An Overview of

Accounting Information System

CHAPTER 1

Information technology has impacted

accounting processes in a very good way. It
is difficult to find anybody doing manual
accounting with paper and pencil these
days. Since accounting is about dealing with
business information, any advances in this
area will have a positive impact in the
accounting department, from the old days
of the battery operated calculator to the fast
computers of today.

 Equipment
The most obvious impact of technology
in accounting is the presence of
computers, printers, scanners and faxes.
Software
There are accounting programs in the
market that are easy to use and
affordable, making them very popular
with small businesses. Software can help
accountants in their daily tasks, such as
paying bills, recording transactions and
reporting. The program keeps all data
organized and in a centralized location.

 Internet
The Internet opened many doors and made life
easier in many ways, especially in the
accounting area, where documents can be
shared, research can be conducted and taxes
can be filed-all online. Connection to the
Internet can be wireless and simple.
Security
Identifications and passwords limit access to
confidential information. Instead of binders and
papers lying around, security can be greatly
enhanced with the proper computer programs.
Using a program, accounting information can
be encrypted in a way to prevent unauthorized
use, making it quite safe.

 Education
Because of the close synergy between
accounting and information systems,
many universities have started offering
four-year degrees in "accounting and
information systems" or "accounting
information systems".
The accountant of the present and
future must be technologically savvy to
be relevant, and the universities are
preparing new graduates for this
challenge.

LEARNING OBJECTIVES
Questions to be addressed in this chapter
include:
I.

What is the meaning of system, information

system and accounting information system?
II. How does the AIS provide information for
decision making?
III. What is the roles of accountant in AIS?
IV. Why is the AIS an important topic to study?

What Is A System?

What Is A System?
A group of interrelated components or
subsystems that serve a common
purpose

System VS 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

What Is A System?
Multiple Components
A system must contain more than one part.

Relatedness
A common purpose related the multiple
parts of the system. Although each part
functions independently of the others, all
parts serve a common objective.

Purpose
A system must serve at least one purpose,
but it may serve several. When a system
ceases to serve a purpose, it should be
replaced.

What Is An Information Systems?

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 inputs,
called
transactions,
which
are
converted through various processes
into output information that goes to
users.

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

organizations information system.
e.g., an airline reservation no
commitment by the customer.

Transactions

14

*What Is An
Accounting Information System?
Accounting is an information system.
It identifies, collects, processes, and
communicates economic information
about a firm using a wide variety of
technologies.
It captures and records the financial
effects of the firms transactions.
It distributes transaction information to
operations personnel to coordinate
many key tasks.

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
(MIS) process

Information

Systems

nonfinancial transactions that are not

normally processed by traditional AIS
e.g., tracking customer complaints

Management Information System

Information
System

Management

Accounting
Information
System

Information
System

Financial
GLS/FRS

TPS

MRS

Management
Systems

Marketing
Systems

Distribution
Systems

Human
Resource
Systems

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
internal use

reports

for

General Model for AIS

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)

Data Sources
Internal financial transactions involve
the exchange or movement of
resources within the organization.
E.g., movement of raw materials into workin-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****
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

1. Data Collection
Objective :
To ensure that the event data entering
the system are valid, complete, and
free from material errors.
Should transaction errors pass through
data collection undetected, the
system may process the errors and
generate erroneous and unreliable
output. It could lead to incorrect
actions and poor decisions by the
users.

1. Data Collection
Two rules govern the design of data
collection procedure :
I. Relevance.
The information system should
capture only relevant data.
Only the data that ultimately
contribute
to
information
are
relevant.

1. Data Collection
II. Efficiency.
Efficient data collection procedures
are designed to collect data only
once.
These data can be then be made
available to multiple users.
Capturing the same data more
than
once
leads
to
data
redundancy and inconsistency.

2. Data Processing

Classifying
Transcribing
Sorting
Batching

Merging
Calculating
Summarizing
Comparing

2. Data Processing
Once collected, data usually require
processing to produce information.
Tasks in the data processing stage
range from simple to complex.

3. Data Management
Storing
Retrieving
Deleting

3. Data Management
The organizations database is its
physical repository for financial and
nonfinancial data.
It can be filling cabinet or a computer
disk.
Regardless of the database physical
form, we can represent its contents in
a logical hierarchy.

