Notes in Chapter I – Accounting Information System (AIS)

((Notes from the video))

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.

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.

What is a System?
 A group of interrelated multiple components or subsystems that serve a common purpose.

System Decomposition versus System Interdependency

 System Decomposition
 The process of dividing the system into smaller subsystem parts.
 Decomposition is a convenient way of viewing and understanding the relationship among
subsystems.
 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.
 The purpose of an information system is to help an organization manage its business better.

Transactions
 A transaction is a business event.
 Financial transactions
 Economic events that affect the assets and equities of the organization.
 For example, the purchase of an airline ticket.
 Nonfinancial transactions
 All other events processed by the organization’s information system.
 E.g., an airline reservation – no commitment made by the customer.
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.

AIS versus MIS?

AIS Subsystems
 Transaction Processing System (TPS)
 Supports daily business operations with numerous reports, documents, and messages sent
to users.
 General Ledger/Financial Reporting System (GL/FRS)
 Produces financial statements and reports such as the statement of comprehensive
income, the balance sheet, the statement of cash flows, the tax returns, and other records
required by the law.
 Management Reporting System (MRS)
 Produces special-purpose reports for internal use in making decisions.
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).
 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
 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 user’s 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 firm’s day-to-day operations.

Organizational Structure
 The structure of an organization helps 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 separated and independent of the functional areas
maintaining resources.
 Accounting supports these functions with information but does not actively participate.
 Decision makers in these functions require that such vital information be supplied by an
independent source to ensure its integrity.

The Computer Services Function

Organization of IT Function in a Centralized System

Organizational Structure for a Distributed Processing System

Potential Advantages of DDP (Distributed Data Processing)
 Cost reductions in hardware and data entry
 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 (Distributed Data Processing)

 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 – user’s 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

A REA Data Model Example

Enterprise Resource Planning Systems (ERP)
 Is an information system model that enables an organization to automate and integrate its key
business processes.
 ERP breaks down traditional functional barriers by facilitating data sharing, information flows,
and the introduction of common business practices among all organizational users.
 ERP packages are sold to client organizations in modules that support standard processes.

ERP Modules
 Asset Management
 Financial Accounting
 Human Resources
 Industry-Specific Solutions
 Plant Maintenance
 Production Planning
 Quality Management
 Sales and Distribution
 Inventory Management

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 the 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.
“Product Champion”
 Person most knowledgeable, not about the technology, about how the system can work for the
company.
 They understand the application and configuration of the system and how it helps their business
run.

“How to stay up to date with your business software applications?”

 Keep yourself aware, learn what’s going on with your software application.
 Before turning on the system, don’t skip the training.
 Go to user conferences provided by the vendor.

“Reasons to lead an upgrade or replacement of your accounting and ERP software”

 You would realize along the way that despite the system working how it should be, it would be
time to upgrade.

“Software upgrade success factor: Define requirements”

 Determine from a functioning perspective what the software needs to provide for us and when we
need it. Ultimately, evaluate.

“Software upgrade success factor: Organizational readiness”

 This is defined by making sure the organization is ready before implementing the software.
 “Sometimes called “change management.”
General Ledger Accounting (FI-GL)

Purpose
 The main purpose of general ledger accounting is to fully represent external accounting and the
accounts involved in it. Recording all business transactions (primary postings as well as
settlements from internal accounting) in a software system that is fully integrated with all the
other operational areas of a company ensures that the accounting information is complete and
reconciled at all times.

Key Features
 The FI Ledger system offers the following functions:
 Free choice of level: corporate group or company
 Automatic and simultaneous posting of all subledger items in General Ledger Accounting
(reconciliation accounts)
 Simultaneous updating of general ledger and cost accounting areas
 Real-time evaluation of and reporting on current accounting data, in the form of account
displays, financial statements with different financial statement versions and additional
analyses.
 Essentially, the general ledger serves as a complete record of all business transactions. It is the
centralized, up-to-date reference for the rendering of accounts. The individual transactions can be
checked at any time by displaying the original documents, line items, and transaction figures at
various levels, such as:
 Account information
 Journals
  Totals/transaction figures
 Balance sheet/profit and loss evaluations

Cost of Sales Accounting