INTRODUCTION TO ACCOUNTING INFORMATION

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OVERVIEW OF ACCOUNTING INFORMATION SYSTEM

Module 001

Overview of Accounting Information

LEARNING OBJECTIVES (LO)

After completing this module, the student is expected to:

1. Define information system

2. Familiarize the information system framework
3. Differentiate the different types of information system
4. Discern the difference between data and information
5. Understand the objectives of information system
6. Determine the responsibility, authority, and accountability through the
organization

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LO 1
Information System

As defined by James Hall in his book, “Accounting Information System”, information system is the
set of formal procedures by which data are collected, processed into information, and distributed
to users. These users can be both internal and external users.

Internal users

These are the users of financial information who are working within the company and use
financial information primarily on planning, controlling and making decision for the
betterment of the company’s operations.

They are the company’s management itself – Senior/top-level management, middle level
management and low-level management.

External users

These are the users of financial information who are outside of an organization and do not
directly run its operations but uses financial information of the company to make decisions
particularly if decisions involve investing or granting credit to the company.

As a review of your basic accounting course, accounting is defined as a systematic process of

providing financial information of an organization or unit that is intended to be useful in making
decisions.

Given the similarities of information system and accounting in terms of that that final output is to
be used by the users, the question now is, what is their difference and what do they cater to the
information users?

Information system comprises both financial and nonfinancial information. Thus, accounting is
just a subset of information system since accounting caters primarily those users who are in need
of financial information.
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OVERVIEW OF ACCOUNTING INFORMATION SYSTEM

Information System Framework

LO 2

Information
Sytem (IS)

Accounting Management
Information Information
Sytem (AIS) Sytem (MIS)

Financial
Transaction Financial Distribution Human Resource
Management Marketing System
Processing Sytem Reporting System System System
Systems

Revenue Expenditure
Processing Processing
System System

Cash
Cash Receipts Purchases Payroll
Sales Processing Disbursement
Processing Processing Processing
System Processing
System System System
System

As illustrated on this framework, it can be inferred that the information system is comprised of the
accounting information system and management information system. Both of which provides
financial and nonfinancial information that is being used both by the internal and external users.

Under the accounting information system is the transaction processing system and the financial
reporting system. The transaction processing system is the primary focus of this course,
Introduction to Accounting Information. Financial reporting system has been already discussed in
the basic accounting course and further elaborated on the higher accounting courses. Nonetheless,
this course will give a review on that matter.

As to the management information system, its subsets namely, Financial Management Systems,
Marketing System, Distribution System, and Human Resource System, are being discussed on the
other courses.

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 Nonetheless, it is still important to differentiate the accounting information system to
management information system, so as to give an overview on what these information systems
are all about.

Types of Information System

LO 3

1. Accounting Information System

2. Management Information System

Accounting Information System (AIS) is a system of collecting and processing financial and
nonfinancial data that are used by both internal and external users, which is later on being
used in coming up with decisions.

Management Information System (MIS) is a system of processing nonfinancial data which

are not usually covered in the nonfinancial data processing of AIS.

Financial Transactions
This is an economic event that has an effect on the company’s assets, liabilities
and/or equities. These types of transactions are usually measured in monetary
terms.

Instances of these transactions include but not limited to the following:

• sale of product to customers,

• collection of receivable accounts,
• purchase of goods,
• payment of payable accounts,
• disbursements for payment of other expenses

Nonfinancial Transactions

These types of transactions do not affect the company’s assets, liabilities and/or
equities and are not measured in monetary terms.

Instances of these transactions include but not limited to the following:

• analyzing the creditworthiness of customer,

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OVERVIEW OF ACCOUNTING INFORMATION SYSTEM

• adding a new supplier to the existing list of suppliers

LO 4
Difference between Data and Information

Many of us use “data” and “information” interchangeably. In fact, these two terms are distinct with
each other.

Data
These are facts that are not yet been organized and processed.
• Data Sources
▪ These are simply the sources of data which could either be a primary data
or a secondary data
▪ Primary data refers to the first hand data that are collected originally
from its main source.
▪ Secondary data refers to the data that are collected in behalf of the
primary user of data. Examples of these are data gathered by the support
staffs that are processed by the manager like inquiry on bank deposit
interest rate.

• Data Collection
▪ It is a process of gathering data, of which is believes to be the first
operational stage in the information system.
▪ This process must ensure that the data gathered are valid, complete, and
free from material errors.
▪ This is usually done through interviews, observations, inspection of
documents and records

• Data Processing
▪ It is the conversion of raw data to useful information

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 Information

These are the organized and processed data of which users, particularly decision makers,
based their actions and decision.

LO 5
Objectives of Information System (excerpted from Accounting Information System by James Hall)

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.
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OVERVIEW OF ACCOUNTING INFORMATION SYSTEM

LO 5
Flow of Responsibility, Authority, and Accountability through the
Organization(excerpted from Accounting Information System by James Hall)

The figure above depicts an organizational structure that shows the flow of delegation of
responsibility, authority, and accountability throughout the organization.

Responsibility

▪ According to Davis, "Responsibility is an obligation of individual to perform

assigned duties to the best of his ability under the direction of his executive
leader.
▪ Characteristics of Responsibility:
• It is a continuing obligation of a subordinate to perform the duty
assigned.
• It always originates from the superior then passed down to subordinates.
• It cannot be delegated.

