Accounting Information System
CHAPTER 1 Likewise, a subsystem is called a system when
OVERVIEW OF ACCOUNTING INFORMATION
SYSTEMS
Organization is divided into three management
tiers:
Operations management is directly responsible
for controlling day-to-day operations.
Middle management is accountable for the
short-term planning and coordination of
activities necessary to accomplish
organizational objectives.
Top management is responsible for longer-term
planning and setting organizational objectives
Information flows in two directions within the
organization: horizontally and vertically.
1. Horizontal flow supports operations-level
tasks with highly detailed information about the
many business transactions affecting the firm.
2. Vertical flow distributes information
downward from senior managers to junior
managers and operations personnel.
Management uses this information to support
its various planning and control functions.
External users of information fall into two
groups: trading partners and stakeholders.
Stakeholders are entities outside (or inside) the
organization with a direct or indirect interest in
the firm.
SYSTEM is a group of two or more interrelated
components or subsystems that serve a
common purpose.
Elements of a System
1. MULTIPLE COMPONENTS – a system must
contain more than one part.
2. RELATEDNESS - a common purpose relates
the multiple parts of the system.
3. SYSTEM VERSUS SUBSYSTEM - A system is
called a subsystem when it is viewed in relation
to the larger system of which it is a part.
it is the focus of attention.
4. PURPOSE - system must serve at least one
purpose, but it may serve several.
SYSTEM DECOMPOSITION. Decomposition is
the process of dividing the system into smaller
subsystem parts.
SUBSYSTEM INTERDEPENDENCY. A system’s
ability to achieve its goal depends on the
effective functioning and harmonious
interaction of its subsystems.
Information system is the set of formal
procedures by which data are collected,
processed into information, and distributed to
users.
A transaction as an event that affects or is of
interest to the organization and is processed by
its information system as a unit of work.
A financial transaction is an economic event
that affects the assets and equities of the
organization, is reflected in its accounts, and is
measured in monetary terms.
Nonfinancial transactions are events that do
not meet the narrow definition of a financial
transaction.
AIS subsystems process financial transactions
and nonfinancial transactions that directly
affect the processing of financial transactions.
AIS is composed of three major subsystems:
(1) the transaction processing system (TPS),
which supports daily business operations with
numerous reports, documents, and messages
for users throughout the organization
(2) the general ledger/financial reporting
system (GL/FRS), which produces the
traditional financial statements, such as the
income statement, balance sheet, statement of
cash flows, tax returns, and other reports
required by law;
 (3) the management reporting system (MRS),
which provides internal management with
special-purpose financial reports and
information needed for decision making such as
budgets, variance reports, and responsibility
reports
•The management information system (MIS)
processes nonfinancial transactions that are not
normally processed by traditional AIS.
•Summaries of transaction cycle activity are
processed by the General Ledger System to
update the general ledger control accounts.
•The FRS measures and reports the status of
financial resources and the changes in those
resources. The FRS communicates this
information primarily to external users.
•Management Reporting System provides the
internal financial information needed to
manage a business.
Elements of the General Model:
end users, data sources, data collection, data
processing, database management, information
generation, and feedback.
End users fall into two general groups: external
and internal.
•External users include creditors, stockholders,
potential investors, regulatory agencies.
•Internal users include management at every
level of the organization, as well as operations
personnel.
•Data are facts, which may or may not be
processed (edited, summarized, or refined) and
have no direct effect on the user.
•Information causes the user to take an action
that he or she otherwise could not, or would
not, have taken. Information is often defined
simply as processed data.
•Data sources are financial transactions that
enter the information system from both
internal and external sources.
•External financial transactions are the most
common source of data for most organizations
•Data collection is the first 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.
Most important stage in the system.
•Data processing- Once collected, data usually
require processing to produce information.
•Database is the physical repository for financial
and nonfinancial data.
THE LEVELS IN DATA HIERARCHY:
1. DATA ATTRIBUTE. most elemental piece of
potentially useful data in the database. A logical
and relevant characteristic of an entity about
which the firm captures data.
2. RECORD. a complete set of attributes for a
single occurrence within an entity class.
3. FILES. a complete set of records of an
identical class.
•Information generation is the process of
compiling, arranging, formatting, and
presenting information to users.
Useful information has the following
characteristics:
1. RELEVANCE. The contents of a report or
document must serve a purpose.
2. TIMELINESS. The age of information is a
critical factor in determining its usefulness.
3. ACCURACY. Information must be free from
material errors
4. COMPLETENESS. No piece of information
essential to a decision or task should be missing.
