The Information System: An

accountant's Perspective
The Information Environment
Information is a vital resource to a company, similar to capital, raw materials,
and labor.
The pyramid depicts four strata of information users (top management, middle
management, operations management, operations personnel) within the business
organization as well as the flow of information (budget, operating, performance) among
those users. Horizontal information flows (more detailed, operations-oriented
information) are compared to vertical information flows (summarized, condensed
information). Also, information flows to and from the outside environment involve
stakeholders and trading partners. The picture demonstrates that the information that
flows through a business organization will vary greatly in terms of quantity of detail and
relevance to users.

What is a system?
Elements of a System
A broad definition of a system: a group of two or more interrelated components or
subsystems which serve a common purpose. The key aspect of this definition is
the multiple, interrelated components. The study of AIS involves the study of how
components relate to one another.

• The perspective or scope of the system defines whether or not you have a
system or a subsystem.
• A system must have at least one purpose, and serving that purpose is its
fundamental job. If a system is not performing its job, then it should be
replaced.
• System decomposition breaks down the larger system into smaller subsystems
and sub-components. Decomposition allows us to better understand the
purposes of each of the subsystems and to determine how the interrelated
sub-components assist in accomplishing their purpose.

The study of subsystem interdependency will make us aware of the importance of each
subsystem within the larger system and of the consequences of a failure of a particular
subsystem. Some subsystems are critical to the overall system performance while others
are not. Accountants must anticipate the cost of their possible failure, and design cost-
effective control procedures
A Framework for Information Systems: The AIS and the MIS
The information system is the set of formal procedures by which data are collected,
processed into information, and distributed to users. Information systems process
both financial and nonfinancial information, which are often processed by the same
physical system. There are two widely acknowledged types of information
systems: the accounting information system and the management information system.
This separation is conceptual as most information systems are not physically separated,
but rather integrated.
The Accounting Information System
The AIS has three major subsystems:

• The TPS: Transaction Processing System for daily operations: has three
subsystems: the revenue cycle, the expenditure cycle and the conversion
cycle.
• The GL/FRS: General Ledger/Financial Reporting System: takes and
summarizes the data in the TPS to update the general ledger accounts and to
create reports that are for both internal and external users.
• The MRS: Management Reporting System: takes and summarizes data in the
TPS and the GL/FRS to create reports for internal users. Discretionary
reporting refers to specific contents and formats that reflect a particular
management’s needs.

The Management Information System

Management Information Systems, in addition, process nonfinancial transactions and
provide management with information that goes beyond the limitations of AIS. [Note
the groupings under MIS in Figure 1-3: Financial Management Systems, Marketing
Systems, Production Systems, Human Resource Systems]
The distinction between AIS and MIS systems centers on the concept of a transaction.
A transaction is an event that affects or is of interest to the organization and that is
processed by its information system as a unit of work. There are two types of business
transactions: financial and nonfinancial.
The Changing Role of Accounting Information
More and more, businesses are demanding integrated AIS and MIS system information.
In response, the structure of information systems have evolved into integrated
approaches such as REA and ERP models, and the role of accountants has changed from
provider of financial information to consultant for management in all functional areas.
Why Distinguish Between AIS and MIS?
Even if businesses are integrating their AIS and MIS systems, we need to distinguish
them because of existing legal and professional standards designed to protect the
resources of a business from the many possible risks.

• A financial transaction, the focus of the AIS, is an economic event that affects
the assets and equities of the organization, is reflected in its accounts, and is
measured in monetary terms.
• Nonfinancial transactions, the focus of the MIS, include all other business
transactions (e.g. adding a new supplier or potential customer. Until there is an
order, it is not a financial transaction).
• The AIS processes all financial transactions and those nonfinancial
transactions that directly affect the processing of financial transactions.

AIS Subsystems
Transaction Processing System
The TPS is central to the AIS because it converts economic events into financial
transactions, because it records those transactions in the accounting journals and
ledgers, and because it distributes essential financial information to daily operations
personnel. Frequent, similar transactions (shipments, receipts, payments, etc.) are
organized into efficient cycles. The three primary transaction cycles are the revenue
cycle, the expenditure cycle, and the conversion cycle.

