Accounting Information

Systems: An Overview
Chapter 1

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 What Is a System?
• System
▫ A set of two or more interrelated components
(subsystems)
▫ interacting
▫ to achieve a goal
• Goal Conflict
▫ Occurs when subsystems goals conflict with goals of
other subsystem or with systems as a whole
• Goal Congruence
▫ Occurs when components acting in their own interest
contribute toward overall goal
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 DATA vs. INFORMATION
• The systems concept encourages integration
(i.e., minimizing the duplication of recording,
storing, reporting, and processing).
• Data are facts that are collected, recorded,
stored, and processed by an information system.
• Organizations collect data about:
▫ Events that occur
▫ Resources that are affected by those events
▫ Agents who participate in the events

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 DATA vs INFORMATION
• Information is different from
data
• Information is data that have
been organized and processed data
data
to provide meaning to a user.
• Usually, more information and data
better information translates
into better decisions.
Information

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DATA vs INFORMATION

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 Value of Information
• Benefits • Costs
• Reduce Uncertainty • Time & Resources
• Improve Decisions ▫ Collecting data
• Improve Planning ▫ Processing data
• Improve Scheduling ▫ Storing data
▫ Distribution to
users
Benefit $’s > Cost $’s
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 What Makes Information Useful?
There are seven general characteristics that
make information useful:
1. Relevant: information needed to make
a decision
▫ Reduces uncertainty
▫ Confirms prior decisions
2. Reliable: information free from bias
▫ Faithful representation of events and
activities

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 What Makes Information Useful?
3. Complete: does not omit important
aspects of events or activities
4. Timely: information needs to be
provided in time to make the decision
5. Understandable: information must be
presented in a meaningful manner

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 What Makes Information Useful?

6. Verifiable: two independent people can

produce the same conclusion
▫ consensus
7. Accessible:
▫ available when needed
▫ Useable format

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 Organizational Decisions and
Information Needed
• Business organizations use business
processes to get things done. These
processes are a set of structured activities
that are performed by people, machines,
or both to achieve a specific goal.
• Key decisions and information needed
often come from these business processes.

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 Transactional Information Between
Internal and External Parties in an AIS
• Business organizations conduct business
transactions between internal and external
stakeholders.
• Internal stakeholders are employees in the
organization (e.g., employees and
managers).
▫ Primarily use discretionary information
▫ On an as needed basis

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 Transactional Information Between
Internal and External Parties in an AIS
• External stakeholders are trading partners
such as customers and vendors as well as
other external organizations such as Banks
and Government.
▫ Mandatory
▫ Essential for conducting business with
external parties
• The AIS captures the flow of information
between these users for the various business
transactions.
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 Business Process Cycles
• Revenue
• Expenditure
• Production
• Human Resources
• Financing

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 Business Transactions
• Give–Get exchanges
• Between two entities
• Measured in economic terms

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 Basic Business Processes
• Transactions between the business organization
and external parties fundamentally involve a
“give–get” exchange. These basic business
processes are:
▫ Revenue: give goods / give service—get cash
▫ Expenditure: get goods / get service—give cash
▫ Production: give labor and give raw materials—get
finished goods
▫ Payroll: give cash—get labor
▫ Financing: give cash—get cash

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 Interactions Between AIS and Internal
and External Parties

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AIS & its Subsystems

Inventory

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• Revenue Cycle
Common Cycle Activities
▫ Receive and answer customer inquiries
▫ Take customer orders and enter them into the AIS
▫ Approve credit sales
▫ Check inventory availability
▫ Initiate back orders for goods out of stock
▫ Pick and pack customer orders
▫ Ship goods to customers or perform services
▫ Bill customers for goods shipped or services performed
▫ Update (increase) sales and accounts receivable
▫ Receive customer payments and deposit them in the bank
▫ Update (reduce) accounts receivable
▫ Handle sales returns, discounts, allowances, and bad debts
▫ Prepare management reports
▫ Send appropriate information to the other cycles 1-18
Common Cycle Activities
• Expenditure Cycle
▫ Request that goods and services be purchased
▫ Prepare, approve, and send purchase orders to vendors
▫ Receive goods and services and complete a receiving report
▫ Store goods
▫ Receive vendor invoices
▫ Update (increase) accounts payable
▫ Approve vendor invoices for payment
▫ Pay vendors for goods and services
▫ Update (reduce) accounts payable
▫ Handle purchase returns, discounts, and allowances
▫ Prepare management reports
▫ Send appropriate information to the other cycles

