Unit 1: Overview of Accounting Information Systems

Learning outcomes:
After studying this chapter, you should be able to:
 Explain the meaning of accounting, information system and accounting information
systems.
 Describe the major business processes present in most companies.
 Explain the role AIS plays in a company’s value chain.
 How an AIS can add value to an organization.

1.1 Terminologies
Accounting can be defined as the art or process of recording, classifying and summarizing in a
significant manner, and in terms of money, transactions and events which are of a financial
character, and interpreting the results thereof.
Recording phase: involves the routine and mechanical process of writing business transactions
and events in the books of accounts – also called books of original entry or simply journals - in a
chronological order in accordance with the entity’s and other established accounting rules and
procedures.

Classifying phase: involves sorting and grouping of similar transactions into their respective
classes by posting them into a ledger. A ledger is a group of accounts of a similar nature An
account is the basic record of accounting which measures increases or decreases in a particular
asset, liability, income or expense account.

Summarizing phase: this involves the preparation of financial statements or reports. It is usually
done periodically e.g. monthly, annually etc.

Interpretation: this refers to the analysis of the accounting information. It involves

communication of financial information to help users in making economic decisions.

An information system is the set of formal procedures by which data are collected, processed
into information and distributed to various users. The information system accepts input, called
transactions which are converted through various processes into output that go to various users.
Transactions can be classified into financial transaction or nonfinancial transaction.

A financial transaction is an economic event that affects assets and equities of a company. The
transaction is shown in the books of the company in monetary terms. Examples include sale of
inventory to customer, paying creditors and so on.

Nonfinancial transactions are events that do not meet the definition of a financial transaction. An
example is adding a new customer to a customer list.

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An accounting information system comprises the processes, procedures, and systems that
capture accounting data from business processes; record the accounting data in the appropriate
records; process the detailed accounting data by classifying, summarizing, and consolidating;
and report the summarized accounting data to internal and external users.

The accounting information system is comprised of: people who use the system; procedures and
instructions used to collect, process, and store data; data about the organization and its business
activities; software used to process the data; information technology infrastructure, including the
computers, peripheral devices, and network communications devices; internal controls and
security measures that safeguard AIS data. Accountants interact with AIS in order to produce
accounting information, therefore AIS knowledge and skills are critical to accountant’s career
success. For example

i Auditors need to evaluate the accuracy and reliability of information produced by the AIS
ii Tax accountants must understand the client’s AIS adequately to be confident that it is
providing complete and accurate information for tax planning and compliance work.

The traditional AIS captured financial data. Non-financial data was captured in other,
sometimes-redundant systems. Enterprise resource planning (ERP) systems are designed to
integrate all aspects of a company’s operations (including both financial and non-financial
information) with the traditional functions of AIS.

Any system that supports financial and accounting activities in any organization can be
referred as an accounting information system or AIS. However, in practice, terms such
as accounting system, Enterprise accounting system, financial system or general ledger
system can be used.

Task1; Explain how AIS is related with MIS (management information systems)

1.2 The types of accounting information systems

The size of the organization, the nature of its processes, the extent of computerization, and the
philosophy of management all affect the choice of AIS. They can be categorized into 3: Manual
systems; Legacy systems and Modern, integrated IT systems.

Manual systems: Even though manual systems are often used by small organizations, large and
medium sized organisations with computerized systems may rely on some manual record
keeping. It is important to examine manual processes in accounting information systems. An
entirely manual system would require paper based source documents (employee time cards,
purchase orders, sales orders, and cash receipts), turnaround document, general ledger, special
journals and subsidiary ledgers. To record in these journals and ledgers, there must be
established processes that employees follow in collecting source documents and entering
information from source documents into the appropriate journals and ledgers. The hardware and

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software are not the entire accounting information system. In addition to the hardware and
software, the human processes that capture, record, and process information are an integral part.

