Accounting Information Systems: An Overview

 Accounting Information System is a set of interrelated activities, documents and

technologies designed to collect data, process it and report information to a diverse group
of internal and external decision makers in an organization.

 Accounting Information System is the Information subsystem within an organization that

accumulates and processes information (both financial and non-financial) from the entity’s
various subsystems and communicates this information to the organization’s users.

Objectives of AIS
1. To collect and store data about the organization’s business activities and transactions
efficiently and effectively:
 Capture transaction data on source documents.

 Record transaction data in journals, which present a chronological record of what

occurred.
 Post data from journals to ledgers, which sort data by account type.

2. To provide management with information useful for decision making:

a. In manual systems, this information is provided in the form of reports that fall
into two main categories: Financial statements, Managerial reports.
3. To provide adequate internal controls:
a. Ensure that the information produced by the system is reliable.
b. Ensure that business activities are performed efficiently and in accordance with
management’s objectives.
c. Safeguard organizational assets.
Reasons for Studying Accounting Information Systems
 Career accountants will be users, auditors, and developers of AIS.
 Modern-day AIS are complex because of new technologies.
 Concepts studied in AIS are integrated into every other accounting course.
 An array of professionally trained persons from different fields of study have
focused on providing information to users.
 These professionals include system and managerial accountants and auditors,
system analysts and industrial engineers.
  Professional certifications are increasing. These include Certified Computing
Professional, Certified Information Systems Auditor, Certified Managerial
Accountant, Certified Fraud Examiner, etc.

Roles of Accountants With Respect to an AIS

 Financial accountants prepare financial information for external decision-making
in accordance with GAAP.
 Managerial accountants prepare financial information for internal decision-
making.
 Auditors - evaluate controls and attest to the fairness of the financial statements.
 Accounting managers - control all accounting activities of a firm.
 Tax specialists - develop information that reflects tax obligations of the firm.
 Consultants - devise specifications for the AIS.
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.

Uses of AIS
1. Producing External Reports: Financial Statements, tax returns, etc.
2. Supporting Routine Activities: Managers need AIS for handling routine operating
activities during firms operating cycle.
3. Decision Support: Information is needed for decision support at all levels of an
Organization.
4. Planning and Control: An information system is required for planning and control
activities. Planner can use data mining to reveal long-term trends and relationships.
5. Implementing Internal Control: Internal Control includes the policies, Procedures and
information system used to protect a company’s assets from loss and to maintain
accurate financial data.
Demerits of Computerized AIS
 Power failure, Computer viruses and hackers are the inherent problems of using
computerized systems.
 Once data been input into the system, automatically outputs are obtained hence the date
being input needs to be validated for accuracy and completeness. (GIGO).
 Accounting system not properly set up to meet the requirement of the business due to badly
programmed or inappropriate software or hardware or personnel problems can cause
more havoc.
 Lack of proper level of control and security whether internal and external may lead to
Computer Fraud

Information Environment
The pyramid shows the Business organization divided horizontally into several levels of activity

 Business operations form the base of the pyramid.

 Operation Management: Directly responsible for controlling day-to-day operations.
 Middle Management: Is accountable for short-term planning and coordination of activities
necessary to accomplish organizational objectives.
 Top Management: Is responsible for Longer-term planning and setting Organizational
objectives.
 Every Individual in the organization from business operations to top management, needs
information to accomplish his or her tasks
 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
 Third Flow of information represents exchanges between the organization and users in
external environment.
 Trading partners: Billing info, purchase info, inventory receipts info
 Stakeholders: Financial statements, Tax returns, stock transaction information
 All user groups have unique information requirements. The level of detail and the nature of
the information these groups receive differ considerably.

Information System
 The Information System is the set of formal procedures by which data are collected, processed
into information, and distributed to users.
 The Information System accepts the input, called ‘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
AIS versus MIS

IS

AIS MIS
Financial Marketi Human
Manage Distributio
GLS/FRS TPS MRS ment
ng n Systems
Resource
Systems Systems
Systems

 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, appointing new staff etc.
AIS Subsystems
1. Transaction processing system (TPS) :
a. Convert the economic events into financial transactions.
b. Recording financial transactions in the accounting records.
c. Distributing essential information to operation personnel to support their
daily operations.
Similar types of transactions are grouped together into transaction cycles.
Each cycle captures and processes different types of finance transactions
 Revenue cycle: Involves activities of selling goods or services and payment for
these sales.
 Expenditure cycle: Involves activities of buying & paying for goods or services used
by the organizations.
 Conversion cycle: Consists of production system and cost accounting system.
 Production cycle: Involves activities converting raw materials and labour into
finished goods.
 Cost accounting system: Monitors the flow of cost information related to
production. Information this system produces is used for inventory valuation,
budgeting, cost control etc.
2. General Ledger/ Financial Reporting System (GL/FRS)
1. The bulk of input to GL portion comes from the transaction cycles.
2. Summaries of transaction cycle activity are processed by the GLS to update the
general ledger control accounts.
3. Events such as stock transactions, mergers, and lawsuit settlements, for which there
are no processing cycles also enter the GLS through alternate sources.

