CHAPTER ONE

An Overview of Accounting Information Systems

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 INTRODUCTION
❑Accounting is process of identifying, recording, classifying, summarizing,
interpreting & communicating financial information for owners, managers &
other interested parties (stakeholders).

❑Information technology refers to hardware, software & related system

components that organizations use to create computerized information
systems.

❑Information system is set of formal procedures by which data are collected,

processed into information, and distributed to users

❑Companies found that their success or failure is often dependent on uses or

misuses of information that knowledge workers manage.

❑AIS exists at intersection of two important disciplines: Accounting & IS 2

 Introduction
❑Accounting Information System (AIS):
❖ Data and processing procedures
❖ Creates needed information for users

❑AIS is study of application of IT to accounting systems.

❑Information technology (IT) affect accounting systems like financial accounting,

managerial accounting, Auditing, taxation.

❑So, We begin study of AIS with recognition that information is business resource.

❑Like other business resources of raw materials, capital & labor, information is vital to
the survival of the contemporary business organization.

❑Every business day information flow to decision makers & other users to meet internal
needs.

❑Information flows out/in from/to organization to external users, such as customers,

suppliers, and stakeholders who have interest in firm. 3
 Systems, Data, and Information
❑A system is set of interrelated components that interact to achieve goal
❑Most systems are composed of smaller subsystems &vice versa!
❑Within accounting profession ‘‘systems’’ refers to ‘‘computer systems.’’
❑Every organization has goals.
❑Subsystems should be designed to maximize achievement of
organization’s goals.
❑Goal conflict occurs w/n activity of subsystem is not consistent with another subsystem
or with larger system.

❑Goal congruence occurs w/n subsystem’s goals are in line with organization’s goals.

❑Larger & more complicated system, more difficult it is to achieve goal

congruence.
➢Systems concept encourages integration (i.e., minimizing
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

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✓Information is different from data.

✓Information is data that have been organized and processed to provide

meaning to user.

✓Usually, more information & better information 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 overload point, quality of decisions declines while

costs of producing information increases.
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 Benefits Of Information
Benefits of information may include:
• Reduction of uncertainty
• Improved decisions
• Improved ability to plan and schedule activities
Cost of producing information:
Costs may include time and resources spent:
• Collecting data
• Processing data
• Storing data
• Distributing information to users
Value of information
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.
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 Characteristics of Useful Information
➢Relevant: the information must be pertaining to the problem at hand.
➢Complete: partial information is often worse than no information.
➢Reliability: erroneous information might lead to disastrous decisions. It’s
dependable, i.e., free from error or bias & faithfully portrays events &
activities.
➢Timeliness: decisions should be based on latest information available,
because what was a fact yesterday might no longer be one today.
➢Accessibility: You can get to it w/n you need it & in format you can use.
➢Verifiability: information should be verifiable w/n d/t knowledgeable &
independent observers can reach consensus that particular
representation is faithful.
➢Understandability: information should be comprehensible to users who
have reasonable knowledge. i.e., Accounting Information.
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 Users of Information
External users and Internal users
❑External users primarily use information that is either:
• Mandatory Information: required by governmental entity, or
• Essential Information: required to conduct business with external
parties, such as purchase orders.
• In providing mandatory or essential information, focus should be
on:
• Minimizing costs.
• Meeting regulatory requirements.
• Meeting minimum standards of reliability and usefulness.
❑Internal users primarily use discretionary information.
• The primary focus in producing this information is ensuring that
benefits exceed costs, i.e., information has positive value. 9
 What Is An Ais?
➢AIS is system that collects, records, stores & processes data to produce
information for decision makers.
➢It can:
• Use advanced technology

• Be simple paper-and-pencil system

• Be something in between.

➢Accounting information systems is (AIS):

➢A set of interrelated activities, documents & technologies designed to;

✓Collect data, process it and report information to diverse groups of

internal, connected and external decision makers of an organization.
 What Is An Ais?
• An accounting information
system is a set of • To a diverse group of:
interrelated:
• Internal decision makers
• Activities
• External decision makers
• Documents
• In all kinds of organizations
• Technologies
• Designed to:
• Collect data
• Process it
• Report information
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 What Is An Ais?
❑Examples of activities ❑Examples of technologies
• Selling goods and services • General ledger software
• Collecting cash • Relational database
❑Examples of documents software
• Invoices
• Purchase orders

