FOUNDATIONAL CONCEPTS OF AIS

Accounting Information System

Study Objectives
1. Understand the interrelationships of business processes and the AIS.
2. Know the types of accounting information systems.
3. Learn about the client-server computing.
4. Explore cloud computing.
5. Check on accounting software market segments.
6. Determine the input methods used in business processes.
7. Learn how the processing of accounting data is done.
8. Outputs from the AIS related to business processes.
9. Create documentation of processes and systems.
10. Ethical considerations of accounting information systems.
The Real World
Since Au Bon Pain, a Boston-based bakery cafe chain, redesigned its interior restaurant
spaces, many of its franchisees adopted a simultaneous roll-out of a new ordering
system using Apple iPads. At these locations, customers are greeted by a server
stationed near the front counter, where orders are taken and entered on the iPad’s
touch screen. Under a traditional ordering system, prior to the use of iPads, servers at
Au Bon Pain took orders manually by writing them on a slip.
During the bustling lunch hour at the cafe, many of the customers require service at
the same time. Upgrading to the iPad system tremendously speeds up the process
taking customer orders. Lines tend to be shorter, as servers and customers can handle
dozens of options available on the menu. Efficiency has increased and savings from
paper is found.
So What is a Business Process?
A business process is a prescribed sequence of work steps completed in order to
produce a desired result for the organization. It is initiated by a particular kind of
event, has a well defined beginning and end, and is usually completed in a relatively
short period of time.
Overall view of the process
Types of Accounting Information Systems
Manual Systems
Manual systems is used by small organizations, in whole, or in part to maintain their
accounting records. An entirely manual system would require documents and
paper-based ledgers and journals.

A source document is a record that captures the key data of a transaction, while
turnaround document is an output of the accounting system that can be used as input
in a different part of an accounting system.

These sources are recorded in the General Ledger which provides details for the entire
set of accounts used in the organization’s accounting systems. These also uses the
General and Special Journals and Subsidiary Ledgers.
Coding Techniques Block Code Sample

Coding is a systematic assignment numbers

or letters to items to classify and organize
them. We can use:
● Sequence codes - items are numbered
consecutively so that gaps in the
sequence code indicate missing items
Group Code Sample
that should be investigated. (used in
official receipts, invoices, cheques).
● Block code - blocks of numbers are
reserved for specific categories of data.
● Group code - two or more sub-groups
of digits that are used to code an item.
● Mnemonic codes - letters and
numbers that are interspersed to
identify an item.
Chart of Accounts
A listing of all the numbers
assigned to balance sheet
and income statement
accounts. The account
numbers allow transaction
data to be coded, classified,
and entered into the proper
accounts. They also
facilitate financial statement
and report preparation.
Legacy Systems
A legacy system is an existing system in
operation within an organization. It uses
older technology in which the organization
has considerable investment and that it
might be entrenched in the organization.
Usually these systems are also maintained
and developed internally.
In large companies, many legacy systems
run on host-based mainframe computers.
Meaning all significant computer
processing takes place on the mainframe
computer.
Advantages of Legacy Systems
1. Have been often customized to meet specific needs in the organization.
2. Often support unique business process not inherent in generic accounting
software.
3. Contain invaluable historical data that may be difficult to integrate into a new
system.
4. Well supported and understood by existing personnel who already trained to use
the system.
Disadvantages of Legacy Systems
1. Costly to maintain in both dollars and time.
2. Often lack adequate, up-to-date supporting documentation.
3. May not easily run on new hardware, and the old hardware and parts needed for
maintenance may become obsolete.
4. Are not usually based on user-friendly interfaces such as Microsoft Windows or
Apple’s Mac OS.
5. Tend to use software written in older computer languages, and fewer
programmers are available for maintenance.
6. Are often too difficult to modify to make them web-based or user-friendly.
7. Become too difficult to integrate when companies merge or acquire other
companies, in which case consolidating subsidiary company information into one
set of financial statements and reports can involve many manual and error-prone
steps.
Approaches to use Legacy Systems in the Modern World
1. Use screen scrapers, or frontware, which adds modern, user friendly screen
interfaces to legacy systems.
2. Use software that bridges legacy systems to new hardware and software systems
and interfaces. These are called enterprise application integration, or EAI. This is a
set of processes, software and hardware tools, methodologies, and technologies to
integrate software systems.
3. Complete replacement of legacy systems, if the organization can afford to do so.
Modern Integrated Systems
Today’s environment marks the availability of several softwares for accounting which is
easy to use, including automations. This is purchased by different organizations and if
need be, personalize it according to their business style or nature of business.
Purchased software has a lower cost, shorter implementation time, and fewer bugs.
Lower cost because the cost can be spread throughout many companies who use the
software. Implementation time is shorter because there is no need for the company to
design a more complex system, and fewer bugs since it is not sold until they are fully
developed.
There are two types of architectures, the client-server model and the cloud accounting
model. Let us visit both.
Client - Server Computing
Client-server computing means that there are two types of computers networked
together to accomplish application processing.
The server is usually a large computer that contains the database and many of the
application programs.
The client computers are usually the PC-type computers, are networked to the server
and work with the server in such a way that the network appears to be one integrated
system for users.
Advantages includes PC clients perform as “smart” terminals that can accomplish
some share of the processing tasks.
In most of these type of set-up, the server manages and stores the large database,
extracts data from the database, and runs the large, complex application programs.
Characteristics of Client-Server Systems
1. Client and server computers are networked together.
2. The system appears to users to be one integrated whole.
3. Individual parts of processing are shared between the server and client.
4. The client computer participates in the processing or data manipulation in some
meaningful way.
Cloud Computing
Cloud computing is a more centralized approach in computing. Normally there is a
“third party hosting” where a host provides and maintains the hardware, installs the
software and software updates on the server, and is responsible for the maintenance,
upkeep, and backups.
There are many advantages of cloud computing.
1. It may be accessed and read from the device you use.
2. The organization does not have to maintain email software and data storage to
save the emails on your computer. Same goes with accounting data.
3. Elimination of cost of hiring IT employees and purchasing servers, and
maintenance of servers.
Cloud Computing
Software as a Service (Saas). - software that resides in the cloud.
Database as a Service (DaaS) - databases that resides in the cloud.
Platform as a Service (PaaS) - happens when the database is combined with an
operating system.
Infrastructure as a Service (IaaS) - computer infrastructure in the cloud.
Infrastructure is the actual servers, drives, on which the data is stored, and networking
components.
Service Level Agreement (SLA) - an agreement between the service provider of and the
buyer/consumer.
Cloud Computing
for a Company
Advantages of Cloud Computing
1. Scalability
2. Expanded Access
3. Infrastructure is reduced
4. Cost Savings
Accounting Software Market Segments
These segments will provide
us with a better
understanding on what
Accounting Software can we
use. A larger company may
opt to get SAP which is under
ERP Tier 1.
POPULAR ACCOUNTING AND ERP SYSTEMS WITH SEGMENTS
INPUT METHODS USED IN BUSINESS PROCESS
Source Documents and Keying
Source documents are preprinted documents and sequentially prenumbered which
captures data for control purposes so that no duplicate or missing source documents
will be missing. This strategy is useful in manual accounting by manually writing on
the source document such as invoices.