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Common Cycle Activities
• HR/Payroll Cycle
▫ Recruit, hire, and train new employees
▫ Evaluate employee performance and promote
employees
▫ Discharge employees
▫ Update payroll records
▫ Collect and validate time, attendance, and commission
data
▫ Prepare and disburse payroll
▫ Calculate and disburse taxes and benefit payments
▫ Prepare employee and management reports
▫ Send appropriate information to the other cycles
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Common Cycle Activities
• Production Cycle
▫ Design products
▫ Forecast, plan, and schedule production
▫ Request raw materials for production
▫ Manufacture products
▫ Store finished products
▫ Accumulate costs for products manufactured
▫ Prepare management reports
▫ Send appropriate information to the other cycles

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Common Cycle Activities
• Financing Cycle
▫ Forecast cash needs
▫ Sell stock/securities to investors
▫ Borrow money from lenders
▫ Pay dividends to investors and interest to lenders
▫ Retire debt
▫ Prepare management reports
▫ Send appropriate information to the other cycles

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 What Is an Accounting Information
System?
• System that
▫ collects,
▫ records,
▫ stores,
▫ processes data to produce information for decision
makers
• It can be manual or computerized

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Components of an AIS
• People using the system
• Procedures, Instructions & Documentation
▫ For collecting, processing, and storing data
• Data
• Software used to process the data
• Information Technology (IT)
Infrastructure
▫ Computers, peripherals, networks, and so on
• Internal Control and Security
▫ Safeguard the system and its data
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AIS and Business Functions
• Collect and store data about
organizational:
▫ Activities, resources, and personnel
• Transform data into information enabling
▫ Management to:
 Plan, execute, control, and evaluate
 Activities, resources, and personnel

• Provide adequate control to safeguard

▫ Assets
▫ data
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 How Does an AIS Add Value?

• A well thought out AIS can add value through

effective and efficient decisions.
▫ Having effective decisions means quality decisions
▫ Having efficient decisions means reducing costs of
decision making

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 AIS Value Add
• Improve Quality and Reduce Costs
• Improve Efficiency
• Improve Sharing Knowledge
• Improve Supply Chain
• Improve Internal Control
• Improve Decision Making

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 Improve Decision Making
• Identify situations that require action.
• Provide alternative choices.
• Reduce uncertainty.
• Provide feedback on previous decisions.
• Provide accurate and timely information.

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 AIS and Strategy
• An AIS is influenced by an organization’s
strategy.
• A strategy is the overall goal the organization
hopes to achieve (e.g., increase profitability).
• Once an overall goal is determined, an
organization can determine actions needed to
reach their goal and identify the informational
requirements necessary to measure how well
they are doing in obtaining that goal.

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 AIS in the Value Chain
• The value chain shows how the different
activities within an organization provide value to
the customer.
• These activities are primary and support
activities.
▫ Primary activities provide direct value to the
customer.
▫ Support activities enable primary activities to be
efficient and effective.

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 Value Chain—Support Activities

Firm
Infrastructure Technology

Human Purchasing
Resources

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 Value Chain—Support Activities

• Support activities include:

▫ Firm infrastructure

Accountants, lawyers, and administration.

Includes the company’s accounting information
system.

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 Value Chain—Support Activities

• Support activities include:

▫ Firm infrastructure
▫ Human resources
Involves recruiting and hiring new employees,
training employees, paying employees, and
handling employee benefits.

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 Value Chain—Support Activities

• Support activities include:

▫ Firm infrastructure
▫ Human resources
▫ Technology

Activities to improve the products or services (e.g.,

R&D, Web site development).

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 Value Chain—Support Activities

• Support activities include:

▫ Firm infrastructure
▫ Human resources
▫ Technology Buying the resources (e.g.,
▫ Purchasing materials, inventory, fixed assets)
needed to carry out the entity’s
primary activities.

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ROLE OF THE AIS IN THE
VALUE CHAIN
• Linkage between the value chain
of various organizations forms a
larger system called the Supply
chain (extended value chain)
•Information technology can
facilitate synergistic linkages that
improve the performance of each
company’s value chain.
•Examples
• POS in retail
• JIT in manufacturing
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