Chapter 1

The Information System:

An Accountant’s Perspective
Accounting Information Systems
Objectives for Chapter 1
 Primary information flows within the business environment
 Accounting information systems and management
information systems
 The general model for information systems
 Financial transactions from non-financial transactions
 The functional areas of a business
 Two main stages in the evolution of information systems
 Three roles of accountants in an information system
Internal & External
Information Flows
Internal Information Flows
• Horizontal flows of information used primarily at the
operations level to capture transaction and operations data
• Vertical flows of information
• downward flows — instructions, quotas, and budgets
• upward flows — aggregated transaction and operations data
Information Requirements

• Each user group has unique information requirements.

• The higher the level of the organization, the greater the need for
more aggregated information and less need for detail.
Information in Business

• Information is a business resource that:

• needs to be appropriately managed
• is vital to the survival of contemporary
businesses
Users of AIS and their needs and
demand
• INTERNAL USERS
• Management
• They use the information for planning that is the development
of short term and long term plans
• Supervisors
• Controlling activities that involve motivating employees and
evaluation of people and other resources within the
organisation
Internal users
3.Internal auditors
They use the information that enables to access operational
and internal controls .
4 employees
• They use the information in order to carryout their daily
duties.
External users
• 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.
• Potential investors
• They want information that will enable them to access the
feasibility of investing their funds in a particular entity or to
withdraw their funds and invest it else where. Information can
be obtained from the SOFP, SOCI and SOCE
External users
• Creditors
• They want to access the ability of the company to settle its
debts.
• Debtors
• They are mainly concerned about the going concern of a
company
• This will assure them if the company is able to supply them
with raw materials in the future(continued business).
What is a System?
• A group of interrelated multiple components or subsystems that
serve a common purpose
• System or subsystem?
• A system is called a subsystem when it is viewed as a component of a
larger system.
• A subsystem is considered a system when it is the focus of attention.
THREE MAIN CHARACTERISTICS OF
A SYSTEM

Component parts/ tangible features .

• These imply structure and order. The
components are arranged to help achieve
objectives for example a computer system is
designed around an input device, a central
processing unit, an output device and one or
more storage units. When linked together they
work as a whole system to produce
information.
CHARACTERISTICS OF A SYSTEM
CONTINUE
Process.
• This is whereby the component parts co-ordinate in a
defined way. Process refers to the manner in which
each components function with other components of
the system.
• For example, in a computer system the CPU must
interact with the input device to solve a problem, in
turn the main memory holds the program and data
that the arithmetic unit uses for computation.
• This means that the parts of the system depend on
each other and they are coordinate and linked
together according to plan.
CHARACTERISTICS OF A SYSTEM
CONTINUED
Goal
• These are the objectives which the
components parts are coordinated. The
objectives may be real or stated. In most
organizations, they state an objective and
operate to achieve it.
WHAT ARE SUB-SYSTEMS AND SUPER SYSTEMS.

Sub-system.
• A subsystem is a system that exists in another
system; its existence depends upon the
existence of a super system. A sub system
contributes to the proper working of the entire
system
• For example, an auto mobile system consists
of many sub-systems like acceleration system,
fuel injection system and the braking system.
Every sub-system is responsible for the proper
functioning of the entire auto mobile system.
Super system
• A super system is a system responsible for
monitoring the overall working of its sub-
systems therefore it contains many sub-
systems. It decides the constraints and
resources to be put on its sub-systems.
• For example; the central government system
which has the state government under its
control which form the sub-system.
Why should an accountant be knowledgeable
about these systems?

1. Enables the accountant to navigate

suitable system software; the knowledge
will enable the accountant to confirm and
record actual business transaction,
describe economic events, perform
activities timely and sufficiently, sort the
economic property in the financial
reports.
2. Enables accountants; to access the barriers
for implementation of financial control of
owners’ connectivity with financial
managers. The accountant will seek ways
to improve and reach maximum
operations if he reviews that the sub-
system and super systems and becoming
obsolete.
3. Enablesthe accountant; to evaluate the
business performance correctly and predict
the prospects of the enterprise.
4. Analysis of systems theory and corporate
financial control; knowing the
characteristics of systems and there
organic in nature, an accountant can
promote the smooth development of
corporate financial activities.
System Decomposition versus
System Interdependency
• System Decomposition
• the process of dividing the system into smaller subsystem parts
• 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
BOUNDARIES AND INTERFACES IN A
SYSTEM

