CHAPTER 10: EXCEL-BASED AIS

 WHY ACCOUNTING IS CALLED AN “INFORMATION SYSTEM”

One characteristic of accounting is that it is an information system. It is a system
because there are several components working interdependently following a predefined
process that includes specific tasks progressing toward a common goal or the
attainment of the common goal of the components, none other than to provide the
financial information needed by management to make important economic decisions.
AIS is usually surrounded by subsystems or small segments that processes financial and
non-financial transactions that directly affect the processing of financial transactions. For
example, updates to the Chart Of Accounts are frequently made to keep the list current.

 THREE MAJOR SUBSYSTEMS OF AIS

1. Transaction Processing System or TPS which supports daily business operations with
numerous reports, documents and messages for users that can be seen on their monitor
throughout the organization.
2. General Ledger Financial Reporting System or the GL/FRS which produces the
traditional financial statements such as the income statement, balance sheet, statement of
cash flows, tax returns and other report requirements by law.
3. Management Reporting System or MRS which provides internal management with
special-purpose financial reports and information needed for decision making such as Budget
Variance Reports (which is a comparison of the actual budget and the actual spending) and
Responsibility Reports.

Management often requires information that goes beyond the capability of AIS as
organizations grow in size and complexity. Specialized Financial areas emerge requiring
additional information for production planning and control, sales forecasting, inventory
warehouse planning, market research and so on and so forth. MIS processes non-financial
transactions that are not normally processed by traditional AIS. These transactions include
but are not limited to Capital Budgeting Systems, Market Analysis, Delivery Scheduling, Job
Skill Tracking, etc.

 Why is it important to distinguish between AIS and MIS?