Legacy systems: Legacy systems employ older technology in which the organization has a
considerable investment in these systems; hence many companies are reluctant to abandon their
legacy systems because they were customized to meet the specific needs of the organization and
the process to replace them is expensive and time consuming Accounting software systems
running on such computers are often written in programming languages that are nearing
obsolescence, such as COBOL, RPG, Basic, and PL1. List the advantages and disadvantages to
maintaining these older systems.

Modern, integrated systems: In modern AIS environment, numerous accounting software

systems are available for purchase that integrates many or all of the business processes within an
organization. Purchased systems are modified by the IT staff to meet specific needs of the
organization. New programs sold by software development companies are more user friendly
than legacy accounting systems, typically utilize the latest technology in data storage and
Internet interfaces, and offer powerful, technologically advanced systems that serve as an
important part of the accounting information system. These modern, integrated systems usually
run in one of two types of computer architectures, or models. One model is a client–server
model, and the other is cloud computing.

1.3 Business Processes

To understand an enterprise system, first you must understand the underlying business and
business processes. Business processes are related activities performed by an enterprise to create
value by transforming input into output.

A business process is a prescribed sequence of work steps performed in order to produce a

desired result for the organization. A business process is initiated by a particular kind of event
and has a well‐defined beginning and end. Business process such as completing a sale,
purchasing raw materials, paying staff, and paying suppliers have either a direct or an indirect
effect on the financial status of the organization. Completing a sale directly increases cash or
other assets, whereas paying staff directly reduces cash or increases liabilities. Therefore, it is
important for the accounting information system to capture and record accurately all business
transactions.

Inputs Processes Outputs

Data from internal Sort/organize/calculate Information for internal
and external sources and external decisions
makers

Fig 1.1: Accounting Information System Overview

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1.3.1 Input of Accounting Data in a business process

As the steps in a business take place, accounting data is generated that must be captured and
recorded in the accounting information system. Input methods used include source documents
and keying, bar coding, point of sale systems, EDI, and e-business.

Source documents and keying: Accounting data is initially captured and recorded on a source
document which is normally pre-printed, sequentially pre-numbered and with established format
to capture data to ensure no duplicate or missing source documents and that all source documents
are accounted for. A manual or automated sales order is an example of a source document. The
sales order would include the customer, terms of sale, items to be purchased by the customer,
and the quantity and cost of each item. Keying involves entering (in-putting) the information
from the sales order into the information system. What are the disadvantages of this method of
input?

Bar codes: This method of inputting data is not a manual keying of data, but a machine reading
data by the bar code scanner. A bar code is a printed code consisting of a series of vertical,
machine-readable, rectangular bars and spaces that vary in width and are arranged in a specific
way to represent letters, numbers, and other human-readable symbols. As a customer checks out
through the cash register, the bar codes are scanned on the items purchased, prices are
determined by accessing inventory and price list data, sales revenue is recorded, and inventory
values are updated. This method eliminates the manual steps of writing the data on a source
document and then later keying the data into software. Eliminating these manual processes
reduces the time, cost, and errors of inputting data. The most well-known use of bar codes, the
point of sale system, is in retail sales.

1.3.2 Processing Accounting Data

Processing accounting data involves calculations, classification, summarization, and

consolidation. In manual accounting systems, this processing occurs through the established
manual methods and the recording, posting, and closing steps in the journals and ledgers.
Automated processing can be accomplished by batch processing or online and real-time
processing.

Batch processing: This method requires that all similar transactions are grouped together for a
specified time, and then this group of transactions is processed together as a batch. Batch
processing is best suited to applications having large volumes of similar transactions that can be
processed at regular intervals e.g. the payroll system. For a payroll system, all time cards are
grouped together for instance, a one-week period, and all payroll processing then would take
place on the entire set, or batch, of time cards. Batch processing is best suited for business
processes where the transactions are stored in sequential access files. Discuss the merits and
demerits of batch processing in a university set up.

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Online and Real-Time Processing: It is utilized by modern and integrated systems. With online
processing, transactions are not grouped into batches; rather, each transaction is entered and
processed individually. Some online processing systems are also real-time processing systems.
Real-time processing means that the transaction is processed immediately, and in real time, so
that the output is available immediately.

