CHAPTER : THE TRADITIONAL ACCOUNTING

INFORMATION SYSTEM
ARCHITECTURE

1. What is Accounting Information?

economic events = transactions

external: internal:
exchanges with accumulation and
outsiders assignment of
cost data

monetary association
monetary terms, ratios, percentages

data is both historical and future oriented

2. Who Needs Accounting Information?

internal/external users

3. Who Receives the Most Accounting Information?

managers - 1st level, middle, top

4. What is an Accounting Information System?

AIS is a delivery system for accounting information

answers the following questions:

Where does the information come from?
How is it processed?
 How is it communicated to users?
Purposes:

a. Meet Statutory Reporting Requirements.

SEC, IRS, state agencies, payroll

b. Provide Reliable Accounting Information to

Users.
heavily oriented to management use
external reporting is secondary

c. Protect Against Risks from:

Abuse of Accounting Data

Abuse of Accounting System

5. Computerization of AIS:
creates overlapping responsibilities of
accountants and IS
professionals

a. Key Components:
Hardware
Software
People

The computer is as compared to

manual systems.
faster
more accurate, reliable
 can more easily handle large volumes of
data
less expensive than manual operation
makes certain types of data
communication possible

6. Importance of AIS to the Organization

external vs. internal monitoring of activities
good vs. bad system - developed, operated,
and controlled
should last long enough to recoup investment

7. Roles of the Accounting Professionals

a. Users of AIS - project team members

b. Consultants - (MAS)
should complement the IS professional

c. Auditors - (SAS 3)
external and internal auditors

The auditor must understand the system in enough

detail to know how to retrieve and assemble
relevant information.

Should be able to answer the following questions:

How are data entered?
What are the outputs?
Are they reliable?
 What interaction is possible between the user
and the
system?
Can data get lost?
What controls are necessary? ( * key question)

8. Professional Exam Requirements:

CPA, CMA, CIA, CISA exams all cover AIS

WHAT IS A SYSTEM?

A SYSTEM IS A SET OF INTERACTING ELEMENTS

FORMING A COMPLEX WHOLE

AND UNITED IN PURSUIT OF COMMON GOALS

AND OBJECTIVES.

OPEN OR CLOSED?

INTERACTS WITH ITS ENVIRONMENT OR

IS EFFECTIVELY ISOLATED FROM ITS ENVIRONMENT

EXAMPLES OF SYSTEMS?
A system is defined in general systems theory as:

a set of interacting elements

forming a complex whole

and united in pursuit of common goals or

objectives.

An accounting information system is made up of:

transaction cycles and applications

that provide accounting information to

internal and external users.

A system is closed: if it is isolated from its
environment.

A system is open: if significant interaction is

taking
place through its inputs and
outputs.

inputs = influence of the environment on the

system

outputs = system's influence on the

environment

feedback - where part of output is fed back as an

input to the system

INPUT PROCESS OUTPUT

FEEDBACK LOOP

STRUCTURE OF THE ACCOUNTING INFORMATION

SYSTEM

A. TYPES ARE AS NUMEROUS AS TYPES OF

ORGANIZATIONS

LACK OF UNIFORMITY COMPLICATES OUR ABILITY

TO UNDERSTAND AND INTERPRET ACCOUNTING
SYSTEMS.

A SUBSYSTEM IN ONE ORGANIZATION MAY OR MAY

NOT BE PRESENT IN ANOTHER ORGANIZATION.

B. TRANSACTION CYCLES

AN ATTEMPT TO ESTABLISH A COMMON

FRAMEWORK TO UNIFY ESSENTIAL ELEMENTS OF
DIFFERENT SYSTEMS.

TRANSACTION CYCLES ARE IDENTIFIED WITH

BROADLY DEFINED FUNCTIONAL SUBSYSTEMS OF
THE ACCOUNTING SYSTEM.

ACCOUNTING INFORMATION SYSTEMS AND BUSINESS

ORGANIZATIONS
INFORMATION IS AS MUCH A RESOURCE (ASSET) AS
PLANT AND EQUIPMENT

ACCOUNTING IS ESSENTIALLY AN INFORMATION

SYSTEM.

1. IT IDENTIFIES, COLLECTS, PROCESSES AND

COMMUNICATES ECONOMIC INFORMATION ABOUT AN
ENTITY TO A WIDE VARIETY OF USERS.

