Chapter One

Accounting Information Systems:

An Overview

1-1
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 What Is a System?
• A system is a framework/ set up that exists for the
benefit of one or more defined objectives.
– An automobile can be thought of as a system
– The objective is to convey people and goods from one
location to another.
• Systems ordinarily use resources and are subject
to constraints.
– Automobiles consume gasoline, lubricants, oxygen,
and they require the driver’s commands.
– Automobiles are constrained both physically and
legally. They function on land (not on water or in the
air), must be operated on legal roadways, and are
subject to traffic regulations and customs.

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 What Is a System?
• Systems are composed of subsystems that
perform tasks contributing to the operation and
goals of the greater system. That is,
• A system is a set of two or more interrelated
components/parts interacting to achieve a
common goal.
– An automobile is composed of various subsystems
such as the ignition system, the steering system,
and the braking system.

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 What Is a System?
• Goal Conflict
– Occurs when
components act in
their own interest Process1

without regard for

overall goal
• Goal Congruence Goal
– Occurs when
components acting in Process2
their own interest
contribute toward
overall goal
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 Information Systems(IS)
• An information system is the set of formal procedures
by which data are collected, processed into
information, and distributed to users.
• A Firm/Company
– depends on information systems to stay competitive.

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 Data Vs Information
• Data are facts that are collected, recorded, stored, and
processed by an information system.
– Insufficient for decision making.
• Organizations collect data about:
– Events that occur
– Resources that are affected by those events
– Agents who participate in the events
• Information is different from data.
• Information is data that have been organized and processed to
provide meaning to a user.

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 Data Vs Information
• For example, the sales prices of a particular
toy might be considered as data.
• However, after subtracting the cost of goods
sold from the sales price to compute the net
profit would be considered information if it
helps a retailer to decide whether to carry that
particular toy in its inventory or to discontinue
the toy from inventory.

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 Data Vs Information
• Usually, more information and better information
translates into better decisions.
• However, when you get more information than you can
effectively assimilate, you suffer from information
overload.
– Example: Final exams week!
• When you’ve reached the overload point, the quality of
decisions declines while the costs of producing the
information increases.

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 Value of Information
- The Value of information is the benefit produced by
the information minus the cost of producing it.
Benefits Costs
• Reduce Uncertainty • Time & Resources
• Improve Decisions – Produce Information
• Improve Planning – Distribute Information
• Improve Scheduling

Benefit $’s > Cost $’s

Copyright © 2012 Pearson Education Tsegay A., 2016/17 1-9

 What Makes Information Useful?
• Necessary characteristics:
– Relevant
• ―The capacity of information to make a difference in a
decision by helping users to form predictions about the
outcomes of past, present, and future events or to
confirm or correct prior expectations.‖
– Reliable
• ―The quality of information that assures that
information is reasonably free from error and bias and
faithfully represents what it purports to represent.‖
– Complete
• ―The inclusion in reported information of everything
material that is necessary for faithful representation of
the relevant phenomena.‖
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What Makes Information Useful?
– Timely
• ―Having information available to a decision maker
before it loses its capacity to influence decisions.‖
– Understandable
• ―The quality of information that enables users to
perceive its significance.‖
– 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.‖
– Accessible
• Available when needed (see Timely) and in a useful
format (see Understandable).

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 WHAT IS AN AIS?
• An AIS is a system that collects, records,
stores, and processes data to produce
information for decision makers.
• It can:
– Use advanced technology; or
– Be a simple paper-and-pencil system; or
– Be something in between.
• Technology is simply a tool to create,
maintain, or improve a system.

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 Accounting Systems Technology
• At one time, accounting data were captured and stored
on paper documents and processed and reported
manually.
• Accounting clerks transcribed data from paper source
documents, such as time cards and customer purchase
orders, to paper journals.
• The transaction data were then posted to paper ledgers.
• Checks, invoices, and other output documents were
prepared by hand, and financial statements were typed
from handwritten drafts.
• Manual accounting systems were slow, prone to error,
and severely limited in the volume of data that could be
processed.
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 Accounting Systems Technology
• The accountants have limited their concern to
monetary amounts, because the cost of capturing
and processing data was far more expensive than
is the case today.
• With the rapid development of computers, the
manual processing of accounting data has become
rare.
• Today, most accounting systems—even in very
small organizations—are computerized.
• Computerized accounting systems are faster, more
accurate, and more reliable, and they can easily
handle large volumes of data.