5. SUMMARIZATION. Information should be
aggregated in accordance with the user’s needs.
•Feedback is a form of output that is sent back
to the system as a source of data.
Information System Objectives:
1. To support the stewardship function of
management.
2. To support management decision making.
3. To support the firm’s day-to-day operations.
•System development life cycle - formal
process of frequently changing needs engage in
in-house development
Three basic types of commercial software:
1. Turnkey systems are completely finished and
tested systems that are ready for
implementation. Typically, they are general-
purpose systems or systems customized to a
specific industry.
2. Backbone systems consist of a basic system
structure on which to build. A compromise
between a custom system and a turnkey
system.
3. Vendor-supported systems are custom (or
customized) systems that client organizations
purchase commercially rather than develop in-
house.
•Organizational Structure reflects the
distribution of responsibility, authority, and
accountability throughout the organization.
•BUSINESS SEGMENTS promote internal
efficiencies through the specialization of labor
and cost-effective resource allocations.
•Materials management is to plan and control
the materials inventory of the company
Materials management has three sub
functions:
1. Purchasing is responsible for ordering
inventory from vendors.
2. Receiving is the task of accepting the
inventory previously ordered by purchasing.
3. Stores takes physical custody of the inventory
received.
• Production activities occur in the conversion
cycle in which raw materials, labor, and plant
assets are used to create finished products.
• Production planning involves scheduling the
flow of materials, labor, and machinery to
efficiently meet production needs.
• Quality control monitors the manufacturing
process at various points to ensure that the
finished products meet the firm’s quality
standards.
• Maintenance keeps the firm’s machinery and
other manufacturing facilities in running order.
•Marketing function deals with the strategic
problems of product promotion, advertising,
and market research.
• Distribution is the activity of getting the
product to the customer after the sale.
• Competent and reliable employees are a
valuable resource to a business.
• Finance function manages the financial
resources of the firm through banking and
treasury activities.
•Accounting function manages the financial
information resource of the firm.
• The value of information to a user is
determined by its RELIABILITY.
• Accounting Independence - accounting
activities must be separate and independent of
the functional areas that maintain custody of
physical resources.
• Centralized Data Processing - all data
processing is performed by one or more large
computers housed at a central site that serve
users throughout the organization.
•Database administrator is responsible for the
security and integrity of the database.
•Data processing group manages the computer
resources used to perform the day-to-day
processing of transactions.
• Data library is a room often adjacent to the
computer center.
• Systems development is responsible for
analyzing user needs and for designing new
systems to satisfy those needs.
• Distributed Data Processing involves
reorganizing the IT function into small
information processing units (IPUs) that are
distributed to end users and placed under their
control.
DISADVANTAGES OF DISTRIBUTED DATE
PROCESSING:
1. Mismanagement of organization-wide
resources.
2. Hardware and software incompatibility.
3. Redundant tasks.
4. Consolidating incompatible activities.
5. Hiring qualified professionals.
6. Lack of standards.
ADVANTAGES OF DDP:
1. Cost reductions.
2. Improved user satisfaction.
3. Backup.
• Manual process model is the oldest and most
traditional form of accounting systems.
• 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.
•Three significant problems in the flat-file
environment: data storage, data updating, and
currency of information
• Database management system is a special
software system that is programmed to know
which data elements each user is authorized to
access.
• Flat-file and early database systems are called
traditional systems.
• THE REA MODEL is an accounting framework
for modeling an organization’s critical
resources, events, and agents (REA) and the
relationships between them.
• Resources are the assets of the organization.
• Economic events are phenomena that affect
changes in resources.
• Economic agents are individuals and
departments that participate in an economic
event. They are parties both inside and outside
the organization with discretionary power to
use or dispose of economic resources.
•Enterprise resource planning (ERP) systems is
an information system model that enables an
organization to automate and integrate its key
business processes.
The Role of the Accountant:
1. ACCOUNTANTS AS USERS
2. ACCOUNTANTS AS SYSTEM DESIGNERS
3. ACCOUNTANTS AS SYSTEM AUDITORS
•Auditing is a form of independent attestation
performed by an expert—the auditor—who
expresses an opinion about the fairness of a
company’s financial statements.
•Assurance services are professional services,
including the attest function, that are designed
to improve the quality of information, both
financial and nonfinancial, used by decision
makers.
•IT auditing is usually performed as part of a
broader financial audit.
•Internal auditing is an appraisal function
housed within the organization.
CHAPTER 2
INTRODUCTION TO TRANSACTION
PROCESSING
•The Expenditure Cycle is the acquisition of
materials, property, and labor in exchange for
cash.