The FRS measures and reports the status of financial resources and changes in those resources.

3. Management Reporting System (MRS)

 Provides the internal management with special purpose financial reports and information
needed for decision making.
 Like budgets, variance reports, cost-volume-profit analysis etc.
 General Model for AIS

This is the general model for viewing AIS applications. This is a general model because it
describes all information systems, regard less of their technological architecture. The
elements of this model are end users, data sources, data collection, data processing,
database management, information generation and feedback.
End users
External users: Institutional users (Banks, SEC, Internal revenue), Creditors, Stockholders,
potential investors, regulatory agencies, tax authorities, suppliers and customers.
Internal users: Include management at every level of organization, as well as operation
personnel
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, receipt of cash, and disbursement of
cash (including payroll)
 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.

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: This is the first and important operational stage in the information
system. The objective is to ensure that event data entering the system are valid, complete
and free from material errors. The tasks performed in this stage are

 Capturing transaction data

 Recording data onto forms
 Validating and editing the data
2 Data Processing: The data once collected usually require processing to produce
information. The tasks in this stage are Classifying, Transcribing, Sorting, Batching,
Merging, Calculating, Summarizing, Comparing.
3 Database Management: The database is the physical repository for financial and
nonfinancial data. Database management involves the monitoring, administration, and
maintenance of the databases and database groups in an enterprise. Three fundamental
tasks involved in database management are Storage, Retrieval and Deletion.
4 Information Generation: It is the process compiling, arranging, formatting, and
presenting quality information to users.
5 Feedback: Feedback is a form of output that is sent back to the system as a source of
data. Feedback may be internal or external and it used to initiate or alter a process.

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
 Product promotion, advertising and market research
 Distribution
 Filling orders , packing goods and shipping
 Personnel
 Recruiting, training, counseling, labor relations and compensation administration
 Finance
 Manages financial resources through banking and treasury activities, portfolio
management, credit evaluation, cash disbursements and cash receipts.
 Accounting
 Computer Services(IT)

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 Information Technology Function

Distributed Data Centralized Data
Processing Most companies fall in between
Processing

Reorganizing the
computer services
function into small
information processing
units that are distributed
to end users and
placed under their control
All data processing
is performed by
one or more large
computers housed
at a central site
that serves users
throughout the
organization.
Primary areas:
database administration
data processing
systems development
systems maintenance

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

The Evolution of Information System

Models:
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

The Flat-File Model : 1960 – 1980

 A spreadsheet is a set of columns and rows, with one record per line. Known as a flat
file, these spreadsheets contain records with no structured relationships.
 The flat file model describes an environment in which individual data files are not
related to other files.
 End users own their data files rather than sharing
 Stand alone applications perform data processing
 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

The Database Model

 Solves the following problems of the flat file approach
 no data redundancy - except for primary keys, data is only
stored once
 single update
 current values
 task-data independence - users have access to the full
domain of data available to the firm
 A database is a set of computer files that minimizes data
redundancy and is accessed by one or more application
programs for data processing.
 The database approach to data storage applies whenever a
database is established to serve two or more applications,
organizational units, or types of users.
 A database management system (DBMS) is a computer
program that enables users to create, modify, and utilize
database information efficiently.
REA Model: 1982
 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.
 REA is a conceptual model, not a physical system.

Enterprise Resource Planning (ERP) Systems

 Enables an organization to automate and integrate its key
components its key business processes.
 It facilitates data sharing, information flows, and introduction of
common business practices among all organizational users
 The implementation of an ERP system can be a massive
undertaking that can span several years.
 includes software packages to integrate information
subsystems into one application
 Integrate data and functions to obtain information needed for
planning, decision making and control
 Examples of ERPs include SAP, Oracle, Sage, Microsoft, and
e-business (amazon.com)
 ERP packages are sold to client organizations in modules that
support standard processes.
 Asset Management
 Financial accounting
 Human resources
 Industry-specific Solutions
 Sales and Distribution
 Inventory management
 Plant Maintenance
 Quality Management