This can also be used if there is an accounting software used, this is known as Keying
where items needed are keyed in by a person to the system. There are two methods
however. Those that were manually written and then keyed in, and those that were
keyed in immediately and printed in a printer (only when the BIR allows it).
Sample of a Sales Invoice
in MS Dynamics NAV
Bar Codes
A bar code is a printed code consisting of a
series of vertical, machine-readable, rectangular
bars and spaces that vary in width and are
arranged in a specific way to represent letters,
numbers, and other human-readable symbols.
These are read and decoded by bar code
scanners and is used to identify retail products,
identification cards, and other items. This also
manage the work in progress, track documents,
and facilitate many other automated
identification applications.
Point of Sale System
A point-of-sale (POS) system is a method of using
hardware and software captures retail sales
transactions by standard bar coding. This is usually
integrated into a cash register.
The POS hardware and software automatically
input the data when the barcode is read as the
product passes through the scanner.
In today’s world, POS systems can be integrated
into the accounting software for automatic
recording of sale. However, older process would
normally extract the day’s data from a POS and is
manually entered by batch in the accounting
software.
Electronic Data Interchange (EDI)
Electronic Data Interchange (EDI) is the intercompany, computer-to-computer
transfer of business documents in a standard business format. EDI transmits purchase
orders, invoices, and payments electronically between trading partners. Since the
transmission is electronic, the paper source documents and the manual keying of those
documents are eliminated.

This reduces time, cost, and errors.

E-Business and E-Commerce
Data is also electronically exchanged between trading partners in e‐business and
e‐commerce. Recall from Chapter 1 that e‐business relates to all forms of online
electronic business transactions and processing, whereas e‐commerce is a type of
e‐business that is specific to consumer online buying and selling. A major difference
between EDI and e‐business (including e‐commerce) is that EDI uses dedicated
networks, while e‐business uses the Internet. As is true for EDI, when data is
exchanged electronically between trading partners, much of the manual data input
process is eliminated, thereby reducing time, cost, and errors.
PROCESSING ACCOUNTING DATA
 Batch Processing
Batch processing requires
that all similar transactions
are grouped together for a
specified time, and then this
group of transactions is
processed together as a batch.
Batch processing is best
suited to applications having
large volumes of similar
transactions that can be
processed at regular intervals.
For instance, payroll.
Advantages of Batch Processing
1. It is very efficient for large volumes of like transactions where most items in a
master file are used during each processing run.
2. The basic accounting audit trail is maintained, because there are well-defined
beginning and ending periods and a set of documents to reconcile to the batch
being processed.
3. Such systems generally use less costly hardware and software than other methods.
4. The hardware and software systems are as not as complicated as online systems
and are therefore easier to understand.
5. It is generally easier to control than other types of computerized systems. Batch
totals can be used to ensure the batch was processed correctly.
6. When personnel are dedicated to batch processing, they become specialized and
efficient in processing those routine transactions.
Disadvantages to batch processing
1. Processing can take longer than normal if the master files are large and not all records in
the master file are used. For example, if only a few customer payments are to be
processed from a large master file of customer records, it may take a legacy system with
older hardware as long to deliver the output as it would take if all the customer records
are demanded.
2. In legacy systems, with older hardware, adding or deleting records take so much
computer maintenance time due to the sequential structure of the files.
3. In legacy systems with older hardware, some data duplication is likely, because each
batch processes often uses its own separate master file. For instance accounts payable
and purchases.
4. Integration across business processes is difficult in legacy systems that are
batch-oriented. The isolated master files and separate batch processing systems make
integration very difficult.
Disadvantages to batch processing
5. By necessity, batch systems have a time lag while all transactions in a batch are
collected. This means that available information in files will not always be current, as it
would in real-time systems.