• Purchases/accounts payable system - this
system recognizes the need to acquire physical
inventory (such as raw materials) and places an
order with the vendor.
• Cash disbursements system - when the
obligation created in the purchases system is
due, the cash disbursements system authorizes
the payment, disburses the funds to the vendor,
and records the transaction by reducing the
cash and accounts payable accounts.
• Payroll system collects labor usage data for
each employee, computes the payroll, and
disburses paychecks to the employees.
• Fixed asset system processes transactions
pertaining to the acquisition, maintenance, and
disposal of its fixed assets.
• Production system involves the planning,
scheduling, and control of the physical product
through the manufacturing process.
• Cost accounting system monitors the flow of
cost information related to production.
• The Conversion Cycle include the readying of
products and services for market and the
allocation of resources.
•Revenue cycle, which involves processing cash
sales, credit sales, and the receipt of cash
following a credit sale.
• Sales order processing. The majority of
business sales are made on credit and involve
tasks such as preparing sales orders, etc.
• Cash receipts processing includes collecting
cash, depositing cash in the bank, and recording
these events in the accounts.
• Document provides evidence of an economic
event and may be used to initiate transaction
processing.
• Source documents are used to capture and
formalize transaction data that the transaction
cycle needs for processing.
• Product documents are the result of
transaction processing rather than the
triggering mechanism for the process.
• Turnaround documents are product
documents of one system that become source
documents for another system.
• A journal is a record of a chronological entry.
• Register is often used to denote certain types
of special journals.
• Firms use the general journal to record
nonrecurring, infrequent, and dissimilar
transactions.
• A ledger is a book of accounts.
• The general ledger (GL) summarizes the
activity for each of the organization’s accounts.
• Subsidiary ledgers are kept in various
accounting departments of the firm, including
inventory, accounts payable, payroll, and
accounts receivable.
• Audit trail is use for tracing transactions from
source documents to the financial statements.
• A master file generally contains account data.
• A transaction file is a temporary file of
transaction records used to change or update
data in a master file.
• A reference file stores data that are used as
standards for processing transactions.
• An archive file contains records of past
transactions that are retained for future
reference.
• Data flow diagram (DFD) uses symbols to
represent the entities, processes, data flows,
and data stores that pertain to a system.
• Entity relationship (ER) diagram is a
documentation technique used to represent the
relationship between entities.
• The degree of the relationship, called
CARDINALITY, is the numeric mapping between
entity instances.
• Data model is the blueprint for what
ultimately will become the physical database.
• A system flowchart is the graphical
representation of the physical relationships
among key elements of a system.
• Batch processing permits the efficient
management of a large volume of transactions.
• Batch is a group of similar transactions that
are accumulated over time and then processed
together.
• Record layout diagrams are used to reveal the
internal structure of the records that constitute
a file or database table.
• Batch systems assemble transactions into
groups for processing. Under this approach,
there is always a time lag between the point at
which an economic event occurs and the point • Virtual storage access method (VSAM)
at which it is reflected in the firm’s accounts. structure is used for very large files that require
• Real-time systems process transactions routine batch processing and a moderate
individually at the moment the event occurs. degree of individual record processing.
• Sequential codes represent items in some • A hashing structure employs an algorithm
sequential order (ascending or descending). that converts the primary key of a record
• Block codes is a variation on sequential directly into a storage address.
coding. This approach can be used to represent • Physical address pointer contains the actual
whole classes of items by restricting each class disk storage location (cylinder, surface, and
to a specific range within the coding scheme. record number) that the disk controller needs.
• Group codes are used to represent complex • Each program in a batch system is called a
items or events involving two or more pieces of run.
related data.
• Alphabetic codes are used for many of the
same purposes as numeric codes. Alphabetic
characters may be assigned sequentially (in
alphabetic order) or may be used in block and
group coding techniques.
• Mnemonic codes are alphabetic characters in
the form of acronyms and other combinations
that convey meaning.
• Data structures constitute the physical and
logical arrangement of data in files and
databases.
• Organization refers to the way records are
physically arranged on the secondary storage
device.
• The access method is the technique used to
locate records and to navigate through the
database or file.
• The flat-file approach is a single-view model
that characterizes legacy systems.
• Sequential files are simple and easy to
process.
• Direct access structures store data at a
unique location, known as an address, on a hard
disk or floppy disk.
• An indexed structure is so named because, in
addition to the actual data file, there exists a
separate index that is itself a file of record
addresses.