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Chapter One

Overview of Accounting Information Systems

 System
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 A system is a set of two or more interrelated

components to achieve a goal.
 Systems are usually composed of smaller
subsystems, each performing a specific function
important to and supportive of the larger system for
which it is a part.
 For instance, faculty of business and economics is
a system composed of various departments.
 The three basic interacting components:
 Input
 Processing (transformation process)
 Cont’d……….
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 A system exists and functions in an environment

containing other systems.
 Subsystem – a component of a larger system.
 Systems that share the same environment may be
connected to one another through a shared boundary,
or interface.
 Systems which are self-monitoring and self-
regulating are called cybernetic system, and are
becoming more useful.
 Open versus closed system.
 Adaptive system
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 Goal conflict occurs when the activity of a

subsystem is not consistent with another subsystem
or with the larger system as a whole.
 Goal congruence occurs when the subsystem’s goals
are in line with the organization’s goals.
 The larger and more complicated a system, the
more difficult it is to achieve goal congruence.
 System Decomposition: the process of dividing the
system into smaller subsystem parts
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 System Interdependency:
 Distinct parts are not self-contained
 They are reliant upon the functioning of the other
parts of the system
 All distinct parts must be functioning or the system
will fail
 Accounting system
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 Accounting system- the procedures & processes

used to analyze transactions, handle routine
bookkeeping tasks, and structure information so it
can be used to evaluate the performance and health of
the business.
 Information is just as much as a resource, plant and
equipment.
 Productivity can be increased through better
information systems.
 Accounting as an information system identifies,
collects, processes and communicates economic
 Information system
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 A set of people, procedures and resources that

collects, transform, disseminates information of
organization to be used for better management.
 Companies cannot operate any more without
automated information systems.
 For most businesses, there are varieties of
requirements for information.
 As a result, businesses tend to have several
"information systems" operating at the same time.
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 Executive Support Systems - designed to help

senior management make strategic decisions.
 Gathers, analyses and summarizes the key internal
and external information used in the business.
 Management Information Systems - concerned
with internal sources of information.
 Usually take data from the transaction processing
systems and summaries it into a series of
management reports.
 Used by middle management and operational
supervisors.
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 Decision-Support Systems - designed to help

management to make decisions in situations where
there is uncertainty about the possible outcomes of
those decisions.
 Knowledge Management Systems - help businesses
to create and share information.
 Used in a business where employees create new
knowledge and expertise, and shared by others to
create further commercial opportunities.
 Transaction Processing Systems - designed to
process routine transactions efficiently and
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 Office Automation Systems - try to improve the

productivity of employees who need to process data
and information.
 The wide range of software systems that exist to
improve the productivity of employees working in an
office.
 Cont’d…… Information Systems: A
glimpse on its historical development
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Information System

Operations Management
Inform ation Information
Systems System s

Transaction Process Office Inform ation Decision Executive

Processing Control Autom ation Reporting Support Information
System s System s Systems Systems System s System s
 Accounting Information System
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 AIS is a system that collects, records, stores &

processes data to produce information for decision
makers.
 Accounting is an information system that identifies,
collects, processes, and communicates economic
information about a firm using a wide variety of
technologies.
 AIS is a unified structure that employs physical
resources and components to transform economic
data into accounting information for external and
internal users.
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 It can use advanced technology or be a simple paper-

and-pencil system or be something in between.
 Resources of AIS
 People Resources – Specialists and End users
 Hardware Resources – Machines and Media
 Software Resources - system, application,
procedures
 Data Resources - database, model base,
knowledge base
 Network Resources - Communication media,
network support
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Accounting Information System Subsystems

 Transaction processing system (TPS): supports

daily business operations:

 Revenue Cycle - sales and collection from sales
 Expenditure Cycle - purchase and disbursements
 HRM (Payroll) Cycle - recruiting, hiring, training
and compensating of employees
 Financing Cycles - obtaining funds and repayment
 Production cycle - conversion of inputs in to
outputs
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 General Ledger/ Financial Reporting System

(GL/FRS): produces financial statements and reports
 Management Reporting System (MRS): produces
special-purpose reports for internal use
 The functions of AIS:
 Collect and store data about events, resources, and
agents.
 Transform data into information that management
can use to make decisions about REA
 Provide adequate controls to ensure that resources
are available when needed, accurate and reliable.
 Why Study AIS?
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 It’s fundamental to accounting:

 Other accounting courses focus on how the
information is provided and used.
 AIS course places greater emphasis on:

 How the data is collected and transformed.

 How the availability, reliability, and accuracy of
the data is ensured.
 AIS courses are not number-crunching courses.
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 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.
 In private industry and not-for-profit, systems
work is considered the most important activity.
 In management consulting, the design, selection,
and implementation of accounting systems is a
rapid growth area.
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 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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 AIS topics affect corporate strategy and culture