2. INFORMATION vs. DATA

INFORMATION IS USEFUL DATA ORGANIZED SO THAT
CORRECT DECISIONS CAN BE BASED UPON IT.

3. EXTERNAL vs. INTERNAL USERS

4. ECONOMIC EVENTS vs. TRANSACTIONS

AN (AIS) ACCOUNTING INFORMATION SYSTEM IS A

COLLECTION OF RESOURCES (ELEMENTS) DESIGNED
TO TRANSFORM FINANCIAL AND OTHER DATA INTO
INFORMATION. AIS PERFORM THIS TRANSFORMATION
WHETHER THEY ARE ESSENTIALLY MANUAL SYSTEMS
OR THOROUGHLY COMPUTERIZED.

Computerization of AIS:
creates overlapping responsibilities of
accountants and IS
professionals
 a. Key Components:
Hardware
Software
People

The computer is as compared to

manual systems.
faster
more accurate, reliable
can more easily handle large volumes of
data
less expensive than manual operation
makes certain types of data
communication possible

HOW TO REMEMBER THIS?

LOOK AT THE DEFINITION OF A SYSTEM.

EXAMPLES OF SYSTEMS.

UNIVERSITY

A BUSINESS

ALL ORGANIZATIONAL SYSTEMS SEEK OBJECTIVES

THROUGH A PROCESS OF RESOURCE ALLOCATION--
WHICH IS ACCOMPLISHED THROUGH MANAGERIAL
DECISION MAKING.
INFORMATION HAS ECONOMIC VALUE TO THE EXTENT
THAT IT ENABLES DECISION MAKING.

ISN=T THIS REALLY WHY WE USE A COMPUTER?

TO FACILITATE OUR DECISION MAKING?

THE COMPUTER IS A TOOL FOR ACCOUNTANT

DECISION MAKING.

BY PROCESSING THE DATA THE AIS INFLUENCES

ORGANIZATIONAL DECISION MAKING.

COULD THE COMPUTER LEAD US TO MAKE A BAD

DECISION?

AUDITORS ARE REQUIRED TO UNDERSTAND

THE FLOW OF TRANSACTIONS

THROUGH COMPUTERIZED FINANCIAL SYSTEMS.

TRANSACTION PROCESSING CYCLES

1. ORGANIZATION IS FACED WITH HUNDREDS OF

ECONOMIC EVENTS.

THE INITIAL TASK OF THE AIS IS TO DECIDE/

RECOGNIZE WHICH ARE TRANSACTIONS THAT
SHOULD BE PROCESSED BY THE SYSTEM.

2. THEN MUST FIND A WAY TO CLASSIFY THESE

TRANSACTIONS SO THAT MEANINGFUL REPORTS AND
FINANCIAL STATEMENTS CAN BE GENERATED.

THE WAY WE DO THIS IS THROUGH THE USE OF CODES

AND THROUGH THE USE OF TRANSACTION CYCLES
(BUSINESS PROCESSES).
Transaction coding
Block and Group Codes (Chart of Accounts)
Sequential Codes (Source Document Numbers)
Mnemonic Codes (Alpha/NumericaBMemory Aids)
Decimal Codes

Transactions are coded to classify them for further processing.

Helps to establish audit trail.
Chart of Accounts provides principal classification scheme and
coding.

CODES

Alternative symbolic forms to identify data

1. Sequential
Consecutive numbers are assigned to objects. Good for
control: prenumbered documents such as checks, invoices,
receiving reports.

2. Block
Characters in a code are grouped together (blocked) to
classify objects into certain groups. Fixed length: good for
chart of accounts such as Assets 1000-00, Liabilities 2000-
00, etc.

3. Group (within Block)

Subdivisions: part of block to identify subsets of data.
Subclassifications are implemented within each block of
the code. 1000B01=Home Office, 1000B02=Store, etc.
4. Mnemonic
A code that is similar to the pronunciation of the object that
is coded. Use of letters/numbers as memory aids:
A185R14B = Auto Tire, size 185 x 14 radial, etc.

5. Decimal
Allows for unlimited expansion to the right of the decimal
point in the code. Expands for new items. Correspondence
for medical insurance for officers, employees, etc. 160.1,
160.2
TRANSACTION CYCLES or BUSINESS PROCESSES

SALES/COLLECTIONS PROCESS - Events related to the

distribution of goods and services to other entities and the
collection of related payment.