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 Accounting Systems Technology
• Computerized accounting systems has expanded
to include any data that are either directly or
indirectly reflected in the financial statements
whether in this or in future accounting periods.
• Computerized accounting systems are also less
expensive to operate than manual systems.
• In addition to this, managing large databases,
moving data rapidly to and from remote locations,
and obtaining immediate feedback on the effects
of transactions would be impossible without
computer technology.
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 Components of an AIS
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
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
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 Functions AIS
1. Collect and store data about organizational
activities, resources, and personnel. Organizations
have a number of business processes, such as
making a sale or purchasing raw materials, which
are repeated frequently.
2. Transform data into information so management
can plan, execute, control, and evaluate activities,
resources, and personnel. Decision making is
discussed in detail later in this chapter.
3. Provide adequate controls to safeguard the
organization's assets and data.

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 How AIS Add Value?
• Improve Quality and Reduce Costs
• Improve Efficiency
• Improve Sharing Knowledge
• Improve Supply Chain
• Improve Internal Control
• Improve Decision Making
– Identify situations that require action.
– Provide alternative choices.
– Reduce uncertainty.
– Provide feedback on previous decisions.
– Provide accurate and timely information.

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 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
1. It’s fundamental to accounting.
• Accounting is an information-providing
activity, so accountants need to understand:
– How the system that provides that
information is designed, implemented, and
used.
– How financial information is reported.
– How information is used to make decisions

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 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?

• Other accounting courses focus on how the

information is provided and used.

• An AIS course places greater emphasis on:

– How the data is collected and transformed.

– How the availability, reliability, and accuracy of

the data is ensured.

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 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
2. The skills are critical to career success.
• Auditors need to evaluate the accuracy and reliability
of information produced by the AIS.
• Tax accountants must understand the client’s AIS
adequately to be confident that it is providing
complete and accurate information for tax planning
and compliance work.
• In management consulting, the design, selection,
and implementation of accounting systems is a rapid
growth area.
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 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
3. The AIS course complements other
systems courses.
• Other systems courses focus on design and
implementation of information systems, databases,
expert systems, and telecommunications.

• AIS courses focus on accountability and control.

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 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
5. AIS topics are tested on the new CPA exam.
• It Makes up about 25% of the Business Environment
& Concepts section of the CPA exam.
• Accountants frequently acquire professional certification,
either as:
– a requirement for their particular area of practice or
– to enhance their professional status and career prospects.
• Success in passing the qualifying examinations for all
of the professional certifications requires a significant
level of competence in accounting information
systems.
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 AIS topics are tested on the new CPA exam.
• Generally, certification requires
– passing an examination,
– meeting specified experience and
– educational requirements, and
– agreeing to be bound in their professional conduct by a
code of ethics established by the respective certifying body.
• These certifications provide evidence that the holders have met
certain minimum standards of competence in their areas of
accounting or accounting related practice.

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 CHAPTER TWO

Overview of Business Processes

• Business Process: a defined as a sequence of
activities performed by a business for
acquiring, producing, and selling goods and
services.

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 BUSINESS PROCESSES
• Businesses engage in a variety of processes,
including:
– Acquiring capital
– Buying buildings and equipment Each activity
– Hiring and training employees requires
different types
– Purchasing inventory of decisions.
– Doing advertising and marketing
– Selling goods or services Each decision
– Collecting payment from customers requires
– Paying employees different types
of information.
– Paying taxes
– Paying vendors
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 BUSINESS CYCLES
• Transactions related to an organization’s business
processes are organized in to 5 transaction
processing cycles .

• A transaction cycle is a process that:

– Begins with capturing data about a transaction.

– Ends with an information output, such as

financial statements.
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 Introduction
• A transaction is:

– An agreement between two entities to exchange

goods or services; OR

– Any other event that can be measured in economic

terms by an organization.