3. Data Management

4. Information Generation

Compiling
Arranging
Formatting
Presenting

*****
Characteristics of Useful Information
I. Relevance:
Serves a purpose
II. Timeliness:
No older than the time period of the
action it supports

III. Accuracy:
Free from material errors

Characteristics of Useful Information

IV. Completeness:
All information essential to a decision
or task is present

V. Summarization:
Aggregated in accordance with the
users needs

Feedback
Feedback is a form of output that is
sent back to the system as a source of
data.

Information System Objectives

I. To support the stewardship function of
management.
Stewardship refers to managements
responsibility to properly manage the
resources of the firm.
Provides information about resource
utilization to external users via traditional
financial
statements
and
other
mandated reports.
Internally,
management
receives
stewardship information from various
responsibility reports.

Information System Objectives

II. To support management decision making.
The information system supplies managers
with information they need to carry out their
decision-making responsibilities.
III. To support the firms day-to-day operations
decision
The information system provides information
operations personnel to assist them in the
efficient and effective discharge of their
daily tasks.

The Accounting Function

The accounting function manages the
financial information resource of the firm.
In this regard, it plays two important roles
in transaction processing.
I. Accounting captures and records the
financial effects of the firms transaction.
II. The accounting function distributes
transaction information to operations
personnel to coordinate many of their
key tasks.

The Information Technology

Function
Distributed Data
Processing
Reorganizing
the
computer
services Most companies fall in
function into small
between.
information processing
units
that
are
distributed
to
end
users
and
placed
under their control

Centralized Data
Processing
All data processing is
performed by one or
more large computers
housed at a central
site that serves users
throughout
the
organization.

Centralized Data Processing.

Organization of IT in a
Centralized System

Organizational Structure for a Distributed

Processing System

The Evolution of Information

System Models
Over the past 50 years, a number of
different approaches or models have
represented AIS.
Each new model evolved because of
the shortcomings and limitations of its
predecessor.

1. 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

2. The Flat-File Model

It is the most often associated with socalled legacy system.
The
flat-file
model
describes
an
environment in which individual data files
are not related to other files.
End users in this environment own their
data files rather than share them with
other users.
When multiple users need the same data
for different purposes, they must obtain
separate data sets structured to their
specific needs.

2. The Flat-File Model

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

3. The Database Model

An organization can overcome the
problems associated with flat files by
implementing the database model to
data management.
With the organizations data in a
central location, all users have access
to data they need to achieve their
respective objectives. Access to the
data resource is controlled by a
database
management
system
(DBMS).

3. The Database Model

4. REA Model
The REA model is an accounting
framework for modeling an organizations

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 the system.
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

WHY STUDY ACCOUNTING INFORMATION

SYSTEMS?
Its fundamental to accounting.
Accounting is an information-providing activity,
so accountants need to understand:
How the system that provides that
information is designed, implemented and
used.
How financial information is reported
How information is used to make decisions

WHY STUDY ACCOUNTING INFORMATION

SYSTEMS?
Its fundamental to accounting.
Other accounting courses focus on how the
information is provided and used.
An AIS course places greater emphasis on:
How the data is collected and transformed
How the availability, reliability, and
accuracy of the data is ensured
AIS courses are not number-crunching courses

WHY STUDY ACCOUNTING INFORMATION

SYSTEMS?
Its fundamental to accounting.
The skills are critical to career success.
Auditors need to evaluate the accuracy and
reliability of information produced by the AIS.

WHY STUDY ACCOUNTING INFORMATION

SYSTEMS?
Its fundamental to accounting.
The skills are critical to career success.
Tax accountants must understand the clients
AIS adequately to be confident that it is
providing complete and accurate information
for tax planning and compliance work.

WHY STUDY ACCOUNTING INFORMATION

SYSTEMS?
Its fundamental to accounting.
The skills are critical to career success.
In private industry and not-for-profits, systems
work is considered the most important activity
performed by accountants.

WHY STUDY ACCOUNTING INFORMATION

SYSTEMS?
Its fundamental to accounting.
The skills are critical to career success.
In management consulting, the design,
selection, and implementation of accounting
systems is a rapid growth area.

WHY STUDY ACCOUNTING INFORMATION

SYSTEMS?
Its fundamental to accounting.
The skills are critical to career success.
The AIS course complements other
systems courses.
Other systems courses focus on design and
implementation
of
information
systems,
databases,
expert
systems,
and
telecommunications.
AIS courses focus on accountability and control.