Boundaries
A boundary is anything marking a limit that
separate the internal components of a system
from external entities. Boundaries can be
classified in to two, permeable and
impermeable boundaries.
Boundaries
• Permeable boundaries allow a certain
degree of interactions between the system
and its environment for example relatively
closed system.
• Impermeable boundaries do not allow
interactions between the system and its
environment for example closed systems.
Interfaces

An interface is a shared boundary or

connection between two similar systems
through which information is passed; the
information can be either physical or
logical.
It is necessary to create boundaries and
interfaces;

• To enable efficiency allocation of

resources to each sub-system.
• To make it easier for accountants and
auditors to review on the effectiveness of
internal controls.
It is necessary to create boundaries and
interfaces;

• To enable the achievement of almost every

characteristic of a successful system since
the components parts, processes and goals
will be established against each boundary.
• Boundaries simplify the process of
organizing subsystems so as to reduce the
number of interconnections, which is a
potential interface for communication
among sub-systems.
Characteristics of a system
• Correct and reliable information
• Timely information
• User satisfaction
• Satisfy the organization’s needs
a)current
b)Future
• Adopt to technological changes
• Reasonable time for development
Correct and reliable
information
• implement adequate internal controls
1)through segregation of duties
2)use of confirmations and inquiries
3)independent verification that is to check to assess if the
information produced is correct
• -maintenance, servings and reviewing of the system at
intervals
• -Correct procedures of recording transactions
Timely information
• Chose a processing method suitable to user’s needs. For
example use of online processing method as it processes
transactions at the moment the event occurs
User satisfaction
• -user input in setting policies
• -user support for project
• -activate user participation in project
• -user responsibility for the system
• -training programs to familiarize the user with the new system
Satisfy the organization’s
needs
• a)current
• Getting steering committee approval for new system
development

• b)future
• Have a long range system master plan this governs the
objectives of the organization.
Adopt to technological
changes
• higher creative and innovative employees
• have systems analyst and expertise responsible for research
and development. For example pastel use can easily change
from version 8 to 17.
Reasonable time for development
• -properly define the scope of the system
• -use project management techniques
Different types of systems
• Closed System
• Relatively Closed system
• Open System
• Feedback control system
TYPES OF SYSTEMS
• CLOSED SYSTEM
• is a system that does not interact with the environment
• There are no interfaces.
• Has no effects on the outside of its boundaries and the
environment has no effects on the process within the system.
For example, a watch.
CLOSED SYSTEM

• It is a system which maintains itself on a limited amount of

resources that are firmly established in that particular system
hence being difficult to change it.
• Such a system is a theoretical concept rather than being a
practical concept.
CLOSED SYSTEM
• EXAMPLE
• Certain departments within an organisation can be set up as
closed system.
• A research and development (R&D) department within a
computer organisation may be set up as a closed system with
no interaction outside the division.
• The purpose is to protect trade secretes and invention that
are being produced inside.
CLOSED SYSTEMS
ADVANTAGES
•There are no disturbances in the system.
•It is highly effective and efficient.
CLOSED SYSTEMS
LIMITATIONS
•Can hamper growth since the flow of information stays within
the system.
•Has no chance to interact with or build on knowledge from the
outer world.
•It does not adapt to technological changes.
•It practically does not exist because it lacks the need for
interaction.
RELATIVELY CLOSED
SYSTEM
RELATIVELY CLOSED SYSTEM
•It reacts with its environment in a known and controlled way.
•The interactions consist of system inputs (if they flow from the
environment to the system) and outputs (which are interactions
flowing in the opposite direction)
•The system contains interfaces with the environment and
controls the effects of the environment on its process.
RELATIVELY CLOSED
SYSTEM
RELATIVELY CLOSED SYSTEM
•It interacts with its environment in a restricted way that does
not eliminate but limits its susceptibility to the environment.
•For example, labour negotiations can limit the effects of strike.
•It is semi permeable.
RELATIVELY CLOSED SYSTEMS
ADVANTAGES
•Able to meet user needs as they are able to take inputs for
development purposes.
•It is flexible – adapts to technological changes.
•It allows for a reasonable level of sharing and exchange of
information.
•Minimises the impact of disturbances as there are control
measures.
RELATIVELY CLOSED
SYSTEMS
DISADVANTAGES
• It is not reliable – for it is prone to disturbances from the
environment
•
OPEN SYSTEM
• Is one in which the systems interaction with the environment
is not controlled.
• Has many interfaces with its environment ,that is ,system that
interacts freely with its environment, taking input and
returning output.
• Contains subsystems which help in converting input into
output.
OPEN SYSTEM
• It permits interactions across its boundary , it receives inputs
from and delivers outputs to the outside.
• System designers anticipate the things that can go wrong in
the environment and create processes and interfaces to
control them.
• For example, media and internet.
• Have flexible boundaries since it interacts with the environment.
• Promote effective problem solving.
• Subsystems help in resolving conflicts as well as allocating
resources.
DISADVANTAGES
• The system has disturbances of uncontrolled inputs that affect
the processed resources within the system.
FEEDBACK CONTROLLED SYSTEM
• A portion of the system is retained as an input to the system.
• For example, in accounting system ,revenue output by other
goods can be used as capital in costing and variances can be
output that can be used in decision making.
• Designed to provide feedback
• Uses interfaces to permeate information bottom up and top
down.
FEEDBACK CONTROLLED
SYSTEM
• Uses the function of a prescribed relationship between the
output and reference input to control the process of resources
in that system.
• The difference between the output of the process under
control and the reference input is amplified and used to
control the process so that the difference is continuously
reduced
ADVANTAGES
• Can be used for decision making.
• Provide the feedback which help the system to obtain its goals
and enhance employee motivation.
• Provide management with meaningful information on how
effective its planning effort was.
• The effect of unwanted disturbances can be effectively
reduced.
DISADVANTAGES
• The time the manager may get the information , the damage
might already have been done thus making feedback
irrelevant
• It is expensive to set up and the cost of feedback is first
manifested in the increased number of components and the
complexity of the system.
What is an Information
System?
An information system is the set of
formal procedures by which data are
collected, processed into information,
and distributed to users.
Transactions
• A transaction is a business event.
• Financial transactions
• economic events that affect the assets and equities of the
organization
• e.g., purchase of an airline ticket
• Nonfinancial transactions
• all other events processed by the organization’s information
system
• e.g., an airline reservation — no commitment by the customer
Transactions