• eg: - Sell goods to customers

- Depreciate equipment
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 BUSINESS PROCESSES
• Many business processes are paired in give-get
exchanges.
• Basic exchanges can be grouped into five
major transaction cycles:
– Revenue cycle
– Expenditure cycle
– Production cycle
– Human resources/payroll cycle
– Financing cycle

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 TRANSACTION CYCLES
• Transactions in the revenue cycle:
MAJOR GIVE-GET • Ship goods
• Give goods or services; get • Bill customers
cash • Update sales and Accts Rec.
OTHER TRANSACTIONS for sales
• Handle customer inquiries • Receive customer payments
• Take customer orders • Update Accts Rec. for
collections
• Approve credit sales
• Handle sales returns,
• Check inventory
discounts, and bad debts
availability
• Prepare management reports
• Initiate back orders
• Send info to other cycles
• Pick and pack orders
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 TRANSACTION CYCLES
• Transactions in the expenditure cycle:
MAJOR GIVE-GET: • Update accounts payable
• Give cash; get goods or for purchase
services • Approve invoices for
OTHER TRANSACTIONS payment
• Requisition goods and • Pay vendors
services • Update accounts payable
• Process purchase orders to for payment
vendors • Handle purchase returns,
• Receive goods and services discounts, and allowances
• Store goods • Prepare management
reports
• Receive vendor invoices
• Send info to other cycles
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 TRANSACTION CYCLES
• Transactions in the HR/payroll cycle:
MAJOR GIVE-GET: • Pay employees
• Give cash; get labor • Process timecard and
OTHER TRANSACTIONS commission data
• Recruit, hire, and train • Prepare and
employees distribute payroll
• Evaluate and promote • Calculate and disburse
employees tax and benefit
• Discharge employees payments
• Update payroll records • Prepare management
reports
• Send info to other cycles
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 TRANSACTION CYCLES
• Transactions in the production cycle:
MAJOR GIVE-GET: • Store finished goods
• Give labor and raw • Accumulate costs for
materials; Get finished products
goods • Prepare management
OTHER TRANSACTIONS reports
• Design products • Send info to other cycles
• Forecast, plan, and
schedule production
• Requisition raw
materials
• Manufacture products
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 TRANSACTION CYCLES
• Transactions in the financing cycle:
MAJOR GIVE-GET:
• Give cash; get cash
OTHER TRANSACTIONS
• Forecast cash needs
• Sell securities to
investors
• Borrow money from
lenders
• Pay dividends to
investors and interest to
lenders
• Retire debt (pay off)
• Prepare management
reports
• Send info to other cycles

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 TRANSACTION CYCLES
• Every transaction cycle:
– Relates to other cycles and
– Interfaces with the general ledger and
reporting system, which generates
information for management and external
parties.

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 TRANSACTION PROCESSING:
THE DATA PROCESSING CYCLE
• An important function of the AIS is to
efficiently and effectively process the data
about a company’s transactions.
– In manual systems, data is entered into paper
journals and ledgers.
– In computer-based systems, the series of
operations performed on data is referred to as
the data processing cycle.

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 TRANSACTION PROCESSING:
THE DATA PROCESSING CYCLE
• The data processing cycle consists of four
steps:
– Data input
– Data storage
– Data processing
– Information output

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 DATA INPUT
• The first step in data processing is to
capture the data.
• Usually triggered by a business activity.
• Data is captured about:
– The event that occurred.
– The resources affected by the event.
– The agents who participated.

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 Data Input

• The accounting cycle begins when

accounting personnel analyze a transaction
from a source document.
• A source document is a piece of paper or
electronic form that records a business
activity such as the purchase or sale of
goods.

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 DATA INPUT
• A number of actions can be taken to improve the
accuracy and efficiency of data input:
– Turnaround documents.
– Source data automation.
– Well-designed source documents and data entry
screens.
– Using pre-numbered documents or having the system
automatically assign sequential numbers to
transactions.
– Verify transactions.

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 DATA STORAGE
• Data needs to be organized for easy and
efficient access.
• Types of AIS storage:
• Paper-based
–Ledgers
–Journals
• Computer-based

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 Journals
The journal is the first place that transactions are entered in manual
systems
• It is a chronological record of business events by account.
• It may be a general journal or a special journal
• A general journal allows any type of accounting transaction to be
recorded,
– If companies adopt special journal, a general journal is used
to record:
• Non-routine transactions, such as loan payments
• Summaries of routine transactions
• Adjusting entries
• Closing entries.

