Chapter 1- An Overview of Accounting Information System

An Overview of Accounting Information System

CHAPTER 1

Information technology has impacted accounting processes in a very good way. It is difficult to find anybody doing manual accounting with paper and pencil these days. Since accounting is about dealing with business information, any advances in this area will have a positive impact in the accounting department, from the old days of the battery operated calculator to the fast computers of today.

EquipmentThe most obvious impact of technology in accounting is the presence of computers, printers, scanners and faxes. SoftwareThere are accounting programs in the market that are easy to use and affordable, making them very popular with small businesses. Software can help accountants in their daily tasks, such as paying bills, recording transactions and reporting. The program keeps all data organized and in a centralized location.

InternetThe Internet opened many doors and made life easier in many ways, especially in the accounting area, where documents can be shared, research can be conducted and taxes can be filed-all online. Connection to the Internet can be wireless and simple. SecurityIdentifications and passwords limit access to confidential information. Instead of binders and papers lying around, security can be greatly enhanced with the proper computer programs. Using a program, accounting information can be encrypted in a way to prevent unauthorized use, making it quite safe.

EducationBecause of the close synergy between accounting and information systems, many universities have started offering four-year degrees in "accounting and information systems" or "accounting information systems". The accountant of the present and future must be technologically savvy to be relevant, and the universities are preparing new graduates for this challenge.

LEARNING OBJECTIVES Questions to be addressed in this

chapter include:

I. What is the meaning of system, information system and accounting information system?

II. How does the AIS provide information for decision making?

III. What is the roles of accountant in AIS? IV. Why is the AIS an important topic to study?

What Is A System?

What Is A System?

A group of interrelated components or subsystems that serve a common purpose

System VS 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

Multiple Components A system must contain more than one part.

Relatedness A common purpose related the multiple parts of the system. Although each part functions independently of the others, all parts serve a common objective.

Purpose A system must serve at least one purpose, but it may serve several. When a system ceases to serve a purpose, it should be replaced.

What Is A System?

What Is An Information Systems?

The information system is the set of formal procedures by which data are collected, processed into information, and distributed to users.

The information system accepts inputs, called transactions, which are converted through various processes into output information that goes 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.

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Transactions

*What Is An Accounting Information System?

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 – 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

Management Information System

Information System

Accounting Information

System

GLS/FRS TPS MRS

ManagementInformation

System

FinancialManagement

Systems

MarketingSystems

Distribution Systems

Human Resource Systems

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

General Model for AIS

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)

Data Sources

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****

AIS model: 1. Data Collection2. Data Processing3. Data Management4. Information Generation

1. Data Collection

Capturing transaction data Recording data onto forms Validating and editing the data

1. Data Collection

Objective : To ensure that the event data entering the system are valid, complete, and free from material errors.

Should transaction errors pass through data collection undetected, the system may process the errors and generate erroneous and unreliable output. It could lead to incorrect actions and poor decisions by the users.

1. Data Collection

Two rules govern the design of data collection procedure :

I. Relevance. The information system should

capture only relevant data. Only the data that ultimately

contribute to information are relevant.

1. Data Collection

II. Efficiency. Efficient data collection procedures

are designed to collect data only once.

These data can be then be made available to multiple users.

Capturing the same data more than once leads to data redundancy and inconsistency.

2. Data Processing

Classifying Transcribing Sorting Batching

Merging Calculating Summarizin

g Comparing

2. Data Processing

Once collected, data usually require processing to produce information. Tasks in the data processing stage range from simple to complex.

3. Data Management

Storing Retrieving Deleting

3. Data Management

The organization’s database is its physical repository for financial and nonfinancial data.

It can be filling cabinet or a computer disk.

Regardless of the database physical form, we can represent its contents in a logical hierarchy.

3. Data Management

4. Information Generation

Compiling Arranging Formatting Presenting

*****Characteristics of Useful Information

I. Relevance: Serves a purpose

II. Timeliness: No older than the time period of the

action it supports

III. Accuracy: Free from material errors

Characteristics of Useful Information

IV. Completeness: All information essential to a

decision or task is present

V. Summarization: Aggregated in accordance with the

user’s needs

Feedback

Feedback is a form of output that is sent back to the system as a source of data.

Information System Objectives

I. To support the stewardship function of management.

Stewardship refers to management’s responsibility to properly manage the resources of the firm.

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.

Information System Objectives

II. To support management decision making.

The information system supplies managers with information they need to carry out their decision-making responsibilities.

III.To support the firm’s day-to-day operations decision

The information system provides information operations personnel to assist them in the efficient and effective discharge of their daily tasks.

The Accounting Function

The accounting function manages the financial information resource of the firm. In this regard, it plays two important roles in transaction processing.

I. Accounting captures and records the financial effects of the firm’s transaction.

II. The accounting function distributes transaction information to operations personnel to coordinate many of their key tasks.

The Information Technology Function

Distributed DataProcessing

Most companies fall in between.

Centralized Data Processing

Reorganizing the computer services function into small information processingunits that are distributed to end users and placed under their control

All data processing is performed by one or more large computers housed at a central site that serves users throughout the organization.

Centralized Data Processing.

Organization of IT in a Centralized System

Organizational Structure for a Distributed

Processing System

The Evolution of Information System Models

Over the past 50 years, a number of different approaches or models have represented AIS.

Each new model evolved because of the shortcomings and limitations of its predecessor.

1. 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

2. The Flat-File Model

It is the most often associated with so-called legacy system.

The flat-file model describes an environment in which individual data files are not related to other files.

End users in this environment own their data files rather than share them with other users.

When multiple users need the same data for different purposes, they must obtain separate data sets structured to their specific needs.

2. 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

3. The Database Model

An organization can overcome the problems associated with flat files by implementing the database model to data management.

With the organization’s data in a central location, all users have access to data they need to achieve their respective objectives. Access to the data resource is controlled by a database management system (DBMS).

3. The Database Model

4. 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

It’s fundamental to accounting.

WHY STUDY ACCOUNTING INFORMATION SYSTEMS?

• Accounting is an information-providing activity, so accountants need to understand:– How the system that provides that

information is designed, implemented and used.

– How financial information is reported– How information is used to make decisions

It’s fundamental to accounting.


• 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 transformed– How the availability, reliability, and

accuracy of the data is ensured• AIS courses are not number-crunching

courses

It’s fundamental to accounting. The skills are critical to career

success.


• Auditors need to evaluate the accuracy and reliability of information produced by the AIS.


success.


• 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.


success.


• In private industry and not-for-profits, systems work is considered the most important activity performed by accountants.


success.


• In management consulting, the design, selection, and implementation of accounting systems is a rapid growth area.


success. 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.

Documents

Chapter 1- An Overview of Accounting Information System