Accounting Information Systems:

Essential Concepts and Applications

Chapter 1: The Study of

Accounting Information
Systems
What Is Accounting?

Definition according to the ASC

(Accounting Standards Council):
Accounting 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.
What Is Accounting?

Definition according to the AICPA

(American Institute of Certified Public
Accountants):
Accounting is 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 a
financial character and interpreting the
results thereof.
What Is Accounting?

Definition according to the AAA (American

Accounting Association):
Accounting is the process of identifying,
measuring, and communicating economic
information to permit informed judgments
and decisions by the users of the
information.
Internal & External Information Flows

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Internal Information Flows

Horizontal flows of information used

primarily at the operations level to capture
transaction and operations data
Vertical flows of information
downward flows — instructions, quotas, and
budgets
upward flows — aggregated transaction and
operations data

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 Information Requirements

Each user group has unique information

requirements.
The higher the level of the organization,
the greater the need for more aggregated
information and less need for detail.

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 Information in Business

Information is a business resource

that:
needs to be appropriately
managed
is vital to the survival of
contemporary businesses

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What Is a System?

 A System is an entity consisting of interacting

parts that are coordinated to achieve one or more
common objectives. Systems must possess
Organization:
Transactions-Journals-Ledgers-Financial Statements
Interrelationships:
The relationship between Subsidiary ledgers and the
General Ledger
Integration:
Individual transactions to Financial Statements
Central Objectives:
Financial Reports, Budgets, Management Reports
What is a System?

A group of interrelated multiple

components or subsystems that serve a
common purpose
System or 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.
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System Decomposition versus
System Interdependency

System Decomposition
the process of dividing the system into
smaller subsystem parts
System Interdependency
distinct parts are not self-contained
they are reliant upon the functioning of the
other parts of the system
all distinct parts must be functioning or the
system will fail
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Data Versus Information

Data are raw facts and figures

that are processed to produce
information
Information is data that have
been processed and are
meaningful and useful to users.
The terms “meaningful” and
“useful” are value-laden terms and
usually subsume other qualities
such as timeliness, relevance,
reliability, consistency,
comparability, etc.
 Functional Steps in Transforming
Data into Information
Data collection - capturing, recording,
validating and editing data for
completeness and accuracy
Data Maintenance/Processing -
classifying, sorting, calculating data
Data Management - storing, maintaining
and retrieving data
Data Control - safeguarding and securing
data and ensuring the accuracy and
completeness of the same
Information Generation - interpreting,
reporting, and communicating information
What Is an Information
System?

 An Information system is a framework in which

data is collected, processed, controlled and managed
through stages in order to provide information to
users
 It evolves over time and becomes more formalized as
a firm grows and becomes more complex. It can be
a manual or computerized system
 Firms depend on information systems in order to
survive and stay competitive
What is an Information
System?

An information system is the

set of formal procedures by
which data are collected,
processed into information,
and distributed to users.
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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
organization’s information system
e.g., an airline reservation — no
commitment by the customer
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Transactions

Financial

Transactions Information User

Nonfinancial System Decisions
Information
Transactions

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Parts of an Information
System?
People are competent end users
working to increase their productivity.
End users use hardware and software
to solve information-related or decision-
making problems
Procedures are manuals and
guidelines that instruct end users on
how to use the software and hardware
 Parts of an Information
System?
Software is another name for
programs-instructions that tell the
computer how to process data.
a. System Software- background
software that helps a computer manage
its internal resources. Ex: operating
system like Windows XP, Vista, 7, 10
b. Application Software- performs
useful work on general-purpose problems
 Basic Applications:
Browsers-navigate, explore, find
information on the internet
Word Processor- prepare written
documents
Spreadsheet- Analyze and summarize
numerical data
Database Management system- organize
and manage data and information
Presentation graphics- communicate a
message or persuade other people
 Advanced Applications:
Multimedia- integrate video, music,
voice, and graphics, to create
interactive presentations
Web Publishers- create interactive
multi-media Web pages
Graphics programs-create
professional publications, draw, edit
and modify images
 Advanced Applications:
Virtual reality- create realistic
three-dimensional virtual or
simulated environments
Artificial intelligence- simulated
human thought processes and
actions
Project managers- plan projects,
schedule, people and control
resources.
 Parts of an Information
System?
Hardware consists of input devices,
the system unit, secondary storage,
output devices, and communication
devices.
Input Devices- translate data and
programs that humans can understand
into a form the computer can process.
Examples are mouse, keyboards,
scanners, digital cameras
 Parts of an Information
System?
The System Unit- consists of
electronic circuitry with two parts:
a. Central Processing Unit
(CPU)- controls and manipulates data to
produce information
b. Memory (primary storage)-
temporarily holds data, program
instructions, and processed data.
 Parts of an Information
System?
Secondary Storage- stores data and
programs. Ex. Flashdrive, Hard disk,
Optical disk
Output Devices- output processed
information from the CPU. Ex. Monitor
and printer
Communication Devices- send and
receive data and programs from one
computer to another
 Parts of an Information
System?
Data is the raw material for data
processing. It consists of numbers,
letters and symbols and relates to facts,
events and transactions.
File a collection of characters organized
as a single unit
Document- letters, research papers, and
memoranda
Worksheet-budget analyses, sales projections
Database-structured and organized data
 The Universal Data Processing
Model

Storage

Processing

Consumers

Exchange Events
Internal Events
Environmental Events
}
Accounting Information
System