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 Journals
• A special journal is used to record routine transactions. The
most common special journals are:
• Sales Journal
– Record of credit sales transactions
• Purchases Journal
– Record of credit purchase transactions
• Cash Receipts Journal
– Record of transactions involving receipts of cash
• Cash Disbursements Journal
– Record of transactionsTsegay
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 Ledgers
• A ledger may be a general ledger or a
subsidiary ledger.
– A general ledger is a collection of detailed
monetary information about an organization’s
assets, liabilities, revenues, and expenses.
– A subsidiary ledger contains detailed records
pertaining to a particular account in the general
ledger.

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 Trial Balances
• Once an AIS records journal entries and posts them to
the general ledger, the system can create a trial
balance.
• Three end of period trial balances are needed:
– A preadjusting trial balance after all entries have
been posted;
– An adjusted trial balance after adjustments have
been recorded and posted;
– A postclosing trial balance after temporary accounts
have closing entries have been recorded and posted.

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 Financial Statements
• Financial statements are the primary
output of a financial accounting system.
• These statements include:
– Income Statement
– Statement of Owners Equity
– Balance Sheet
– Statement of Cash Flows

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 COMPUTER-BASED STORAGE CONCEPTS

• An entity- is something about which an organization

wishes to store data.
– Person, place, or thing (Noun)
• In your university’s student information system, one
entity is the student. The student information
system stores information about students.
• What are some other entities in your student
information system?

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 COMPUTER-BASED STORAGE CONCEPTS

• Attributes- are characteristics of interest with respect

to the entity. Or are facts about the entity
• Some attributes that a student information system
typically stores about the student entity are:
– Student ID number
– Phone number
– Address
• What are some other attributes about students that
a university might store?

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 COMPUTER-BASED STORAGE CONCEPTS

• A field is the physical space where an attribute is

stored.
• The space where the student ID number is stored is
the student ID field.

Student Id Last Name First Name Phone number

328469993 SIMPSON ALICE 4053721111
328500732 ANDREWS BARRY 4057440236
529036409 FLANDERS CARLA 4057475863
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 COMPUTER-BASED STORAGE CONCEPTS

• A record is the set of attributes stored for a particular

instance of an entity. i.e, Group of related attributes
about an entity
• The combination of attributes stored for Barry
Andrews is Barry’s record.

Student Id Last Name First Name Phone number

328469993 SIMPSON ALICE 4053721111
328500732 ANDREWS BARRY 4057440236
529036409 FLANDERS CARLA 4057475863
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 COMPUTER-BASED STORAGE CONCEPTS

• A data value is the intersection of the row and

column.
• The data value for Barry Andrews’ phone number is
405-744-0236.

Student Id Last Name First Name Phone number

328469993 SIMPSON ALICE 4053721111
328500732 ANDREWS BARRY 4057440236
529036409 FLANDERS CARLA 4057475863

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 COMPUTER-BASED STORAGE CONCEPTS

• A file is a group of related records.

• The collection of records about all students at the
university might be called the student file. If there
were only three students and four attributes stored
for each student, the file might appear as shown
below:
Student Id Last Name First Name Phone number
328469993 SIMPSON ALICE 4053721111
328500732 ANDREWS BARRY 4057440236
529036409 FLANDERS CARLA 4057475863
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 COMPUTER-BASED STORAGE CONCEPTS

• A transaction file is a file that contains records of

individual transactions (events) that occur during a
fiscal period/specific period of time
• It is conceptually similar to a journal in a
manual AIS in that:
– The files are temporary.
– The files are usually maintained for one fiscal
period.

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 COMPUTER-BASED STORAGE CONCEPTS
• A master file is a file that stores cumulative information about
an organization’s entities.
• It is conceptually similar to a ledger in a manual AIS in that:
– The file is permanent.
– The file exists across fiscal periods.
– Changes are made to the file to reflect the effects of new
transactions, i.e, it is updated by transaction with the
transaction file.
Transaction File

Updated Master File

Master before Update

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 COMPUTER-BASED STORAGE CONCEPTS

• A database is a set of interrelated, centrally-

coordinated files.
• When files about students are integrated with files
about classes and files about instructors, we have a
database.