Financial

Transactions User
Information
Decision
Nonfinancial System
Information Making

Transactions
What is Accounting Information
Systems?
• Accounting is an information system.
• It identifies, collects, processes, and
communicates economic information about a
firm using a wide variety of technologies.
• It captures and records the financial effects of
the firm’s transactions.
• It distributes transaction information to
operations personnel to coordinate many key
tasks.
AIS versus MIS
• Accounting Information Systems (AIS) process
• financial transactions; e.g., sale of goods
• and nonfinancial transactions that directly affect the processing of
financial transactions; e.g., addition of newly approved vendors
• Management Information Systems (MIS) process
• nonfinancial transactions that are not normally processed by traditional
AIS; e.g., tracking customer complaints
AIS versus MIS?
Differences between AIS and MIS
AIS MIS
• is concerned about day • MIS is mainly used for
to day running of the strategic planning which
business with involves identifying a
subsystems such as company’s long run goal
Transaction Processing and developing plans for
System (TPS). achieving these goals.
Differences between AIS and MIS
AIS MIS
• records financial • goes beyond AIS in that
transactions which are it records financial
economic events that transactions and non-
affect assets and equities financial transactions.
of a firm and is
measured in monetary
terms for instance sale
of goods to customers
cash movements etc.
Differences between AIS and MIS
AIS MIS
• provides information for • MIS principally provides
internal and external information to internal
use. parties.
Differences between AIS and MIS
AIS MIS
AIS is used as a tool for • MIS gives data for long
short term decision term decision making
making. and control.
It uses historical data. • MIS is futuristic that is
decisions are made
based on projections.
Differences between AIS and MIS
AIS
• supports stewardship • MIS is used as a yardstick
management with
information contained in
the financial statements
and responsibility report.
Information is about
how resources are
utilised and safeguarded.
MIS
for measuring
performance. Managers
make future projections
and hence actual results
are compared with the
projections made.
Differences between AIS and MIS
AIS MIS
• provide information • Albright (2006) goes on
that conforms to to say it is produced in a
Generally Accepted variety of formats that
Accounting Principles meet the particular
(GAAP). information needs of a
company’s managers.
AIS Subsystems
• Transaction processing system (TPS)
• supports daily business operations
• General Ledger/ Financial Reporting System
(GL/FRS)
• produces financial statements and reports
• Management Reporting System (MRS)
• produces special-purpose reports for internal use
The General AIS Model
Data Sources
• Data sources are financial transactions that enter the
information system from internal and external
sources.
• External financial transactions are the most common source of data for
most organizations.
• E.g., sale of goods and services, purchase of inventory, receipt of
cash, and disbursement of cash (including payroll).
• Internal financial transactions involve the exchange or movement of
resources within the organization.
• E.g., movement of raw materials into work-in-process (WIP),
application of labor and overhead to WIP, transfer of WIP into
finished goods inventory, and depreciation of equipment.
Transforming the Data into
Information
Functions for transforming data into information according
to the general AIS model:
1. Data Collection
2. Data Processing
3. Data Management
4. Information Generation
1. Data Collection

