AIS Chapter 1

C HAPTER 1
Accounting Information Sys-

tems:
An Overview
© 2008 Prentice Hall Business Publishing Accounting Information Systems, 11/e Romney/Steinbart 1 of 85
INTRODUCTION
• Questions to be addressed in this chapter in-
clude:
– What is the meaning of system, data, and informa-
tion?
– What is an accounting information system (AIS)?
– Why is the AIS an important topic to study?
– What is the role of the AIS in the value chain?
– How does the AIS provide information for decision
making?
SYSTEMS, DATA, AND INFORMATION
• A system is:
– A set of interrelated components
– That interact
– To achieve a goal
• Most systems are composed of smaller

subsystems . . .
• . . . and vice versa!
• Every organization has goals.

– The subsystems should be designed to max-
imize achievement of the organization’s goals.
– Even to the detriment of the subsystem itself.
– EXAMPLE: The production department (a
subsystem) of a company might have to
forego its goal of staying within its budget in
order to meet the organization’s goal of deliv-
ering product on time.
• Goal conflict occurs when the activity of a

subsystem is not consistent with another
subsystem or with the larger system.
• Goal congruence occurs when the sub-
system’s goals are in line with the organi-
zation’s goals.
• The larger and more complicated a sys-
tem, the more difficult it is to achieve goal
congruence.
• The systems concept encourages integration

(i.e., minimizing the duplication of recording,
storing, reporting, and processing).
• 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 different from data.

• Information is data that have been orga-
nized and processed to provide meaning
to a user.
• Usually, more information and better in-
formation translates into better decisions.
• However, when you get more information

than you can effectively assimilate, you
suffer from information overload.
– Example: Final exams week!
• When you’ve reached the overload point,
the quality of decisions declines while the
costs of producing the information in-
creases.
Benefits of information
- Cost of producing information
Value of information
Benefits of information may include:

• 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
Costs and benefits of information are often
difficult to quantify, but you need to try when
you’re making decisions about whether to
provide information.
• Characteristics that make information

useful:
– Relevance
It reduces uncertainty by helping you predict
what will happen or confirm what already has
happened.

useful:
– Relevance
– Reliability
It’s dependable, i.e., free from error or bias
and faithfully portrays events and activities.

useful:
– Relevance
– Reliability
– Completeness
It doesn’t leave out anything that’s important.

useful:
– Relevance
– Reliability
– Completeness
– Timeliness
You get it in time to make your decision.

useful:
– Relevance
– Reliability
– Completeness
– Timeliness
– Understandability
It’s presented in a manner you can compre-
hend and use.

useful:
– Relevance
– Reliability
– Completeness
– TimelinessA consensus notion—the nature of the infor-
mation is such that different people would
tend to produce the same result.
– Verifiability

useful:
– Relevance
– Reliability
– Completeness
– Timeliness
You can get to it when you need it and in a
– Verifiability
format you can use.
– Accessibility
• Information is provided to both:

– External users
– Internal users

– External users
– Internal users
• External users primarily use information

that is either:
– MANDATORY INFORMATION—required by a
governmental entity, such as Pension contri-
bution required by the Social Security of-
fice; or
– ESSENTIAL INFORMATION—required to
conduct business with external parties, such
as purchase orders.
• In providing mandatory or essential in-

formation, the focus should be on:
– Minimizing costs.
– Meeting regulatory requirements.
– Meeting minimum standards of reliability and
usefulness.

– External users
– Internal users
• Internal users primarily use discretionary

information.
• The primary focus in producing this infor-
mation is ensuring that benefits exceed
costs, i.e., the information has positive
value.
WHAT IS AN AIS?
• An AIS is a system that collects, records,
stores, and processes data to produce in-
formation for decision makers.
• It can:
– Use advanced technology; or
– Be a simple paper-and-pencil system; or
– Be something in between.
• Technology is simply a tool to create,
maintain, or improve a system.
WHAT IS AN AIS?
Accounting information system -

It includes people, procedures and in-
structions, data, software, information
technology infrastructure, and internal
controls and security measures
WHAT IS AN AIS?
There are six components of an AIS:

1. The people who use the system
2. The procedures and instructions used to collect, process,
and store data
3. The data about the organization and its business activities
4. The software used to process the data
5. The information technology infrastructure, including the
computers, peripheral devices, and network communications
devices used in the AIS
6. The internal controls and security measures that safe-
guard AIS data
WHAT IS AN AIS?
• The functions of an AIS are to:
– Collect and store data about events, re-
sources, and agents.
– Transform that data into information that
management can use to make decisions
about events, resources, and agents.
– Provide adequate controls to ensure that the
entity’s resources (including data) are:
• Available when needed
• Accurate and reliable
WHAT IS AN AIS?
An AIS Processes Data to Produce Information for

Decision Makers
WHY STUDY ACCOUNTING INFORMA-
TION SYSTEMS?
• It’s fundamental to accounting.
• Accounting is an information-providing ac-
tivity, so accountants need to understand:
– How the system that provides that in-
formation is designed, implemented,
and used.
– How financial information is reported.
– How information is used to make deci-
sions.
TION SYSTEMS?
• Other accounting courses focus on how
the information is provided and used.
• An AIS course places greater emphasis
on:
– How the data is collected and trans-
formed.
– How the availability, reliability, and ac-
curacy of the data is ensured.
• AIS courses are not number-crunching
courses.
TION SYSTEMS?
• The skills are critical to career success.
• Auditors need to evaluate the accuracy
and reliability of information produced by
the AIS.
TION SYSTEMS?
• Tax accountants must understand the
client’s AIS adequately to be confident that
it is providing complete and accurate in-
formation for tax planning and compliance
work.
TION SYSTEMS?
• In private industry and not-for-profit, sys-
tems work is considered the most impor-
tant activity performed by accountants.
TION SYSTEMS?
• In management consulting, the design, se-
lection, and implementation of accounting
systems is a rapid growth area.
TION SYSTEMS?
• The AIS course complements other
systems courses.
• Other systems courses focus on design and
implementation of information systems, data-
bases, expert systems, and telecommunica-
tions.
• AIS courses focus on accountability and con-
trol.
TION SYSTEMS?
systems courses.
• AIS topics are tested on the new CPA
exam.
• Makes up about 25% of the Business Environ-
ment & Concepts section of the CPA exam.
TION SYSTEMS?
systems courses.
• AIS topics impact corporate strategy
and culture.
How an AIS Can Add Value to an Or-
ganization?
A well-designed AIS can add value to an organization by:
1. Improving the quality and reducing the costs of products or
services. For example, an AIS can monitor machinery so op-
erators are notified immediately when performance falls out-
side acceptable quality limits. This helps maintain product
quality, reduces waste, and lowers costs.
2. Improving efficiency. For example, timely information makes
a just-in-time manufacturing approach possible, as it requires
constant, accurate, up-to-date information about raw materi-
als inventories and their locations.
ganization?
3. Sharing knowledge. Sharing knowledge and ex-
pertise can improve operations and provide a
competitive advantage.
4. Improving the efficiency and effectiveness of its
supply chain. For example, allowing customers to
directly access inventory and sales order entry
systems can reduce sales and marketing costs,
thereby increasing customer retention rates
ganization?
5. Improving the internal control structure. An AIS with
the proper internal control structure can help pro-
tect systems from fraud, errors, system failures,
and disasters.
6. Improving decision making. Improved decision
making is vitally important and is discussed below
in more detail.
SUMMARY
• What we’ve learned so far:

– The meaning of system, data, and information.
– What an AIS is.
– Why it’s an important topic to study.
– How it provides information for decision making.
End of Chapter One

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C HAPTER 1

Accounting Information Sys-

• Most systems are composed of smaller

• Every organization has goals.

• Goal conflict occurs when the activity of a

• The systems concept encourages integration

• Information is different from data.

• However, when you get more information

Benefits of information may include:

Costs may include time and resources spent:

• Characteristics that make information

• Characteristics that make information

• Characteristics that make information

• Characteristics that make information

• Characteristics that make information

• Characteristics that make information

• Characteristics that make information

• Information is provided to both:

• Information is provided to both:

• External users primarily use information

• In providing mandatory or essential in-

• Information is provided to both:

• Internal users primarily use discretionary

Accounting information system -

There are six components of an AIS:

An AIS Processes Data to Produce Information for

• What we’ve learned so far:

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