An Accounting Information

System is a unified structure that
employs physical resources and
components to transform economic
data into accounting information
for external and internal users.
Accounting Information
System

Is the combination of

personnel, records, and
procedures that a business
uses to meet its need for
financial information
 Objectives:
To process information efficiently at the least
cost (cost-benefit)
To protect entity’s assets, to ensure that data
are reliable, and to minimize wastes and the
possibility of theft or fraud (control principle)
To be in harmony with the entity’s
organizational and human factors
(compatibility principle)
To be able to accommodate growth in the
volume of transactions and for organizational
changes (flexibility)
 The Accounting
Process

Economic Accounting
Activities Information

Decision
Makers
Objectives and Users of AIS

Support day-to-day operations

Transaction processing
Support Internal Decision-Making
Trend Analyses
Quantitative & Qualitative Data
Non-transactional sources
Help fulfill Stewardship Role
Resources Required for an AIS

Processor(s): Manual or Computerized

Data Base(s): Data Repositories
Procedures: Manual or
Computerized
Input/Output Devices
Miscellaneous Resources
AIS as an MIS Subsystem

Sales/ Production
Marketing Info

AIS

Personnel Finance
 Relationship of AIS & MIS
MIS

Finance Sales/Marketing Production AIS Personnel

Order entry/Sales

Billing/A.Rec./Cash receipts

Purchasing/A. Pay./Cash disb.

Inventory

Payroll
General ledger

Production
 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 Information Systems (MIS)
process
nonfinancial transactions that are not
normally processed by traditional AIS; e.g.,
tracking customer complaints
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 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 reports for internal
use

37
General Model for AIS

Figure 1-5

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Characteristics of Useful
Information
Regardless of physical form or technology, useful
information has the following characteristics:
Relevance: serves a purpose
Timeliness: no older than the time period of
the action it supports
Accuracy: free from material errors
Completeness: all information essential to a
decision or task is present
Summarization: aggregated in accordance
with the user’s needs
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Information System
Objectives
in a Business Context

The goal of an information system is

to support
the stewardship function of
management
management decision making
the firm’s day-to-day operations
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Organizational Structure
The structure of an organization helps to
allocate
responsibility
authority
accountability
Segmenting by business function is a
very common method of organizing.

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Functional Areas
 Inventory/Materials Management
purchasing, receiving and stores
 Production
production planning, quality control, and
maintenance
 Marketing
 Distribution
 Personnel
 Finance
 Accounting
 Computer Services
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Accounting Independence
Information reliability requires accounting
independence.
Accounting activities must be separate
and independent of the functional areas
maintaining resources.
Accounting supports these functions with
information but does not actively
participate.
Decisions makers in these functions
require that such vital information be
supplied by an independent source to
ensure its integrity. 43
Organization of IT Function in a
Centralized System

Figure 1-10

44
Organizational Structure for a Distributed
Processing System

Figure 1-11

45
Potential Advantages of DDP
Cost reductions in hardware and data
entry tasks
Improved cost control responsibility
Improved user satisfaction since control is
closer to the user level
Backup of data can be improved through
the use of multiple data storage sites

46
Potential Disadvantages of DDP
Loss of control
Mismanagement of company resources
Hardware and software incompatibility
Redundant tasks and data
Consolidating tasks usually segregated
Difficulty attracting qualified personnel
Lack of standards
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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
48
 The Evolution of IS Models:
The Flat-File Model

Figure 1-12

49
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
Task-Data Dependency - user’s inability
to obtain additional information as needs
change
Data Integration - separate files are
difficult to integrate across multiple users
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The Evolution of IS Models: The
Database Model

Figure 1-13

51
REA Model
The REA model is an accounting framework
for modeling an organization’s
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.
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 An REA Data Model
Example
R E A
M M M 1
Inventory Line items
Sales Party to Sales
M person
M
1
Pays for Made to
Customer
1
M
M Received
1 M Cash from
Cash Increases
Collections M Cashier
1
Received 34
53by
Reasons for Studying
Accounting Information Systems

Career accountants will be users, auditors, and

developers of AIS
Modern-day AIS are complex because of new
technologies
Concepts studied in AIS are integrated into
every other accounting course
Information-Oriented
Professionals
An array of professionally trained persons from
different fields of study have focused on providing
information to users
These professionals include system and
managerial accountants and auditors, system
analysts and industrial engineers
Professional certifications are increasing. These
include Certified Computing Professional,
Certified Information Systems Auditor,
Certified Managerial Accountant, Certified
Fraud Examiner, etc.
Roles of Accountants With
Respect to an AIS

 Financial accountants
prepare financial information
for external decision-making
in accordance with GAAP
 Managerial accountants
prepare financial information
for internal decision-making
Roles of Accountants With
Respect to an AIS
 Auditors - evaluate controls
and attest to the fairness of
the financial statements.
 Accounting managers -
control all accounting
activities of a firm.
 Tax specialists - develop
information that reflects tax
obligations of the firm.
 Consultants - devise
specifications for the AIS.
Ethical Standards for
Consulting
Professional competence
Exercise due professional care
Plan and supervise all work
Obtain relevant data to support reasonable
recommendations
Maintain integrity and objectivity
Understand and respect the responsibilities
of all parties
Disclose any conflicts of interest
How does Accounting
Information System
helps the entity for an
efficient and effective
flow of operational
activities?