Accounting Information

Systems
A.I.S

Accounting Information Systems

 Chapter 1
The Information System:
An Accountant’s
Perspective
 Introduction
The Information
Environment:
We begin the study of AIS with the recognition that
information is a business resource. Like the other
business resources of raw materials, capital, and
labor, information is vital to the survival of the
modern business organization. Information flows
out from the organization to external users, such as
customers, suppliers, and stakeholders who have an
interest in the firm.
Figure 1-1 presents an overview of these internal and
 F I G U R E 1-1
Internal and external flows of information

Stakeholders
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Middle
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Operations Management

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Operation Personnel
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Day-to-day operations information

Internal Information Flows
 Horizontal flows of information used primarily at the
operations level to capture transaction and operations
data
 Vertical flows of information
downward flows — instructions, quotas, and budgets
upward flows — aggregated transaction and operations
data
Information Requirements
 Each user group has unique information
requirements.
 The higher the level of the organization, the greater
the need for more aggregated information and less
need for detail.
Information in Business
 Information is a business resource that:
needs to be appropriately managed.
is vital to the survival of contemporary
businesses.
What is a System?
 A group of interrelated multiple components or
subsystems that serve a common purpose
 System or subsystem?
A system is called a subsystem when it is viewed
as a component of a larger system.
A subsystem is considered a system when it is the
focus of attention.
 System Decomposition versus
System Interdependency
 System Decomposition
the process of dividing the system into smaller
subsystem parts
 System Interdependency
distinct parts are not self-contained
they are reliant upon the functioning of the other
parts of the system
all distinct parts must be functioning or the
system will fail
What is an Information System?
“An information system is the set
of formal procedures by which data
are collected, processed into
information, and distributed to
users.”
 What is Accounting Information
Systems?
An accounting information system (AIS) is the
collection, storage and processing of financial
and accounting data used by internal users to
report information to investors, Creditors and
tax authorities.

An accounting information system is generally a

computer-based method for tracking accounting
activity in conjunction with information
technology resources.
 Transactions
A transaction is a business event.
Financial transactions:
economic events that affect the assets
and equities of the organization
e.g., purchase of an airline ticket
Nonfinancial transactions:
all other events processed by the
organization’s information system
e.g., an airline reservation — no
commitment by the customer
 Transactions

Financial

Transactions User
Information
Decision
Nonfinancial System
Information Making
Transactions
 AIS versus MIS
 Accounting Information Systems (AIS)
process:
Financial transactions; e.g., sale of goods.
Nonfinancial transactions that directly affect
the processing of financial transactions; e.g.,
addition of newly approved vendors.
 Management Information Systems (MIS)
process:
Nonfinancial transactions that are not
normally processed by traditional AIS; e.g.,
tracking customer complaints.
 AIS versus MIS?

IS

AIS MIS

GLS/FRS TPS MRS Finance Marketing Production HRS Distribution

 AIS Subsystems
 Transaction processing system (TPS;
Supports daily business operations
 General Ledger/ Financial Reporting
System (GL/FRS);
Produces financial statements and reports
 Management Reporting System (MRS);
Produces special-purpose reports for
internal use
The General AIS Model
 Data Sources
Data sources are financial transactions that enter the
information system from internal and external sources.
External financial transactions are the most common
source of data for most organizations.
E.g., sale of goods and services, purchase of
inventory.
Internal financial transactions involve the exchange
or movement of resources within the organization.
E.g., movement of raw materials into work-
in-process (WIP), application of labor and
overhead to WIP, transfer of WIP into
finished goods inventory, and depreciation of
equipment.
 Transforming the Data into
Information
Functions for transforming data into information according
to the general AIS model:
1. Data Collection.
2. Data Processing.
3. Data Management.
4. Information Generation.
1. Data Collection
Capturing transaction data.
Recording data onto forms.
Validating and editing the data.
2. Data Processing
Classifying • Merging
Transcribing • Calculating
Sorting • Summarizing
Batching • Comparing
3. Data Management
Storing
Retrieving
Deleting

