivable (AR) at the beginning Revenue Cycle- time lag between the two due to credit
and end of the period. relations with customers:
4. Accounts payable (AP) at the beginning and Physical component- sales order processing.
end of the period.
5. The number of days in the period. Financial component- cash receipts.

Revenue cycle Payroll Cycle

- it is essentially the system of processes a small - The payroll cycle, sometimes also called the pay
or midsize business has in place to initiate and cycle, is the time that passes between two
complete the revenue process. payroll runs. In other words, it's the time span
- this ranges from taking a sales order request to between two consecutive paydays. For
delivery of a product or service, billing of the example, if a business pays its employees
account, and the ultimate collection of weekly, every new 7-day period represents a
payment. new payroll cycle.
- The cycle includes:
Manual System Accounting Records
1. Order from customer
2. Processing order Source Documents used to capture and formalize
3. Billing and invoice preparation transaction data needed for transaction processing
4. Delivery of goods and services
Product Documents the result of transaction processing
5. Delivery received by customer
6. Recording transactions Turnaround Documents a product document of one
7. Payment received system that becomes a source document for another
system
ACCOUNTING CYCLE
Journals - a record of chronological entry
1. Identify Transactions
2. Record Transactions in Journal 1. Special journals - specific classes of transactions
3. Posting that occur in high frequency.
4. Unadjusted Trial Balance 2. General journal - nonrecurring, infrequent, and
5. Worksheet dissimilar transactions
6. Adjusted Journal Entries
Ledger - a book of financial accounts
7. Financial Statements
8. Closing Journal Entries 1. General ledger - shows activity for each account
listed on the chart of accounts.
A transaction cycle is an interlocking set of business
2. Subsidiary ledger - shows activity by detail for
transactions. Most of these transactions can be
each account type.
aggregated into a relatively small number of transaction
cycles related to the sale of goods, payments to Flow of Economic Events into the General Ledger (Pg.
suppliers, payments to employees, and payments to 27 of 2nd PPT)
lenders.
Accounting Records in a Computer-Based System (Pg.
RELATIONSHIP BETWEEN TRANSACTION CYCLE 28 of 2nd PPT)
1. Expenditure Cycle- Purchasing of needed Audit Trail
materials and labor for conversion of products.
2. Labor, Materials, Physical Plant 1. Source Document
3. Conversion Cycle- Manufacturing process 2. Journal
4. Finished Goods- Product 3. General Ledger
5. Revenue Cycle- Finished goods to money 4. Financial Statements
6. Customers 5. Vice-Versa- Accountants should be able to trace
in both directions. Sampling and Confirmation
EACH CYCLE HAS TWO SUBSYSTEM are two common techniques.
Expenditure Cycle- the time lag between the two due to Computer-Based Systems
credit relations with suppliers:
 - The audit trail is less observable in computer- Resources- Economic resources are things of economic
based systems than traditional manual systems. value to the organization. They are defined as objects
- The data entry and computer programs are the that are both scarce and under the control of the
physical trail. enterprise. Resources are used in economic exchanges
- The data are stored in magnetic files. with trading partners and are either increased or
decreased by the exchange.
Computer Files
Example (cash, raw materials).
Master File - generally contains account data (e.g.
general ledger and subsidiary file) - the ‘assets’ of the company
- things of economic value
Transaction File - a temporary file containing
- objects of economic exchanges able to generate
transactions since the last update
revenue
Reference File - contains relatively constant information - objects that are scarce and under the control of
used in processing (e.g., tax tables, customer addresses) the organization
- can be tangible or intangible
Archive File - contains past transactions for reference
purposes Does not include some traditional accounting assets:

Documentation Techniques - artifacts that can be generated from other

primary data
- Documentation in a CB environment is - for example, accounts receivables
necessary for many reasons.
- Five common documentation techniques: Events- REA modeling embraces two classes of events:
1. Entity Relationship Diagram
- Economic events and support events. Economic
- Is a documentation technique to represent the
events affect changes (increases or decreases)
relationship  between entities in a system.
in resources as represented by the stock flow.
- The REA model version of ERD is widely used in
- They result from activities such as sales of
AIS. REA uses 3 types of entities:
products to customers, receipt of cash from
a. resources (cash, raw materials)
customers, and purchases of raw materials from
b. events (release of raw materials into the
vendors.
production process)
- Economic – increases or decreases resources
c. agents (inventory control clerk, vendor,
- Support – control, planning, and other
production worker)
management activities; but do not directly
affect resources.
2. Data Flow Diagrams
- Economic events are the critical information
- use symbols to represent the processes, data
elements of the accounting system and must be
sources, data flows, and entities in a system
captured in as disaggregated (highly detailed)
- represent the logical elements of the system
form as possible to provide a rich database.
- do not represent the physical system
- Example (release of raw materials into the
3. Document Flowcharts
production process)
- illustrate the relationship among processes and
the documents that flow between them Agents - Economic agents are individuals and
- contain more details than data flow diagrams departments participating in economic and support
- clearly depict the separation of functions in a events. They are parties inside and outside the
system organization with discretionary power to use or
4. System Flowcharts dispose of economic resources.
- are used to represent the relationship between
- Each economic event is associated with at least
the key elements--input sources, programs, and
one internal agent and one external agent
output products—of computer systems
participating in the exchange.
- depict the type of media being used (paper,
- The respective roles of internal and external
magnetic tape, magnetic disks, and terminals)
agents in transactions with outsiders are usually
- in practice, not much difference between
apparent.
document and system flowcharts
- For example, in a sales transaction, the internal
5. Program Flowcharts
agents are various employees of the company
- illustrate the logic used in programs
and the external agent is the customer
REA Model
Document Flowcharts Symbols (Pg. 52 of 2nd PPT)
The REA model is an accounting framework for
Systems Flowchart Symbols (Pg. 55 of 2nd PPT)
modeling an organization’s critical resources, events,
and agents and the relationships between them Program Flowchart Symbols (Pg. 58 of 2nd PPT)
REA models consists of three entity types and the Modern Systems versus Legacy Systems
associations linking them.
Modern systems characteristics:
Elements of an REA Model
 - client-server based and process transactions in - Advantages of Batch Processing
real time a. Organizations can increase efficiency by
- use relational database tables grouping large numbers of transactions into
- have high degree of process integration and batches rather than processing each event
data sharing separately.
- some are mainframe based and use batch b. Batch processing provides control over the
processing transaction process via control figures.
B. Real-Time Systems
Some firms employ legacy systems for certain aspects of
- process transactions individually at them
their data processing.
moment the economic event occurs
- Accountants need to understand legacy - have no time lag between the economic event
systems. and the processing
- generally require greater resources than batch
Legacy systems characteristics: processing since they require dedicated
- mainframe-based applications processing capacity; however, these cost
- batch-oriented differentials are decreasing
- early legacy systems use flat files for data - oftentimes have longer systems development
storage time
- later legacy systems use hierarchical and Why Do So Many AIS Use Batch Processing?
network databases
- data storage systems promote a single-user AIS processing is characterized by high-volume,
environment that discourages information independent transactions, such are recording cash
integration receipts checks received in the mail. The processing of
such high-volume checks can be done during an off-
Database Backup Procedures peak computer time. This is one reason why batch
- Destructive updates leave no backup. processing maybe done using real-time data collection.
- To preserve adequate records, backup
procedures must be implemented, as shown
below:
a. The master file being updated is copied as a
backup.
b. A recovery program uses the backup to
create a pre-update version of the master
file.

Computer-Based Accounting Systems

Two broad classes of systems:

A. Batch Processing
- A batch is a group of similar transactions that
are accumulated over time and then processed
together.
- The transactions must be independent of one
another during the period over which the
transactions are accumulated for batch
processing to be appropriate.
- A time lag exists between the event and the
processing.
- Steps in Batch Processing/Sequential File
a. Keystroke - source documents are
transcribed by clerks to magnetic tape for
processing later
b. Edit Run - identifies clerical errors in the
batch and places them into an error file
c. Sort Run - places the transaction file in the
same order as the master file using a
primary key
d. Update Run - changes the value of
appropriate fields in the master file to
reflect the transaction
e. Backup Procedure - the original master
continues to exist and a new master file is
created