Because of the highly integrative nature of Modern Information Systems (MIS).
Management and auditor need a conceptual view of the information system that
distinguishes key processes in areas of risk and legal responsibility from the other non-legal
binding aspects of the system. For example, AIS must be distinguished from MIS to identify
a boundary of the PFRS, Sarbanes-Oxley, SEC and BIR requirements. And so the scope of
AIS is a related to these areas only and responsibilities of the management are bound within
the boundaries of this information system.
 3 Major stages or also called three major processes of AIS
1. Data Collection
The task of this stage is to collect data from various sources, primarily the TPS or the
Transaction Processing System. TPS is a type of system that is most widely used in an
organization because it is designed to accommodate the day-to-day transactions of the
business. It is built to be robust, highly reliable, highly available and user-friendly. The main
purpose of the data collection stage is to ensure that event and data entering the system are
valid and free from material errors. This is the most important stage in the system. Should
transaction errors pass to data collection undetected, the system may process the errors and
generate erroneous and unreliable output. This in turn could lead to incorrect actions and
poor decisions by the users.
The information system should capture only relevant data. A fundamental task of the
system designer is to determine “what is and what is not relevant.” He or she does that by
analyzing the user needs. Only data that ultimately contribute to information are considered
relevant. The data collection stages should be designed to filter irrelevant facts from the
system. Efficient data collection procedures are designed to collect only once. This data can
then be made available to multiple users. Capturing the same data more than once leads to
data redundancy and inconsistency. Information systems have limited collection
processing data storage capacity. Data redundancy overloads facilities and reduces the
overall efficiency of the system. Inconsistency among redundant data can result in
inappropriate actions and bad decisions.
At this point, it is appropriate to distinguish data from information. Data are facts, which
may or may not be processed, in Process, we mean edited, summarized or refined, and have
no direct effect on the user. By contrast, Information causes the user to take an action that
he/she otherwise could not or would not have taken. Information is often defined as simply
as processed data; however, this is an inadequate definition. Information is determined by the
effect it has on the user, not by its physical form.
For example, a purchasing agent receives a daily report listing raw materials
inventory items that are at low levels. This report causes the agent to place orders for
more inventories. The facts in this report have information content for the purchasing
agent. However, this same report, the level of the inventory in the hands of the
personnel manager is a mere collection of facts or data causing no action and having
no information content.
We can see from this example that one person’s information is another person’s data. This
information is not just a set of processed facts arranged in formal report. Information allows
user to take action to resolve conflicts, reduce uncertainty and make decisions. We should
know that action does not necessarily mean a physical act.
For instance, a purchasing agent, who receives a report showing that inventory levels
are adequate, will respond by ordering nothing. The agent’s action to do nothing is a
conscious decision triggered by information and different from doing nothing
because of being misinformed.
The distinction between data and information has pervasive implications for the study of
information systems. If output from the information system fails to cause user to act, the
system serves no purpose and has failed in its primary objective.
THREE STAGES OF INFORMATION SYSTEMS continuation
2. The second operational stage of the system is DATA PROCESSING. Once collected,
data is processed. Task in the data processing stage, range from simple to complex
depending on how the system was designed.
Examples include, mathematical algorithms, such as linear programming models
used for production scheduling applications, statistical techniques for sales
forecasting and posting and summarizing procedures for accounting applications.
An important task related to data processing is Database Management. The organizations
database is its physical repository for financial and non-financial data. We use the term
database in the generic sense. It can be a filing cabinet or a computer disk. Regardless of the
database’s physical form, we can represent its content in a logical hierarchy.
On the next slide, you can see that the levels in the data hierarchy attribute record and file in
both physical and electronic formats. The data attribute is the most elemental piece of
potentially useful data in the database. An attribute is a logical and relevant characteristic of
an entity about which the firm captures data. The attribute shown on the slide are logical
because they all relate sensibly to a common entity that is customer information. The
attributes in both physical and electronic data are customer number, name, address, and
credit limit. Each attribute is also relevant because it contributes to the information content
of the entire set as proof of this. The absence of any single relevant attribute diminishes or
destroys the information content of the set. The addition of irrelevant or illogical data would
not enhance the information content of the set.
Record is a complete set of attributes for a single occurrence within an entity class. For
example, a particular in the sample on the slide has customer number, name address and
credit limit. This complete set is on occurrence or one record within the class. To find a
particular record within the database, we must be able to identify it uniquely. Therefore,
every record in the database must be unique in at least one attribute. This unique identifier
attribute is the primary key, because no natural attribute, such as the customer name can
guarantee uniqueness. We typically assign artificial keys to records. In our example the
artificial for the customer information is the customer number.
File is a complete set of records of an identical class, where in our example, a complete set
of customer records. Similarly, files are constructed for other classes of records such as,
accounts receivable, inventory, accounts payable, and payroll. The organization’s database is
the entire collection of such files.
Database management as part of the data processing stage involves three fundamental
tasks:
1. Storage – this task assign keys to new records and stores them in their proper location
in the database.
 2. Retrieval – this is the task of locating and extracting an existing record from the
database for processing. After processing is completed, the storage task restores the
updated record to its place in the database.
3. Deletion – this is the task of permanently removing obsolete or redundant records
from the database.
Third stage – INFORMATION GENERATION
This is the process of compiling, arranging, formatting, and presenting information to users.
Information can be an operational document such as, sales order, a structured report, or a
message on a computer screen.
Regardless of physical form, useful information has the following characteristics:
 Relevance – this requires that the contents of a report or document must serve a
purpose. This could be, to support a manager’s decision or a clerk’s task. We have
established that only data relevant to a user’s action have information content.
Therefore, the information system should present only relevant data in its reports.
Reports containing irrelevances waste resources and may be counterproductive to the
user. Irrelevances detract attention from the true message of the report and may result
in incorrect decisions or actions.
 Timeliness – this dictates that the age of information is a critical factor in
determining its usefulness. Information must not be older than the time of the action
it supports.
 Accuracy – this requires that information must be free from material errors.
However, materiality is a difficult concept to quantify. It has no absolute value; it is a
problem specific concept. This means that in some cases, information must be
perfectly accurate. In other instances, the level of accuracy may be lower. Material
error exists when the amount of inaccuracy in information causes the user to make
poor decisions or fail to make necessary decisions. In providing information, system
designers seek a balance information that is as accurate as possible yet timely enough
to be useful.
 Completeness – this means that no piece of information essential to a decision or task
should be missing.
 Summarization – this is aggregation is accordance with the user’s needs. Lower level
managers tend to need information that is highly detailed as information flows
upward through the organization to top management, it becomes more summarized.
Feedback is a form of output that is sent back to the system as a source of data. This may be
internal or external, and is used to initiate or alter a process.

