ACCOUNTING INFORMATION SYSTEM

THE INFORMATION SYSTEM ENVIRONMENT

 A System, described
o Two or more interrelated components (subsystems) that interact to achieve a goal, often composed of subsystems
that support the larger system.
 Multiple Components – a system must contain more than one part.
 Relatedness – a common purpose relates the multiple parts of the system even though the each part
functions independently of the others
 Purpose – a system must serve at least one purpose, though it may serve several
 System Decomposition – the process of dividing the system into smaller parts (subsystems), for users to be
convenient in representing, viewing, and understanding relationships among subsystems
 Subsystem Interdependency – a system’s ability to achieve its goal depends on the effective functioning
and harmonious interaction of its subsystems
 Goal Conflict - when a subsystem’s goals are inconsistent with the goals of another subsystem or the
system as a whole.
 Goal Congruence - when a subsystem achieves its goals while contributing to the organization’s overall
goal

 An Information, explained
o Data that have been organized and processed to provide meaning and improve decision-making.
 Data - Facts that are collected, recorded, stored, and processed by a system.
 Information overload – Exceeding the amount of information a human mind can absorb and process,
resulting in a decline in decision-making quality and an increase in the cost of providing information.
 Information Technology – The computers and other electronic devices used to store, retrieve, transmit and
manipulate data.
 Value of Information – The benefits (reduced uncertainty and improved decisions) provided by information
less the cost (time and resources spent to produce and distribute the information) of producing it.
o Characteristics of a Useful Information
 Relevant
 Capacity to make a difference in a decision.
 Reduces uncertainty, improves decision making, or confirms or corrects prior expectations.
 Reliable
 Reasonably free from error and bias.
 Faithfully represents what it purports to represent.
 Accurately represents organization events or activities.
 Complete
 The inclusion in reported information of everything material that is necessary for faithful
representation of the relevant phenomena.
 Does not omit important aspects of the events or activities it measures
 Timely
 Availability of information on time
 Provided in time for decision makers to make decisions.
 Understandable
 The quality of information that enables users to perceive its significance
 Presented in a useful and intelligible format.
 Verifiable
 The ability through consensus among measurers to ensure that information represents what it
purports to represent or that the chosen method of measurement has been used without error or
bias.
 Two independent, knowledgeable people produce the same information.
 Accessible
 Available when needed and in a format users can use

 Information System Framework

o A set of formal procedures by which data are collected, processed into information and distributed to the users.
 Transaction - event that affects or is of interest to the organization and is processed by its information
system.
 Transaction Processing - process of capturing transaction data, processing it, storing it for later use, and
producing information output, such as a managerial report or a financial statement.
 Financial Transaction - an economic event that affects the assets, liabilities and equities of the organization,
is reflected in its accounts, and is measured in monetary terms.
 Non- Financial Transactions - are events that do not meet the narrow definition of a financial transaction.

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  Financial and Non-Financial Transactions are PROCESSED into the organization’s INFORMATION
SYSTEM, to generate INFORMATION that will be used by the users for DECISION MAKING.
o Three fundamental objectives are common to all systems:
 To support stewardship function of management
 Stewardship refers to the management’s responsibility to properly manage the resources of the
firm.
 The information system provide information about resource utilization to external users via
financial statements.
 To support management decision making
 The information system supplies managers with the information they need to carryout their
decision making responsibilities
 To support the firm’s day to day operations
 The information system provides information to operations personnel to assist them in the efficient
and effective discharge of their daily tasks
o Information System of a Hypothetical Manufacturing Firm (decomposed into subsystems):
 Accounting Information System (AIS)
 Transaction Processing System
o Revenue Cycle
 Sales Processing System
 Cash Receipt System
o Expenditure Cycle
 Purchase System
 Cash Disbursement System
 Payroll Processing System
 Fixed Asset System
o Conversion Cycle
 Cost Accounting System
 Production, Planning and Control System
 General Ledger/ Financial Reporting System
 Management Reporting System
 Management Information System (MIS)
 Financial Management System
 Marketing System
 Distributions System
 Human Resource Systems

THE ACCOUNTING INFORMATION SYSTEM

 Accounting, defined
o “The art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and
events which are, in part at least of financial character, and interpreting the results thereof” – American Institute of
Certified Public Accountants (AICPA)
o “It is a service activity. Its function is to provide quantitative information, primarily financial in nature, about
economic entities, that is intended to be useful in making economic decisions.” – Accounting Standards Council
(ASC)
o “the skill, system, or job of keeping the financial records of a business or person” – Merriam Webster Dictionary
o A data identification, collection, and storage process as well as an information development, measurement, and
communication process
o Accounting is considered to be the “language of the business”