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 • An individual accepting responsibility is accountable for all of his actions

Authority

▪ "Authority is the right to give orders and the power to exact obedience." (Henri
Fayol).
▪ It must be clearly defined. Without clear definition, there will be confusion. An
organizational chart should clearly define the paths, while job descriptions
clearly define the full scope of the authority for each position. (Tom Luby).
▪ Requires the ability to give orders properly.
▪ Every individual, from the president of the company down to the floor sweepers,
must know the limits and scope of the authority of his or her position. These
limitations—this scope— must never be circumvented. When an individual
circumvents the authority of any other, he effectively relieves that individual of
all responsibility and accountability for an unspecified length of time.

Additionally, such circumvention harms the morale of that individual. The side
effects will spread downwards to the individual’s subordinates.

▪ Authority may be delegated along with equal and corresponding responsibility.

The extent of such delegation must be clearly spelled out in writing. Authority
does not imply autocracy, but it does require the use of orders and instructions.

Accountability

▪ Accountability arises due to the use of authority.

▪ It is the obligation of an individual to account for its activities, accept
responsibility for them, and to disclose the results in a transparent manner.
▪ Responsibility implies accountability. Accountability is a two-way street for
every manager. Each will be held accountable by a supervisor, who will hold a
subordinate accountable. To avoid blame, the supervisor/manager must exercise
accountability over their subordinates, and it is a must to do it consistently in
order for the departments to operate effectively.
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OVERVIEW OF ACCOUNTING INFORMATION SYSTEM

To illustrate, reflect on this situation:

Verne Harnish, founder and CEO of Gazelles International Gazelle’s CFO has
accountability for cash – she literally “counts” and reports it to the team
daily. And she’s accountable for alerting the team if she senses any potential
issues now or later in the year.

In turn, Harnish, as CEO, maintains the authority over cash, signing off on
major expenditure and investments.

And everyone in the company has responsibility for making sure that cash is
spent wisely and that deals/contracts are structured so they help generate
instead of absorbing cash as Gazelles continues to scale up.

In an effective, successful and well-positioned business, everyone is responsible for their assigned
tasks, but only one person is accountable to the results or progress of those tasks, and only
specific, clearly-identified people have the authority to make decisions around these tasks.

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FUNCTIONAL SEGMENTATION

In order to properly delegate the responsibility, authority, and accountability throughout the
organization, it is always recommended that business functions should be segmented in order to
properly organize the task and duties of personnel, from the top positions down to the lower level
positions.

Depicted below is a diagram that shows how a business function can be segmented.
(excerpted from Accounting Information System by James Hall)
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OVERVIEW OF ACCOUNTING INFORMATION SYSTEM

Materials Management

The objective of materials management is to plan and control the materials inventory of the
company. As depicted above, materials management has three sub-functions:

1. Purchasing is responsible for ordering inventory from vendors when inventory levels fall to
their reorder points.

2. Receiving is the task of accepting the inventory previously ordered by purchasing. Receiving
activities include counting and checking the physical condition of these items.

3. Stores takes physical custody of the inventory received and releases these resources into the
production process as needed.

Production
Production activities occur in the manufacturing processes in which raw materials, labor, and
plant assets are used to create finished products.

Activities herein are classified as:

(1) primary manufacturing activities

(2) production support activities

Primary manufacturing activities shape and assemble raw materials into finished products.

Production support activities ensure that primary manufacturing activities operate efficiently
and effectively. These include, but are not limited to, the following types of activities:
▪ production planning
- involves scheduling the flow of materials, labor, and machinery to efficiently
meet production needs
▪ quality control
- monitors the manufacturing process at various points to ensure that the
finished products meet the firm’s quality standards

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 ▪ maintenance
- keeps the firm’s machinery and other manufacturing facilities in running
order

Marketing

The marketing function deals with the strategic problems of product promotion, advertising, and
market research.

Distribution

Distribution is the activity of getting the product to the customer after the sale.

Personnel

The objective of the personnel function is to effectively manage competent and reliable employees
since employees are viewed as valuable resource to a business.

Finance

The finance function manages the financial resources of the firm through banking and treasury
activities, portfolio management, credit evaluation, cash disbursements, and cash receipts.

Accounting

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

First, accounting captures and records the financial effects of the firm’s transactions.

Second, the accounting function distributes transaction information to operations personnel to

coordinate many of their key tasks.
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OVERVIEW OF ACCOUNTING INFORMATION SYSTEM

Accounting activities that contribute directly to business operations include inventory control,
cost accounting, payroll, accounts payable, accounts receivable, billing, fixed asset accounting, and
the general ledger.

Information Technology

Like accounting, the IT function is associated with the information resource. Its activities can be
organized in a number of different ways. One extreme structure is the centralized data processing
approach; at the other extreme is the distributed data processing approach.

Centralized Data Processing

Under the centralized data processing model, all data processing is performed by one or
more large computers housed at a central site that serve users throughout the
organization. Illustrated below is this approach in which IT activities are consolidated and
managed as a shared organization resource. (excerpted from Accounting Information System by James Hall)

Distributed Data Processing

This model involves reorganizing the IT function into small information processing units
(IPUs) that are distributed to end users and placed under their control. IPUs may be
distributed according to business function, geographic location, or both. (excerpted from Accounting

Information System by James Hall)

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END OF MODULE
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OVERVIEW OF ACCOUNTING INFORMATION SYSTEM

References and Supplementary Materials

Books and Journals

1. Hall, James A (2016). Accounting Information System (9th ed). Boston City: Cengage
Learning.
2. Tom Luby; Understanding the relationship between authority, responsibility and
accountability; World Fence News; April 2015 Issue;2015

Online Supplementary Reading Materials

1. Words With Meaning – The Importance of Definitions ;
https://ssbg.co.nz/about/media/words-with-meaning-the-importance-of-
definitions/ ; July 7, 2018.

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