Chapter 1

The Information
System:
An Accountant’s
Perspective

Accounting Information Systems, 7e

James A. Hall

Hall, Accounting Information Systems, 7e

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 Foreword

This course focuses on the fundamental concepts and

information related to accounting system. Emphasis is
on the effect of technological and systematic in the
accounting procedures and different software. The
course covers, as well, a variety of topics to illustrate
the unique nature and importance of information system
in accounting including system flowcharts, accounting
cycle within operations, ethics, internal control audit and
accounting software.

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 Objectives for Chapter 1
· Understand the primary information flows within the
business environment.
· Understand the difference between accounting
information systems and management information
systems.
· Understand the difference between Financial
transactions and non-financial transactions.
· Know the general model for information systems.
· Be familiar with the functional areas of a business.
· Understand the stages in the evolution of information
systems.
· Understand the relationship between the three roles of
accountants in an information system.
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 Internal & External Information Flows

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 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

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 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.

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 Information in Business

 Information is a business
resource that:
 needs to be appropriately
managed
 is vital to the survival of
contemporary businesses

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 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.

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 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

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 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.

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 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

Financial

Transactions Information User

Nonfinancial System Decisions
Information
Transactions

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 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.
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 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

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Hall, Accounting Information Systems, 7e 15
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 AIS versus MIS?

IS

AIS MIS

Financial Human
Marketing Distribution
GLS/FRS TPS MRS Management Resource
Systems Systems
Systems Systems

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 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

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 General Model for AIS

Figure 1-5

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 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

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 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

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 1. Data Collection

 Capturing transaction data

 Recording data onto forms
 Validating and editing the data

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 2. Data Processing

• Classifying • Merging
• Transcribing • Calculating
• Sorting • Summarizing
• Batching • Comparing

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 3. Database Management

 Attributes
 Records
 File

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Hall, Accounting Information Systems, 7e 24
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 4. Information Generation

 Compiling
 Arranging
 Formatting
 Presenting

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 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
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 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
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 Organizational Structure

 The structure of an organization helps to allocate

 responsibility
 authority
 accountability
 Segmenting by business function is a very
common method of organizing.

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Hall, Accounting Information Systems, 7e 29
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 Functional Areas
 Inventory/Materials Management
 purchasing, receiving and stores
 Production
 production planning, quality control, and
maintenance
 Marketing
 Distribution
 Personnel
 Finance
 Accounting
 Computer Services
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Hall, Accounting Information Systems, 7e 31
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 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.
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 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
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 Organization of IT Function in a
Centralized System

Figure 1-10
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 Organizational Structure for a Distributed
Processing System

Figure 1-11
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 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

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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

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 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

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 The Evolution of IS Models:
The Flat-File Model

Figure 1-12

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 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
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 The Evolution of IS Models: The Database
Model

Figure 1-13

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 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
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 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.
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 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.

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 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.

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 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
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 Discussion Questions
1. Discuss the differences between internal and external users of information and their
needs and demands on an information system. Historically, which type of user has the
firm catered to most?
2. Comment on the level of detail necessary for operations management, middle
management, and stockholders.
3. Distinguish between financial and nonfinancial transactions. Give three examples of each.
4. Why have re-engineering efforts been made to integrate AIS and MIS?
5. Do you think transaction processing systems differ significantly between service and
manufacturing industries? Are they equally important to both sectors?
6. Discuss the difference between the financial reporting system and general ledger system.
7. Discuss how the elements of efficiency, effectiveness, and flexibility are crucial to the
design of an information system.
8. Discuss what is meant by the statement, ‘‘The accounting system is a conceptual flow of
information that represents the physical flows of personnel, raw materials, machinery, and
cash through the organization.’’
9. Discuss why it is crucial that internal auditors report solely to the uppermost level of
management (either to the chief executive officer or the audit committee of the board of
directors) and answer to no other group.
10. Discuss how conceptual and physical systems differ and which functions are responsible
for each of these systems.

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