Chapter 2 Business Environment And Accounting

Information System

Accounting Information Systems: Essential Concepts

and Applications
Fourth Edition by Wilkinson, Cerullo,
Raval, and Wong-On-Wing
 Data and Information
Although the terms data and information are often used
interchangeably, it is useful to distinguish between them.
Data (the plural of datum) are raw facts about events that
have little organization or meaning.
Data are facts, which may or may not be processed (edited,
summarized, or refined) and have no direct effect on the user.
By contrast, information causes the user to take an action that
he or she otherwise could not, or would not, have taken.

Information is often defined simply as processed data. This is an

inadequate definition. Information is determined by the effect it
has on the user, not by its physical form.
Thus, information is not just a set of processed facts arranged in
a formal report. Information allows users to take action to
resolve conflicts, reduce uncertainty, and make decisions.
 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
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. Three fundamental
objectives are, however, common to all systems:
1. To support the stewardship function of management.

Stewardship refers to management’s responsibility to

properly manage 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 operations
personnel to assist them in the efficient and effective
discharge of their daily tasks.
Users of Accounting Information System
End users fall into two general groups: external and internal.
External users include creditors, stockholders, potential
investors, regulatory agencies, tax authorities, suppliers, and
customers. Institutional users such as banks, receive
information in the form of financial statements, tax returns,
and other reports that the firm has a legal obligation to
produce.
Trading partners (customers and suppliers) receive transaction-
oriented information, including purchase orders, billing
statements, and shipping documents.
Internal users include management at every level of the
organization, as well as operations personnel.
 Resources Required for an AIS
An accounting information system that combines traditional
accounting practices such as the Generally Accepted
Accounting Principles (GAAP) with the available modern
information technology resources. Seven resources compose
the typical accounting information system.
• People - the system users.
• Processor(s): Manual or Computerized
• Procedure and Instructions - Methods for retrieving and
processing data.
• Database - Information pertinent to the organization's
business practices.
• Software - computer programs used to process data.
• Information Technology Infrastructure - Hardware used to
operate the system i.e. input-output devices.
• Internal Controls - Security measures to protect sensitive
data.
 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
• 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
To maintain professional knowledge and skill at the level required to
ensure that clients or employers receive competent 
professional service; and
To act diligently in accordance with applicable technical and
professional standards when providing professional services.

 Exercise due professional care

A professional accountant shall take reasonable steps to ensure that

those working under the professional accountant's authority in a
professional capacity have appropriate training and supervision.

 Plan and supervise all work

 Obtain relevant data to support reasonable
recommendations
 Maintain integrity and objectivity
Integrity - to be straightforward and honest in all professional
and business relationships.
Objectivity - to not allow bias, conflict of interest or undue
influence of others to override professional or business
judgments.

 Understand and respect the responsibilities of all parties

 Disclose any conflicts of interest

When initiating either a formal or informal conflict resolution

process, the following factors, either individually or together
with other factors, may be relevant to the resolution process:
Relevant facts;
• Relevant parties;
• Ethical issues involved;
• Fundamental principles related to the matter in question;
• Established internal procedures; and
• Alternative courses of action.
• Having considered the relevant factors, a professional
accountant shall determine the appropriate course of action,
weighing the consequences of each possible course of
action. If the matter remains unresolved, the professional
accountant may wish to consult with other appropriate
persons within the firm or employing organisation for help in
obtaining resolution.
• It will generally be preferable for the ethical conflict to be
resolved within the employing organisation before consulting
individuals outside the employing organisation.
 Basic Subsystems in the AIS

1. The revenue cycle: involves activities of selling goods or

services and collecting payment for those sales.
2. The expenditure cycle: involves activities of buying and
paying for goods or services used by the organization.
3. The human resources/payroll cycle: involves activities of
hiring and paying employees.
4. The production cycle: involves activities converting raw
materials and labor into finished goods.
5. The financing cycle: involves activities of obtaining
necessary funds to run the organization, repay creditors,
and distribute profits to investors.

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 Common Source
Documents and Functions
REVENUE CYCLE
Source Document Function

Sales order Take customer order.

Delivery ticket Deliver or ship order
Remittance advice Receive cash.

Deposit slip Deposit cash receipts.

Credit memo Adjust customer accounts

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 Common Source
Documents and Functions
EXPENDITURE CYCLE
Source Document Function

Purchase requisition Request items.

Purchase order Order items.

Receiving report Receive items.
Check Pay for items.

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 Common Source
Documents and Functions
HUMAN RESOURCES CYCLE
Source Document Function

W4 forms Collect employee

withholding data.

Time cards Record time worked

by employees.

Job time tickets Record time spent

on specific jobs.

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