ACQUISITION/PAYMENT PROCESS- Events related to

the acquisition of goods and services from other entities and the
settlement of the obligation.

CONVERSION BUSINESS PROCESS - Events related to the

transformation of resources into goods and services.

HUMAN RESOURCE BUSINESS PROCESS – Events related

to hiring, training, compensation of employees (payroll
processes).

FINANCING BUSINESS PROCESS - Events related to the

acquisition and management of capital funds, including cash.

WHAT JOURNAL ENTRIES FALL INTO EACH CYCLE?

NON-OPERATING

FINANCIAL REPORTING CYCLE - obtains accounting

and operating data from other cycles and processes these into
financial reports.

ALL TRANSACTION DATA EVENTUALLY FLOW

INTO THE GENERAL LEDGER.

TRANSACTIONS MAY BE INITIATED :

by personnel within the organization

by the computer itself through programmed instructions

by outside bodies such as taxing or regulatory bodies

by the passage of time, i.e. depreciation

TRANSACTION FLOWS in a Traditional Accounting System

a. Flow of Transactions
Captured and Coded to Account
Recorded in Records and Files

b. Flow Diagram of Conventional Accounting

Source Document
Journalize in Appropriate Journal (by Transaction Date)
 Post to Account in Ledger
Make Unadjusted Trial Balance
Post Adjusting Journal Entries
Make Adjusted Trial Balance
Prepare Financial Statements
Post Closing Journal Entries
Prepare Post Closing Trial Balance

TRANSACTION VS. MASTER FILES

TRANSACTION FILES: capture detailed

transaction data, usually in chronological order,
providing a kind of diary of the organization's
financial activities. They are analogous to paper
journals or registers of manual accounting systems.
They are created to suit major types or
transactions.

MASTER FILES: correspond to the general ledger

and the subsidiary ledgers in manual based
accounting systems.
TO DRAW ACCOUNTING PERSPECTIVE INTO THE AIS
COURSE:

1. THINK OF A SET OF FINANCIAL STATEMENTS -

AN ANNUAL REPORT

2. LOOK AT EACH ACCOUNT BALANCE IN THE

BALANCE SHEET, INCOME STATEMENT, ETC.

3. TIE THE ACCOUNT BALANCE TO THE SYSTEMS

OR ACCOUNTING CYCLE THAT GENERATES THAT
BALANCE - THE JOURNAL ENTRIES THAT FEED
TRANSACTIONS INTO THAT CYCLE

4. THINK OF THE DOCUMENTS THAT ARE

AGGREGATED TO INITIATE THESE JOURNAL ENTRIES
- THE FLOW OF THESE DOCUMENTS WILL BE
MAPPED OR DIAGRAMMED IN THE DOCUMENT AND
SYSTEMS FLOWCHARTS THAT WE DRAW TO
REPRESENT THE SYSTEM
5. THE DOCUMENT IS USED TO RECORD THE
TRANSACTION

SO WE CAN GO FROM DOCUMENTS TO THE

FINANCIAL STATEMENTS = AGGREGATION
OR FROM THE FINANCIAL STATEMENTS BACK TO
THE SUPPORTING DOCUMENTS =
DISAGGREGATION
CRITICISMS OF TRADITIONAL APPROACH

1. DUPLICATION OF PROCESSES AND DATA

2. ONLY A SUBSET OF ALL BUSINESS EVENTS

UNDERLYING THE TRANSACTION IS REPRESENTED--
ONLY THOSE THOSE EVENTS DEEMED ACCOUNTING
TRANSACTIONS ARE INCLUDED

3. PROCESSING MAY BE UNTIMELY

4. CAPTURING ONLY LIMITED INFORMATION--

LIMITED CHARACTERISTICS ABOUT THE EVENTS

5. LEVEL OF AGGREGATION OR SUMMARIZATION

6. ONLY ONE VIEW OF DATA IS PRESENTED

TO ANSWER THESE CRITICISMS WE MUST:
REDEFINE EVENTS
IDENTIFY BUSINESS RISK ASSOCIATED WITH
EACH EVENT
REDESIGN THE INFORMATION SYSTEM