 AIS design is affected by IT, the organization’s
strategy, and the organization’s culture.
 IT affects the company’s choice of business
strategy. To perform cost-benefit analyses on IT
changes, you need to understand business strategy.
 Although culture affects the design of the AIS, it’s
also true that the AIS affects culture by altering the
dispersion and availability of information.
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 Michael Porter suggested two basic business

strategies companies can follow:
1. Product-differentiation strategy
 It involves setting your product apart from those of

your competitors, i.e., building a “better” cell phone

by offering one that’s faster, has enhanced features,
etc.
2. A low-cost strategy:
 Involves offering a cheaper cell phone than your

competitors. The low cost is made possible by

operating more efficiently.
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 Porter also argues that companies must choose a

strategic position among three choices:
 Variety-based strategic position: Offer a subset of
the industry’s products or services.
 Needs-based strategic position: Serve most or all of
the needs of a particular group of customers in a
target market.
 Access-based strategic position: Serve a subset of
customers who differ from others in terms of factors
such as geographic location or size. Example:
Satellite Internet services are intended primarily for
customers in rural areas who cannot get cable
 Role of the AIS in the Value Chain
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 The objective of most organizations is to provide

value to their customers.
 Adding value means making the value of the finished
component greater than the sum of its parts.
 It may mean:
 Making it faster and more reliable, providing better
service or advice, providing something in limited
supply, providing enhanced features, customizing
it.
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 Value is provided by performing a series of activities

referred to as the value chain.
 These include:
 Primary activities and support activities.
 These activities are sometimes referred to as “line”
and “staff” activities respectively.
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Primary activities:
 Inbound Logistics: Receiving, storing, &
distributing the materials (or inputs) to the product or
service.
 Operations: Transforming inputs into products or

services.
 Outbound Logistics: Distributing products or
services to customers.
 Marketing and Sales: Helping customers to buy the

organization’s products or services.

 Service: Post-sale support provided to customers
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Support activities:
 Firm Infrastructure: Accountants, lawyers, and

administration. Includes the company’s AIS.

 Human Resources: involves recruiting and hiring

new employees, training employees, paying

employees, and handling employee benefits.
 Technology: activities to improve the products or

services (e.g., R&D, Web site development).

 Purchasing: buying the resources (e.g., materials,

inventory, and fixed assets) needed to carry out the

entity’s primary activities.
 The Supply Chain
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 The chain of activities between an organization, its

customers, supplier and distributors is called the
Supply Chain.

 IT can facilitate synergistic linkages that improve the

performance of each company’s value chain.
 Information and Decision Making
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 There are different models of decision-making and

problem solving process. The steps:
 The problem has to be identified.
 The decision maker must select a method for
solving the problem
 The decision maker must collect the data needed to
execute the decision and interpret the outputs of
the model evaluating the merits of each alternative
 The decision maker chooses and executes the
preferred solution.
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 AIS can provide assistance in all phases of decision-

making.
 The degree to which AIS can support decision-

making depends on the type of decision being made.

 Decisions may be categorized either in terms of the

degree of structure or by their scope.

Structure
 Structured decisions: Repetitive and routine and

can be delegated to lower-level employees.

 Semi structured decisions: are characterized by

incomplete rules and require subjective assessments.

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 Unstructured decisions: Non-recurring and non-

routine & require a great deal of subjective
assessment.
Scope
 Occupational control decisions: relate to
performance of specific tasks and are often of a day-
to-day nature.
 Management control decisions: relate to utilizing

resources to accomplish organizational objectives.

 Strategic planning decisions: involves establishing

organizational objectives and policies to achieve

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 There exists a correspondence between a manager’s

level in an organization and the decision making
responsibilities.
 Top management - unstructured and semi structured
decisions, involving strategic decisions
 Middle managers - deal with semi structured
decisions, involving management control
 Lower level supervisors and employees - face semi
structured or unstructured decisions involving
operational control.
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Value of Information for Decision Making

 The information produced by well-designed AIS can

improve decision making in several ways:

 It identifies situations requiring management
action. For example, a cost report with a large
variance.
 By reducing uncertainty, accounting information
provides a basis for choosing among alternative
actions. For example, set prices and credit policies.
 Information about the results of previous decisions
provides valuable feedback that can be used to
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 Information overload reduces the value of

information.
 It is important to recognize that there are costs
associated with producing information.
 Those costs include the time and resources spent in
colleting, processing, and storing data as well as in
distributing the information to decision makers.
 AIS plays an important role in helping to adopt and
maintain a strategic position.
 Traditionally, AIS was used as transaction processing
system because it was concerned about financial
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 To handle nonfinancial data, other systems were used

leading to redundancy and problem in updating data.
 Enterprise resource planning (ERP) systems are
designed to overcome these problems as they
integrate all aspects of operations with its traditional
AIS.
 A key feature of ERP systems is the integration of
financial with other nonfinancial operating data.
 Data versus Information
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 Data are facts that are collected, recorded, stored, and

processed by an information system.
 Organizations collect data about:
 Events that occur
 Resources that are affected by those events
 Agents who participate in the events

 Information is data that have been organized and

processed to provide meaning to a user.
 Usually, more information and better information
translates into better decisions.
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 Benefits versus costs of information

 Information should be obtained if and only if its
benefits is at least equal to the costs
 Benefits of information:
 Reduction of uncertainty, Improved decisions,
Improved ability to plan and schedule activities
 Costs may include time and resources spent:
 Collecting data, processing data, storing data,
distributing information to users
 Value of information (VI) is the net benefit derived
from information. VI = Benefit - Cost
 Characteristics of Useful Information
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 Reliability: free from error or bias and faithfully

portrays events and activities of the organization.
 Understandability: presented in a manner you can
comprehend and use.
 Verifiability: A consensus notion—the nature of the
information is such that different people would tend
to produce the same result.
 Accessibility: You can get to it when you need it and
in a format you can use.
 Relevance: serves a purpose that is pre-supposed.
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 Timeliness: no older than the time period of the

action it supports
 Completeness: all information essential to a decision
or task is present
 Summarization: aggregated in accordance with the
user’s needs
 The characteristics of useful information are related
to the three dimensions of information;
 Time,
 Content and
 Form;
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The End!

Thank You!