• Capturing transaction data

• Recording data onto forms
• Validating and editing the data
2. Data Processing
• Classifying • Merging
• Transcribing
• Sorting • Calculating
• Batching • Summarizing
• Comparing
3. Data Management
• Storing
• Retrieving
• Deleting
4. Information Generation
• Compiling
• Arranging
• Formatting
• Presenting
Characteristics of Useful Information
• Regardless of physical form or technology, useful
information has the following characteristics:
• Relevance: serves a purpose
• Timeliness: no older than the time period of the action it supports
• Accuracy: free from material errors
• Completeness: all information essential to a decision or task is present
• Summarization: aggregated in accordance with the user’s needs
Information System Objectives in a
Business Context
• The goal of an information system is to
support
• the stewardship function of management
• management decision making
• the firm’s day-to-day operations
Organizational Structure
• The structure of an organization helps to allocate
• responsibility
• authority
• accountability
• Segmenting by business function is a very common method of
organizing.
Functional Areas
• Inventory/Materials Management
• purchasing, receiving and stores
• Production
• production planning, quality control, and maintenance
• Marketing
• Distribution
• Personnel
• Finance
• Accounting
• Computer Services
Accounting Independence
• Information reliability requires accounting
independence.
• Accounting activities must be separate and independent of the
functional areas maintaining resources.
• Accounting supports these functions with information but does
not actively participate.
• Decisions makers in these functions require that such vital
information be supplied by an independent source to ensure its
integrity.
 The Computer Services
Function
Distributed Data Centralized Data
Processing Most companies fall in between. Processing

Reorganizing the All data processing

computer services is performed by
function into small one or more large
information processing computers housed
units that are distributed at a central site
to end users and that serves users
placed under their control throughout the
organization.

Primary areas:
database administration
data processing
systems development
systems maintenance
Organization of Computer Services Function in a
Centralized System
Organizational Structure for a Distributed Processing
System
Potential Advantages of DDP
• Cost reductions in hardware and data entry tasks
• Improved cost control responsibility
• Improved user satisfaction since control is closer to the user level
• Backup of data can be improved through the use of multiple data
storage sites
Potential Disadvantages of DDP
• Loss of control
• Mismanagement of company resources
• Hardware and software incompatibility
• Redundant tasks and data
• Consolidating tasks usually segregated
• Difficulty attracting qualified personnel
• Lack of standards
Manual Process Model
• Transaction processing, information processing, and accounting are
physically performed by people, usually using paper documents.
• Useful to study because:
• helps link AIS courses to other accounting courses
• often easier to understand business processes when not shrouded in
technology
• facilitates understanding internal controls
The Evolution of IS Models: The Flat-File Model
Data Redundancy Problems
• Data Storage - excessive storage costs of paper
documents and/or magnetic form
• Data Updating - changes or additions must be
performed multiple times
• Currency of Information - potential problem of
failing to update all affected files
• Task-Data Dependency - user’s inability to obtain
additional information as needs change
• Data Integration - separate files are difficult to
integrate across multiple users
The Evolution of IS Models: The Database Model
 An REA Data Model Example

R E A
M M M 1
Inventory Line items Sales Party to Sales
M person
M
1
Pays for Made to
Customer
1
M
M Received
1 M Cash from
Cash Increases
Collections M 1 Cashier
Received 34
by
REA Model
• The REA model is an accounting framework for
modeling an organization’s
• economic resources; e.g., assets
• economic events; i.e., affect changes in resources
• economic agents; i.e., individuals and departments that participate in
an economic event
• Interrelationships among resources, events and agents
• Entity-relationship diagrams (ERD) are often used to
model these relationships.
Accountants as Information System
Users
• Accountants must be able to clearly convey their needs to the
systems professionals who design the system.
• The accountant should actively participate in systems development
projects to ensure appropriate systems design.
Accountants as System
Designers
• The accounting function is responsible for the conceptual system,
while the computer function is responsible for the physical system.
• The conceptual system determines the nature of the information
required, its sources, its destination, and the accounting rules that
must be applied.
Accountants as System Auditors
• External Auditors
• attest to fairness of financial statements
• assurance service: broader in scope than traditional
attestation audit
• IT Auditors
• evaluate IT, often as part of external audit
• Internal Auditors
• in-house IS and IT appraisal services