Information System objectives

Each organization must tailor its information system to the needs of its users. Therefore,
specific information system objectives may differ from firm to firm. However, three
fundamental objectives are common to all systems.
1. To support the stewardship function of management.
 Stewardship refers to management’s responsibility to properly manage and
utilize the resources of the firm. The information system provides information
about resource utilization to external users via traditional financial statements
and other mandated reports. Internally, management receives stewardship
information from various responsibility reports.
2. To support management decision-making,
The information system supplies managers with the information they need to
carry out their decision-making responsibilities.
3. To support the firm’s day-to-day operations.
The information system provides information to operational personnel to
assist them in the efficient and effective discharge of their daily tasks.

SIMULATION OF AN EXCEL BASED ACCTG INFO SYSTEM

1st Demo File- EXCEL BASED AIS WORKBOOK
By opening this workbook, you will see eight worksheets.
1. Chart of Accounts (COA)- you can find here the list of accounts. One of the reference files
that is maintained by AIS sub systems (as mentioned earlier), which helps to ensure that the
System Parameter or the COA itself are updated. SYSTEM PARAMETERS these are the
rules or company rules that were built-in to the systems which makes the AIS process the
transactions accurately. The attributes of the COA Parameter file are Account Offset and
Account Balance. ACCOUNT OFFSET is the default offset account used when no other
account was specified by the source Transaction Process system (TPS). However, in the
presentation, it is assumed that all the source system used the correct specific offset account.
ACCOUNT BAL is the Account Normal Balance. If 1(positive one) it means that the
normal balance is debit while -1(negative one) means that the normal account balance is
credit. This parameter is used when summarizing the current transactions from the source
transaction process system.
2. Balance Sheet Beginning (BSBeg)-it contains amounts from the previous month’s balance
sheet as of the end of the period. The beginning balance of the accounts will be used to
compute for the ending balance once the current transactions have been processed.

3. Current- this worksheet is a simulation of the data from Transaction process system (TPS).
The texts on the right part of the data range alerts you to an important system parameter
which is the maximum number of records allowed to be processed by the excel workbook.
For the demo file, it is currently set at 1,000 records. If you scroll down and check on the
Excel ID A1002, it indicates that it’s the End of the File with the letters EOF. If you
imported more than 1000 records, you will override the contents of the cell and the
worksheet will alert you that the maximum number of records have been reached with the
words “WARNING! END OF FILE REACHED!”. The conditional message is defined using
the function IF ( =IF(A1002=”EOF”,”End of file not yet reached”,”WARNING!END OF
FILE REACHED!”). The only attribute that contains data in this current transaction is the
CUR_SEQ (Current Sequence) which is the assigned sequence number to the data that will
be imported. CUR_SRC (Current Source) represents the name of the source TPS where the
data conceptually comes from. CUR_KEY is the Unique Identification Number of the
transactions generated by the TPS. CUR_SDOC (Current Source Document) and
CUR_RDOC (Current Reference Document) are the source and reference or turn around
document that supports the transaction. CUR_DESC is a short description of the transaction
and also this is supplied by the source TPS. CUR_ AMT is the amount of the transaction
based on the source TPS. CUR_DR (Debit Entry) and CUR_CR (Credit Entry).

