Accounting Information Systems, 6th edition

James A. Hall

COPYRIGHT 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western
are trademarks used herein under license

Objectives for Chapter 1

Primary information flows within the business

environment
Accounting information systems and management
information systems
The general model for information systems
Financial transactions from non-financial transactions
The functional areas of a business
Two main stages in the evolution of information systems
Three roles of accountants in an information system

Internal & External

Information Flows

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

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.

Information in Business
Information is a business resource

that:
needs to be appropriately managed
is vital to the survival of
contemporary businesses

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.

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

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.

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 organizations
information system
e.g., an airline reservation no commitment by the
customer

Transactions
Financial
Transactions
Nonfinancial

Transactions

Information
System

Information

User
Decision
Making

What is Accounting Information

Systems?
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 firms 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
and 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

AIS versus MIS?

IS

AIS

GLS/FRS

TPS

MIS

MRS

Finance

Marketing

Production

HRS

Distribution

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

The General AIS Model

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.

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

1. Data Collection
Capturing transaction data
Recording data onto forms

Validating and editing the data

2. Data Processing
Classifying
Transcribing
Sorting
Batching

Merging
Calculating
Summarizing
Comparing

3. Data Management
Storing
Retrieving
Deleting

4. Information Generation
Compiling
Arranging
Formatting
Presenting

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
users needs

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 firms day-to-day operations

Organizational Structure
The structure of an organization helps to allocate
responsibility
authority
accountability
Segmenting by business function is a very common

method of organizing.

Functional Areas
Inventory/Materials Management
purchasing, receiving and stores

Production
production planning, quality control, and

maintenance
Marketing
Distribution
Personnel
Finance
Accounting
Computer Services

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.

The Computer Services Function

Distributed Data
Processing

Most companies fall in between.

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

Centralized Data
Processing
All data processing
is performed by
one or more large
computers housed
at a central site
that serves users
throughout the
organization.
Primary areas:
database administration
data processing
systems development
systems maintenance

Organization of Computer Services Function in a

Centralized System

Organizational Structure for a Distributed Processing

System

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

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

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

The Evolution of IS Models: 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
Task-Data Dependency - users inability to
obtain additional information as needs change
Data Integration - separate files are difficult to
integrate across multiple users

The Evolution of IS Models: The Database Model

An REA Data Model Example

R
Inventory

E
M

Line items

Sales

1
Party to

Sales
person

M
1

Pays for

Made to

Customer
1

M
M

Cash

Increases

Cash
Collections M

Received
from
Received
by

1 Cashier
34

REA Model
The REA model is an accounting framework for

modeling an organizations
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