4. Information Generation
Compiling
Arranging
Formatting
Presenting
Characteristics of Useful Information
Regardless of physical form or technology,
useful information has the following
characteristics:
Relevance: serves a purpose.
Timeliness: no older than the time period of the
action it supports.
Accuracy: free from material errors.
Completeness: all information essential to a
decision or task is present.
Summarization: aggregated in accordance with
the user’s needs.
Information System Objectives in a Business
Context
The goal of an information system is to
support :
The stewardship function of management
Management decision making
The firm’s day-to-day operations
 Organizational Structure

 The structure of an organization helps to

allocate:
Responsibility.
Authority.
Accountability.
 Segmenting by business function is a very
common method of organizing.
 Functional Areas
Inventory/Materials Management
purchasing, receiving and stores
 Production
production planning, quality control,
and maintenance
 Marketing
 Distribution
 Personnel
 Finance
 Accounting
 Computer Services
 Accounting Independence
Information reliability requires accounting
independence.
Accounting activities must be separate and
independent of the functional areas maintaining
resources.
Accounting supports these functions with
information but does not actively participate.
Decisions makers in these functions require that
such vital information be supplied by an
independent source to ensure its integrity.
 The Computer Services Function

Distributed Data Centralized Data

Processing Most companies fall in between. Processing

Reorganizing the All data processing

computer services is performed by
function into small one or more large
information processing computers housed
units that are at a central site
distributed that serves users
to end users and throughout the
placed under their organization.
control Primary areas:
database administration
data processing
systems development
systems maintenance
Organization of Computer Services Function in
a Centralized System
Organizational Structure for a Distributed Processing
System
Potential Advantages of DDP
 Cost reductions in hardware and data entry
tasks.
 Improved cost control responsibility.
 Improved user satisfaction since control is
closer to the user level.
 Backup of data can be improved through the
use of multiple data storage sites.
Potential Disadvantages of DDP
 Loss of control.
 Mismanagement of company resources.
 Hardware and software incompatibility.
 Redundant tasks and data.
 Consolidating tasks usually segregated.
 Difficulty attracting qualified personnel.
 Lack of standards.
Manual Process Model
Transaction processing, information
processing, and accounting are physically
performed by people, usually using paper
documents.
Useful to study because:
helps link AIS courses to other accounting
courses
often easier to understand business
processes when not shrouded in
technology
facilitates understanding internal controls
Data Redundancy Problems
 Data Storage - excessive storage costs of paper
documents and/or magnetic form.
 Data Updating - changes or additions must be
performed multiple times.
 Currency of Information - potential problem
of failing to update all affected files.
 Task-Data Dependency - user’s inability to
obtain additional information as needs change.
 Data Integration - separate files are difficult to
integrate across multiple users.
 An REA Data Model Example
R E A
M M M 1
Inventory Line items Sales Party to
Sales
M person
M
1
Pays for Made to
Customer
1
M
M Received
1 M Cash from
Cash Increases
Collections M 1 Cashier
Received 34
by
 REA Model
The REA model is an accounting framework for
modeling an organization’s:
economic resources; e.g., assets.
economic events; i.e., affect changes in resources.
economic agents; i.e., individuals and departments
that participate in an economic event.
Interrelationships among resources, events and
agents.
Entity-relationship diagrams (ERD) are often used to
model these relationships.
Accountants as Information System Users
 Accountants must be able to clearly convey their
needs to the systems professionals who design it.
 The accountant should actively participate
in systems development projects to ensure
appropriate systems design.
Accountants as System Designers
 The accounting function is responsible for the
conceptual system, while the computer function is
responsible for the physical system.
 The conceptual system determines the nature of
the information required, its sources, its destination,
and the accounting rules that must be applied.
Accountants as System Auditors
 External Auditors;
attest to fairness of financial statements
assurance service: broader in scope than
traditional attestation audit
 IT Auditors;
evaluate IT, often as part of external audit
 Internal Auditors;
in-house IS and IT appraisal services.
End