4. Summary- this worksheet is a simulation of the manual ledger and it contains the
following;
 ACCT_ID- it is the account called copied form the Chart of Accounts
 ACCT_NB (Account Normal Balance)- 1 is debit, -1 is credit
 ACCT_BEG- is the beginning balance from last period’s balance sheet. All
Income and Expense accounts are all zero as all transactions of income
statement accounts are close to the income summary account and capital
account.
 ACCT_TDR

For Income Statement Accounts the balances will all be zero as all transactions of income
statement accounts are closed to the income summary account and to the capital account
4. ACCT_TDR and ACCT_TCR – this stands for total debits and total credits, using the
sumifs function the total debit and credit amounts from the current worksheet are calculated
using these fields or columns. Notice that sum range and criteria range arguments are set to
include all records up to the end of file. If the current transaction has less than 1,000 records,
the total debits and credits will still be accurate, however if the current transactions has more
than 1,000 records the total of these columns will be inaccurate and the warning message on
the current worksheet will appear.
5. ACCT_END – it is the ending balance of each account after considering the beginning
balance and the total debits and total credits from the current worksheet. It uses the if
function to calculate the right balance considering whether the normal balance of the account
is debit or credit as indicated by the account nb field
At the bottom of the worksheet you will find what we call control hash totals of debits and
credits for the beginning balance, total debits total credits and ending balance fields. These
are calculated using the sum ifs function for the beginning and ending balances and the
simple sum function for the total debits and total credits. The purpose of these calculations is
to ascertain the accuracy of the debit and credit amounts, if the debits and credits balance it
indicates that the current transactions as well as the beginning and ending balances are
accurate. However, this controls has totals and if they do not balance there is problem, either
with the formula or the data imported into the current worksheet.