General Ledger/Financial Reporting Systems

The bulk of the inputs to the GL are from the transaction cycles. Summaries of these
cycles are utilized to update the GL control accounts. Non-frequent or unique
transactions are entered with specialized methods. The FRS reports the status of
financial resources and the changes in those resources, primarily for external users
(typically termed “nondiscretionary reporting” because the content and format are
typically required by professional or regulatory standards such as GAAP, IRS, GAAS).

Management Reporting System

The MRS provides the internal financial information needed by management. Managers
need this information to plan, execute and control their operations (e.g., budgets,
variances, price lists, etc.). These are typically termed “discretionary” reporting because
the content and format for each of these reports can be determined by each
organization.

A General Model for AIS

Data versus Information:
Data are raw or processed measurements of fact that have no direct effect on the users.
Information is data that causes a user to take an action that he or she would not have
taken without receiving that information. This definition depends on the effect on the
users. Data for one person may be information for another person. If an information
system does not create a reaction in the designed-for user, the information system may
fail in its purpose.

Data Sources
External sources of financial transactions are those involving other legal entities: sales,
purchases, payments, etc. Internal sources of financial transactions usually involve the
movement of resources within a business: moving materials into production, adding
labor costs to inventories, etc.

Data Collection
This first step is crucial, if not the most important, phase of the system since here lies the
first and best opportunity to ensure that data is valid, correct, and free from material
errors. Two rules govern data collection: relevance and efficiency. Only data that
contributes to the user’s information needs are relevant. Efficient procedures collect
data once, and make them available to a variety of users. Redundancy in data collection
can lead to inconsistencies and poor decisions.

Data Processing
Many times, raw data needs to be processed before it is considered information to the
user. Processing can be as simple as sorting events alphabetically or adding up like
events, or as complex as statistical modeling.

Database Management
Database management involves the tasks of storing, retrieving, and deleting collected
and processed data. Data is typically represented in a logical hierarchy from smallest to
largest where:

• Data attributes refer to the most elemental characteristics of a record such as

the address of a supplier, or the unit cost of an inventory item. Each attribute
must logically pertain to the record and must be relevant in terms of affecting
the user. Attributes are often called columns or fields.
• A record refers to the set of attributes for a single occurrence within an entity
class, such as a customer, an invoice, or a piece of machinery. Each record
must have a unique identifier attribute, termed the “primary key,” to
distinguish it from the other records (e.g., social security number for each
student). Other fields may have secondary purposes, for example, for
summarizing purposes (e.g., total sales), and these attributes are termed
“secondary keys.”
 • A file is a complete set of similar records for an identical class, for example, all
customers or all invoices.
• A database is the organization’s collection of files. Database management
involves the storage, retrieval and deletion of data.

Information Generation
Data is compiled, arranged, formatted, and presented to make it meaningful and useful
to end users. To be effective, information must be relevant, timely, accurate, complete,
and summarized. Without these characteristics, information will lack value to external
users, such as creditors, stockholders, and potential investors, and to internal users, such
as management and operations personnel.

• Relevance: the data must serve a purpose.

• Timeliness: the data is received by the user before the decision is made. The
data must be no older than the time period of the action that it supports.
• Accuracy: the data is free from material errors. The user’s purpose determines
the degree of accuracy needed. Accuracy usually trades off with timeliness.
• Completeness: no relevant related data is missing.
• Summarization: the data is aggregated to the level demanded by the user’s
purposes.

Feedback
Feedback is decision related to a system output that is sent back to the system as a
source of data. Feedback may be internal or external, for example, ordering low stock
items, or changing your credit policies.

Information System Objectives

The objectives of information systems are:

• to support management in its responsibility for the firm's resources

• to support management in decision making, and
• to support the day-to-day operations of the firm.

The Accounting Function

The accounting function captures and records the firm's financial transactions in the
database (sales, payments) and distributes transaction information throughout the
organization.
The Value of Information
Information value is determined by its reliability. Reliable information must have
integrity, that is, it must be relevant, accurate, complete, summarized, and timely since
users will be depending on it, both internally and externally. (Bad examples: selling
inventory you do not have to sell, or promising a schedule that cannot be met!)

Accounting Independence
Reliability of accounting information is founded on the concept that the accounting
department is independent from the other operational departments that maintain
physical custody of the assets of the business. Independence ensures integrity of the
recorded data.