6. Legacy systems with older hardware may require that both the transaction files and
master files be sorted in the same sequential order. This leads to flexibility in record
storage and retrieval.
Online and Real-time Processing
Online processing - transactions are not
grouped into batches; rather, each transaction
is entered and processed individually.

Real-time processing - means that the

transaction is processed immediately, and in
real time, so that the output is available
immediately.

Online processing is best suited to applications

in which there is a large volume of records, but
only a few records are needed to process any
individual transaction.
Advantages to Real-time System
1. As data is entered in real time, the system checks for input errors. Therefore,
errors can be corrected immediately.
2. Information is provided to users on timely basis, without the time lag inherent in
batch systems.
3. Since all data is in a database system and is updated in real time, all files are
constantly up to date.
4. The business processes are integrated into a single database so that a single system
is achieved.
Disadvantages of Real-time Processing
1. The hardware and software are more expensive than those used for batch systems.
2. A single database that is shared is more susceptible to authorized access of data,
unless extensive controls are implemented to prevent unauthorized access.
3. Real-time systems can be difficult to audit because of the complexity of the
system.
Outputs from AIS
1. Trading partner documents such as checks, invoices, and statements.
2. Internal documents.
3. Internal reports.
4. External reports.
Documenting Processes and Systems
Data Flow Diagrams
A data flow diagram is a
graphical representation of
the flow of data within an
organization, including data
sources/destinations, data
flows, transformation
processes and data storage.
Data Flow Diagrams
Data source - the entity that produces or sends the data that is entered into a system.
Data destination - the entity that receives data produced by a system.
Data flow - the movement of data among processes, stores, sources and destinations.
Example
of a DFD
Narrative
Description

A Narrative
Description is
required after making
the DFD.
A DFD for Payroll Process
Activities in the Data Flow Diagram for Payroll Processing
Guidelines for Drawing a DFD
1. Understand the system 9. Identify all files or data stores.
2. Ignore certain aspects of the
10. Identify all data sources and
system destinations.
3. Determine system boundaries
11. Name all DFD elements.
4. Develop a context diagram
5. Identify data flows. 12. Subdivide the DFD.
6. Group data flows. 13. Give each process a sequential number.
7. Identify transformation processes.
14. Refined the DFD.
8. Group transformation processes.
15. Prepare the final copy.
Flowcharts
A flowchart is a pictorial, analytical technique used to describe some aspect of an
information system in a clear, concise, and logical manner.
Flowcharts record how business processes are performed and how documents flow
through an organization.
Flowcharting are divided into four categories:
● Input/Output Symbols
● Processing Symbols
● Storage Symbols
● Flow and Miscellaneous Symbols
Common
Flowcharting
Symbols
Common
Flowcharting
Symbols
Types of Flowcharts
Document Flowcharts - illustrates the flow of documents and data among areas of
responsibility within an organization.

Internal control flowchart - used to describe, analyze, and evaluate internal controls,
including identifying system strengths, weaknesses, and inefficiencies.

System flowchart - depicts the relationships among system input, processing, storage
and output.

Program flowchart - illustrates the sequence of logical operations performed by a

computer in executing a program.
Document Flowchart
Continuation Document Flowchart
System Flowchart
Program Flowchart
Guidelines for preparing flowchart
1. Understand the system.
2. Identify the entities to be flowcharted.
3. Organize the flowchart.
4. Clearly label all symbols.
5. Page connectors.
6. Draw a sketch of the flowchart.
7. Draw a final copy of the flowchart
Business Process
Diagrams

Business Process
Diagram (BPD) - a visual
way to describe the
different steps or
activities in a business
process.
Sample of a Business Process Diagram for Payroll
Ethical Considerations at the Foundation of AIS
Accountants should be aware of opportunities for unethical behaviors within the
various business processes. If accountants are well informed about these risks, they can
be better prepared to control such exposure. As a company chooses features and
options for its accounting information systems, the importance of monitoring those
systems should not be overlooked as a factor in decision making.
END