5th worksheet
The WS worksheet – WS simply means worksheet or it represents the counterpart papers
columnar worksheet used in the basic accounting when performing the end of period task of
number 1 preparing the trial balance (2) including adjustments of prepaid accounts to bring
them from their book balances to their actual balances (3) computing for the adjusted
balances in the adjusted trial balance columns and from the adjusted tb (4) extending the
amounts that go into the income statement and balance sheet debit and credit columns
Under the adjustments column you will see letters A through I for some balance sheet
accounts these indicate that the account needs to be adjusted for the amount of expense for
the current period, the amounts will be automatically be updated into the sales of the expense
counterpart, since the cells of the balance sheet accounts that need to be adjusted are
referenced by the cells in the income statement accounts, these are the cells with green
background.
In the income statement columns, you will find that the balance of account 140 or inventory
had been extended under the debit column this is because the beginning inventory balance
will be used to compute for the cost of sales amount in the income statement. The inventory
balance is the first amount that we can extend. Further down the rows you will notice a
highlighted cell in an orange background, this cell will hold the amount for account id 819
inventory, end. Note that the inventory ending balance does not appear in the balance sheet
since the amount of this account will transferred as the beginning balance of the resultant
balance sheet and that is why we also have an orange highlighted cell under the debit column
of the balance sheet. In actual situations the ending inventory may be determined by taking
physical count of the inventory or computing its book value by using the inventory
beginning purchases and sales data. We will use a hypothetical ending inventory amount
based on similarly hypothetical physical count. Right at the bottom of the worksheet, you
can find the account id 600 or it is the income summary account. The difference between the
debit and credit columns of IS will determine its value and transfer to the balance sheet
column to form part of the ending bal. of account. Note that even if we don’t have the
current transactions imported yet, all the debit and credit are corresponding in balance. The
IS, SCE and BS end worksheets are the formal financial statements, their datas derived from
WS worksheet. You can use the sum if or vlookup functions to locate the value in appropriate
columns of the worksheet. You can also use the simple straight forward cell referencing
formula to show how simple excel functions can replace a tedious manual work.
Preparing the Financial Statements
1. Import the transactions from different data sources
1. Go to the current worksheet
2. Position the cursor at cell B2
3. Click on data, get external data from text in the import text file dialog find the
folder where you save the CSV files.
4. Choose one file and it doesn’t matter which one to import first and click import
5. The text import wizard will appear and notice that the data importing is different
in row one because the first record in row one is the header information.
6. Headers and batch control data that are read by systems to prevent duplications
of file processing and assure completeness by accounting for the sequence of the
files in large business entities that process huge volumes of transactions.
7. Transactions are grouped in batches depending on the number of transactions or
the length of time passed, and this is called batch processing. Thus, they divide
the transactions into chunks and save each chunk as a file called a batch.
Sometimes, batch files also contain footer information to include other
processing controls. Transaction files do not have footers.
 8. Step 1: In our simulation, we don’t need to process the headers of each files, so
we will just ignore them. On the set import at row option put number two so that
importing will not include the first record- the header, then click next for step 2
of the text import wizard.
9. Step 2: The delimiter is set to tab. However, our transaction files are delimited
with commas, so uncheck tab and check comma. Note how changing the type
affects the data presentation. Note also the header is handled differently by the
import wizard treating it as just one long string of text on a single field. Then
click next for step 3 of the text import wizard.
10. Step 3: We don’t need to change anything. Excel just imports all data assigning
them with a general type which converts numeric values to numbers date values
to dates and all remaining values to text. Just as what we want Excel to do, click
finish.
11. Step 4: The next dialog box asks if wanted to import the data starting at cell
where your cursor is currently in position at cell id b2. Note that Excel ignored
the header information and starting the import from the second record of the file.
At this point, do not save the file but if you want to save if, be sure to save it with
another file name.
12. Do the same import process for the rest of current transaction files. Remember
to import all nine csv files. Remember also to always start the import from
record number 2.
13. After finished importing all with the nine csv, you should have imported 876
records. Check the data if there is something suspicious that might have been
caused by the import process. If nothing seems to be out of the ordinary, save the
file using a different file name. whenever you do something wrong during the
import process, close the Excel file, and open the original file and start all over
again.
14. After correctly imported the current transactions from the different source dps,
open the payroll21.01.png file, which is a simulation of a journal butcher coming
from the HR Department. Add the transaction to the current worksheet.
15. Go and check the summary worksheet, the total debits and credits at the bottom
show that all transactions are recorded. Again, this does not tell us that we have
used the correct account codes. And now you have the ending balance needed for
the trial balance and other columns in the ws worksheet.
16. You can go and check the effect of importing the current transaction in the other
worksheets. Note how the values in the cells previously blank are updated. Note
also that the financial statements are now almost complete but not yet.
We still have the adjustments in the ending inventory to deal with. Next we go to the WS
worksheet, make the end of period adjustment as follows:
1. go to cell h11, assuming that the prepaid rent is good for one year and we have
used the January portion, we input the formula to compute for the expired portion
which is the amount divided by 12.
2. do the same for the other prepaid accounts, assuming that they are also good for a
year, or 12 months.
 3. for the depreciation expense related to non-current assets, we assume that the net
book value as of December 31, 2020 is still good for 5 years, and write the formula
for these accounts.
4. As for the customer deposits, let us assume that of the total 125,448 reserved
amounts for items from the online store, 65,500 have already been shipped to the
customer, so we reduce the balance by the same amount.
5. inputting the ending balance in the Inventory balance, as for the ending inventory,
let us assume that we took an inventory and established that the balance is 125,460.
So we put that amount on the credit side and the same amount is updated as the
ending inventory in the balance sheet area. Since the formula in this cell is reference
to the amount in the income statement area.
After all the necessary adjustments have been input in the appropriate places we see that
the net income for the month is 88,179.98, it is approximately 6% of the total sales. You can
see that the income statement is already updated with the figures from the worksheet and
calculates the same net income. That income is updated into the Statement of Changes in
Equity as an addition to the beginning capital balance which is reduced by a drawing
amounting to 25,500, the transaction coming from the check disbursement transaction
processing system.
To put the ending balance at 720, 094.65, this figure is carried over to the balance sheet.
Our simple excel based AIS is now up to date as of January 31,2021. For the month of
February, we will move the balances of the BS end sheet to the BS beg sheet, and do the
process all over again. You may now save your work.