 Accounting Information System, described

o Is a system that a business uses to collect, store, manage, process, retrieve and report its financial data so that it can
be used by accountants, consultants, business analysts, managers, chief financial officers (CFOs), auditors and
regulatory and tax agencies.
o In particular, specially trained accountants work with AIS to ensure the highest level of accuracy in a company's
financial transactions and recordkeeping and to make financial data easily available to those who legitimately need
access to it, all while keeping data intact and secure.
o An AIS can be a paper-and-pencil manual system, a complex system using the latest in IT, or something in between;
regardless of the approach, the process is still the same (collect data, process data, store data and report information
for decision making).
o If accounting is the language of the business, AIS is the information providing vehicle.
o AIS has six (6) components:
1. The people who use the system
2. The procedures and instructions used to collect, process, and store data
3. The data about the organization and its business activities
4. The software used to process the data

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 5. The information technology infrastructure, including the computers, peripheral devices, and network
communications devices used in the AIS
6. The internal controls and security measures that safeguard AIS data
o These six components mentioned above enable an AIS to fulfill three important business functions:
1. Collect and store data about organizational activities, resources, and personnel.
2. Transform data into information so management can plan, execute, control, and evaluate activities,
resources, and personnel.
3. Provide adequate controls to safeguard the organization’s assets and data
o AIS adds value to an organization by:
 Improve Quality and Reduce Costs
 Improving Efficiency
 Improve Knowledge Sharing
 Improving the Efficiency and Effectiveness of Supply Chain
 Improving the Internal Control Structure
 Improving the Decision Making
o End Users of AIS
 External Users
 Creditors
 Stockholders
 Potential Investors
 Regulatory Agencies
 Suppliers
 Customers
 Internal Users
 Management
o Top Management
o Middle Management
o Operations Management
 Operations Personnel

 Introduction to AIS Subsystems

o Transaction Processing System (TPS)
 The TPS converts economic events into financial transactions, recording financial transactions in the
accounting records (journal and ledgers), and distributing essential financial information to operations
personnel to support daily operations.
 TPS deals with business events that occur frequently (daily operations)
 Revenue Cycle
 Expenditure Cycle
 Production Cycle (for manufacturing firms)
o General Ledger and Financial Reporting System (GL/FRS)
 The General Ledger System (GLS) and Financial Reporting System (FRS) are two closely related
subsystems, however, because of their operational interdependency, they are generally viewed as a single
integrated system
 The inputs to the GLS portion of the system comes from the TPS, then, the FRS measures and reports the
status of financial resources and changes in those resources, and communicates this information primarily
to external users
o Management Reporting System (MRS)
 The MRS provides internal financial information to manage a business, thus, managers requires different
information for the various kinds of decisions they make.
 Typical discretionary reports under MRS includes:
 Short term and long term Budgeting
 Variance Reports and Analysis
 Cost-Volume-Profit Analysis

 The Roles of Accountants in AIS

o System Designers
 Accountants play a prominent role on systems development teams as domain experts.
 As the domain experts, accountants determine the nature of the information required, its sources, its
destination and the accounting rule that need to be applied.
 Accountants are responsible for specifying certain operational rules, reporting requirements and framing
internal control objectives that the system must achieve.
 Because of the specificity of accounting rules, the implications of material error and the potential for fraud,
the accountant’s involvement in system design is essential and pervasive throughout the development
process/
o System Auditors

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  Accountants perform audits of business organizations for various reasons, which typically involve the
accounting information system.
 The most common audits are:
 External Audits (Attestation)
o An independent attestation performed by an expert who expresses an opinion in the form
of a formal audit report, regarding the presentation of financial statements.
o This is performed by CPAs in public practice who are independent from the client
organization being audited.
o The audit objective is to assure the fair presentation of financial statements.
o CPAs conducting external audits are acting on behalf of stakeholders.
 Internal Audits (Operation)
o Independent appraisal function established within an organization to examine and
evaluate its activities.
o Internal auditors perform a wide range of activities such as:
 Conducting financial audits
 Performing IT audits
 Examining an operation’s compliance with organizational policies and legal
obligations
 Evaluating operational efficiency
 Detecting and pursuing fraud within the firm
o Typically conducted by auditors who work for the organization,
o Internal auditors are often certified as Certified Internal Auditor (CIA) or a Certified
Information System Auditor (CISA)

THE MANAGEMENT INFORMATION SYSTEM

 MIS, described
o Management often requires information that goes beyond the capability of AIS.
o The MIS processes non-financial transactions that are not normally processed by AIS
o MIS Applications in the Functional Areas in an Organization:
 Finance
 Portfolio Management
 Capital Budgeting Systems
 Marketing
 Market Analysis
 New Product Development
 Product Analysis
 Distributions
 Warehouse Organization and Scheduling
 Delivery Scheduling
 Human Resource Management
 Job Skill Tracking System
 Employee Benefit System
 Timekeeping System

END

Prepared by:
EUREZE LHOED G. TABAR
CPA, MBA, CrFA

Source:
 Accounting Information System Ninth Edition by James A. Hall
 Accounting Information Systems, Marshall Romney, Paul John Steinbart
 Various Websites

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