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Components Of Accounting Information System
 Components Of Accounting Information System
A) Person ( Stakeholders)
• Starting & ending of every accounting aspects. There is stakeholder
who feeds information into system, collects, analyses, reports & there
is another person(stakeholder) who needs information.
• For example, accountant records various financial information &
presents them for the use of various stakeholders like an owner,
shareholders, creditors, government, etc.
B) Data
• Now, what do AIS records, reports? It is all about various accounting
transactions, events & other monetary items. Any information w/c
does not have monetary base will not be recorded by AIS.
• Data can be anything like sales ledger, customer account, vendors
ledgers, financial reports like P&L & Balance sheet, cash flow statement,
etc. 14
C) Established Procedures
• To perform various function, AIS follows predefined steps, procedures.
So as to ensure consistency, this is one of most basic need of AIS.
• An action may be performed by AIS either with manual intervention
or automatically. This action needs to be instructed to person
processing data or coded in the system in case of automatic systems.
D) Software (ERP)
• It is computer-based program w/c performs stated functions.
• ERP can be described as database software package system w/c
supports business’s processes & operations including manufacturing,
marketing, financial, human resources, etc. It forms one of main
components of AIS.

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E) Information System Infrastructure

• IT Infrastructure can be said consortium of various IT & IS hardware,

tools, accessories. Example, computers, printers, scanners, etc

F) Internal Controls

• Are basic need of every business organization.

• These are tools, checks, procedures, systems adopted by an

organization to ensure integrity of financial information, prevention of
frauds, errors, safeguarding of assets, etc.

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 AIS: At Intersection of Accounting and IS

o Accounting information systems (AISs) stand at crossroads of

two disciplines: ‘‘accounting’’ and ‘‘information systems.’’
o Thus, study of AISs is often viewed as study of computerized
accounting systems.

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 Function of Accounting Information System (AIS)
1) Efficient & effective processing of data about company’s transactions:
❖ Capture transaction data on source documents.
❖ Record transaction data in journals, which present chronological record
of what occurred.
❖ Post data from journals to ledgers, which sort data by account type.
2) To provide management with information useful for decision making:
In manual systems, this information is provided in form of reports that fall
into two main categories:
• Financial statements
• Managerial reports
3) To provide adequate internal controls:
• Ensure that information produced by the system is reliable.
• Ensure that business activities are performed efficiently & in accordance with
management’s objectives.
• Safeguard organizational assets. 18
 Why Study Accounting Information Systems?
1. It’s fundamental to accounting:
• Accounting is all about information-providing activity, so accountants
need to understand:
• How system that provides that information is designed, implemented,
and used.
• How financial information is reported.
• How information is used to make decisions.
• Other accounting courses focus on how information is provided &
used.
• AIS course places greater emphasis on:
• How data is collected and transformed.
• How availability, reliability, and accuracy of data is ensured.
• AIS courses are not number-crunching courses. 19
2. The skills are critical to career success
❖Auditors need to evaluate accuracy & reliability of information
produced by the AIS.
❖Tax accountants must understand client’s AIS adequately to be
confident that it is providing complete & accurate information for tax
planning and compliance work.
❖In private industry and not-for-profit, systems work is considered the
most important activity performed by accountants.
❖In management consulting, design, selection & implementation of
accounting systems is a rapid growth area.
3.The AIS course complements other systems courses
• Other systems courses focus on design & implementation of
information systems, databases, expert systems, & telecommunications.
• AIS courses focus on accountability and control.
4. AIS topics impact corporate strategy and culture 20
 SCOPE OF AN (AIS)
Analyzing Producti
and on and
Overlap of Subsystems
forecasting material
All subsystems of (MIS) are important sales require
and different information is needed ments
to carry out their respective function,
& substantial overlaps in information Marketing Production
system requirements have arose
between these subsystems because
they use data about same underlying
business processes.
estimates
of Human Accounting
Scope of an (AIS) personnel Resources & Finance
needed
(AIS) is subsystem that provides
accounting and financial information, as Figure demonstrates the substantial overlap
well as other information obtained in in the information system requirements of
routine processing of accounting these four subsystems.
transaction. 21
 Uses of (AIS)
Producing External Reports
Businesses use (AIS) to produce special reports that follow required structure established
by FASB. These reports include financial statements, tax returns, etc
Supporting Routine Activities
Managers need (AIS) for handling routine operating activities during firm’s operating
cycle. Computer systems excel at handling repetitive transaction by many accounting
software support these routine functions.
Decision Support
Information is needed for nonroutine decision support at all levels of an organization.
Some information are critical for planning, deciding, marketing functions.
Planning and Control
An information system is required for planning and control activities as well. Historical
data can be extracted from database and used to forecast growth and cash flows.
Planners can use data mining to reveal long-term trends and relationships.
Implementing Internal Control
Internal control includes policies, procedures, and information system used to protect a
company’s assets from loss and to maintain accurate financial data. It is possible to build
controls into a computerized accounting information system to help reach these goals.
 Role of the AIS in the Value Chain
❑Objective of organizations provide value to their customers.