Student Class
File File

Instructor
File
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 Coding Systems
• AISs depend on coding to record, store, classify
and retrieve financial data.
• Computer systems most often use numeric or
alphanumeric codes for processing accounting
transactions.
• Purposes of coding:
1. Uniquely identify transactions
and accounts
2. Compress data
3. Aid in classification process
4. Convey special meanings

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 Types of Codes
• Mnemonic Codes give visible clues concerning the
objects they represent.
• Sequence Codes assign numbers or letters in
consecutive order.
• Block Codes are sequential codes in which specific
blocks of numbers are reserved for particular uses.
• Group Codes reveal two or more
dimensions or facets pertaining to
an object.

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 Design Considerations in Coding
1. Codes should serve some useful purpose.
2. Codes should be consistent.
3. Codes should be standardized throughout the
organization.
4. Codes should plan for future
expansion.

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 DATA PROCESSING
• Once data about a business activity has been collected
and entered into a system, it must be processed.
• There are four different types of file processing:
– Updating existing records - to record the
occurrence of an event, the resources affected by
the event, and the agents who participated, e.g.,
recording a sale to a customer.
– Changing data/record, e.g., a customer address.
– Create/ add new records, e.g., a new customer.
– Deleting records or data from records, e.g.,
removing an old customer that has not

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 DATA PROCESSING
• Updating can be done through the following
approaches:
– Batch processing
– Online, batch processing
– Online, real-time processing

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 DATA PROCESSING
• Batch processing:
– Source documents are grouped into batches, and
control totals are calculated.
– Periodically, the batches are entered into the
computer system, edited, sorted, and stored in a
temporary file.
– The temporary transaction file is run against the
master file to update the master file.
– Output is printed or displayed, along with error
reports, transaction reports, and control totals.

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 DATA PROCESSING
• Online, batch processing:
– Transactions are entered into a computer system
as they occur and stored in a temporary file.
– Periodically, the temporary transaction file is run
against the master file to update the master file.
– The output is printed or displayed.

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 DATA PROCESSING
• Online, real-time processing
– Transactions are entered into a computer system
as they occur.
– The master file is immediately updated with the
data from the transaction.
– Output is printed or displayed.

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 INFORMATION OUTPUT
• The final step in the information process is
information output.
• This output can be in the form of:
– Documents
– Reports
– Queries

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 INFORMATION OUTPUT
• Documents are records of transactions or other
company data.

• EXAMPLE: Employee paychecks or purchase orders

for merchandise

• Documents generated at the end of the transaction

processing activities are known as operational
documents (as opposed to source documents).

• They can be printed or stored as electronic images.

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 INFORMATION OUTPUT
• Reports are used by employees to control operational
activities and by managers to make decisions and design
strategies.
• They may be produced:
– On a regular basis
– On an exception basis
– On demand
• Reports
– should be useful for managerial decision-making,
– should not create information overload.
• Format of the report should
– contain fundamental identification,
– be convenient, and
– be consistent Tsegay A., 2016/17 1-66
 INFORMATION OUTPUT
• Queries are user requests for specific pieces of
information.
• They may be requested:
– Periodically
– One time
• Outputs can be displayed:
– Displayed on a screen, called soft copy
– Printed on paper, called hard copy

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 INFORMATION OUTPUT
• Output can serve a variety of purposes:
– Financial statements can be provided to both
external and internal parties.
– Some outputs are specifically for internal use:
1. For planning purposes
• Examples of outputs for planning purposes include:
– Budgets
• Budgets are an entity’s formal expression of goals in
financial terms
– Sales forecasts
2. For management of day-to-day operations
• Example: delivery schedules
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 INFORMATION OUTPUT
3. For control purposes
• Performance reports are outputs that are used for control
purposes.
• These reports compare an organization’s standard or expected
performance with its actual outcomes.
• Management by exception is an approach to utilizing
performance reports that focuses on investigating and acting
on only those variances that are significant.
4. For evaluation purposes
• These outputs might include:
– Surveys of customer satisfaction
– Reports on employee error rates

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