❑What does it mean to deliver value?

❑Although “adding value” is commonly used buzzword, in its genuine sense, it

means making value of finished component greater than 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 and customizing it.

❑Value is provided by performing series of activities referred to as value chain.

These include:

• Primary activities and Support activities

❑These activities are referred to as “line” & “staff” activities respectively.

❑Primary activities include:

✓Inbound logistics: Receiving, storing & distributing materials that

are inputs to organization’s product or service.

❑For pharmaceutical company, this activity might involve handling

incoming chemicals & elements that will be used to make their drugs.

✓ Operations: transforming those inputs into products or

services.
❑For pharmaceutical company, this step involves combining the raw
chemicals and elements with the work of people and equipment to
produce the finished drug product that will be sold to customers.
 Outbound logistics: distributing products or services to customers.

• For pharmaceutical company, this step involves packaging and shipping the
goods to drug stores, doctors, and hospitals.
 Marketing and sales: helping customers to buy organization’s products or
services.

• A pharmacy rep may visit with drug stores, doctors, etc. to inform them about
their products and take orders.
 Service: Post-sale support provided to customers such as repair and
maintenance function.

• A pharmaceutical firm will typically not be repairing it’s product (though

product may be periodically reformulated).

• The pharmaceutical company is more likely to be providing advisory services

to pharmacists, etc. 25
• Support activities include:
❑Firm infrastructure
• Accountants, lawyers & administration. Includes company’s accounting
information system.

❑ Human resources
• Involves recruiting and hiring new employees, training employees,
paying employees, and handling employee benefits.
❑ Technology

• Activities to improve products or services (e.g., R&D, Web site

development).

• For pharmaceutical company, these activities would include research

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and development to create new drugs and modify existing ones.
 ROLE OF THE AIS IN THE VALUE CHAIN

 Purchasing

• Buying the resources (e.g., materials, inventory, fixed assets) needed

to carry out the entity’s primary activities.

• In the pharmaceutical company, the purchasing folks are trying to get

the best combination of cost and quality in buying chemicals,
supplies, and other assets the company needs to run its operations

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 ROLE OF THE AIS IN THE VALUE CHAIN

Smith Supply Co. The linking of these separate value chains creates a larger
Inbound Logistics system known as a supply chain.
Operations
Outbound Logistics
Marketing & Sales Pharmaceuticals, Inc.
Service Inbound Logistics
Operations
Outbound Logistics Customer Pharmacy
Information technology can
facilitate synergistic linkages that Inbound Logistics
Marketing & Sales
improve performance of each Operations
Service
company’s value chain. Outbound Logistics
Marketing & Sales
Service
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 Role of Accountants in Relation to (AIS)

Role of The relation to the (AIS)

accountants

As routine transaction processing becomes automated, accountants are

spending less time on routine functions (such as producing external
reports, decision support, etc). Instead, they are leveraging their
User understanding for strategic decision making and planning.
Accountant as

Accounting managers in larger firms work closely with chief information

officer and they understand content of the database, information needs
Manager of many users, and techniques for internal control. This understanding
make them a valuable member of executive committees.

Experience can give accounting professionals a competitive advantages

in consulting about the acquisition, design, installation, and modification
Consultant of accounting systems. They understand how information systems
support business processes and they know about financial reporting
requirement and internal control risk.

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ROLE OF ACCOUNTANTS IN RELATION TO (AIS)

Role of
The relation to the (AIS)
accountants
We consider the accountant as an
• Internal Auditors
They evaluate various units within organization to determine
whether those units are effectively pursuing their mission.
Internal auditors must understand the business processes and
Accountant as

the information system itself to retrieve data needed for their

Evaluator audits and evaluate internal control.
• External Auditors
They audits financial statements to meet legal requirements.
They must evaluate the reliability of the (AIS) that used to
prepare these financial statement.

Provider of Accountant s use accounting software to provide financial

Accounting and statements for small clients and tax software to provide tax
Tax Services services for their clients.
END OF CHAPTER ONE

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