Online processing is best suited to applications in which there is a large volume of records, but
only a few records are needed to process any individual transaction. Thus, online processing
requires that data from the related business processes be stored in random access files. Real-time
processing usually requires a database and database management software systems.

1.3.3 Outputs from the AIS Related to Business Processes

i Trading partner documents such as checks, invoices, and statements
ii Internal documents
iii Internal reports
iv External reports

These outputs may be in electronic or paper form.

1.3.4 Documenting Processes and Systems

Recall from your MIS course that the old adage that “a picture is worth a thousand words” is true
for users documenting processes and systems. A picture, or chart, of the system is a concise,
complete, and easy to understand way to analyze a process or system. The various types of
popular pictorial representations of processes and systems used in businesses today include the
following:

i Process maps
ii System flowcharts
iii Document flowcharts
iv Data flow diagrams
v Entity relationship diagrams (ER diagrams)

1.4 Business processes or transaction cycles

Transaction cycles can be categorized as:
i. The revenue cycle, Activities associated with selling goods and services in exchange for
cash or a future promise to receive cash.
ii. The expenditure cycle, Activities associated with purchasing inventory for resale or raw
materials in exchange for cash or a future promise to pay cash.
iii. The financing cycle, Activities associated with raising money by selling shares in the
company to investors and borrowing money as well as paying dividends and interest.
iv. The production or conversion cycle, Activities associated with using labor, raw
materials and equipment to produce finished goods.

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 v. The human resources/payroll cycle, Activities associated with hiring, training,
compensating, evaluating, promoting, and terminating employees.
vi. The general ledger interfaces various transaction cycles to generate information for both
management and external parties.

1.5 The role of AIS in a firm’s value chain

Although “adding value” is a commonly used buzzword, in its genuine sense, it means making
the value of the finished component greater than the sum of its parts. In a value chain, primary
and support business activities are linked together and value is added as a product passes through
the chain.

It may mean; making it faster, making it more reliable, providing better service or advice,
providing something in limited supply (like O-negative blood or rare gems), providing enhanced
features customizing it.

Primary activities are value chain activities that produce, market, and deliver products and
services to customers and provide post-delivery service and support. They include

i. Inbound logistic consists of receiving, storing, and distributing the materials an

organization uses to create the services and products it sells. For example, an
automobile manufacturer receives handles, and stores steel, glass, and rubber.
ii. Operations activities transform inputs into final products or services. For example,
assembly line activities convert raw materials into a finished car.
iii. Outbound logistics activities distribute finished products or services to customers. An
example is shipping automobiles to car dealers.
iv. Marketing and sales activities help customers buy the organization’s products or
services. Advertising is an example of a marketing and sales activity.
v. Service activities provide post-sale support to customers. Examples include repair and
maintenance services.

Support activities are value chain activities such as firm infrastructure, technology, purchasing,
and human resources that enable primary activities to be performed efficiently and effectively.
These activities are sometimes referred to as “line” and “staff” activities respectively.

i. Firm infrastructure; Accountants, lawyers, and administration that enable a company

to function. The AIS is part of a firm infrastructure.
ii. Human resources activities include recruiting, hiring, training, and compensating
employees.
iii. Technology activities improve a product or service. Examples include research and
development, investments in IT, and product design.
iv. Purchasing activities procure raw materials, supplies, machineries, and the buildings
used to carry out the primary activities.

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The linking of these separate value chains creates a larger system known as a supply chain.
Information technology can facilitate synergistic linkages that improve the performance of each
company’s value chain.

Primary Activities

Inbound Operations Outbound Marketing P

Service
logistics logistics and sales R
O
F
Firm Infrastructure Human Resource Management I
T
Procurement Technology

Support Activities

Fig 1.2 Porter’s Value Chain Model

https://strategicmanagementinsight.com/tools/img/value-chain-model.svg

a.6 Value of AIS to an Organization

A well designed AIS can add value to an organization by:

i. Reducing cost and ensuring quality of products and services. AIS can be used to
monitor machinery such that when performance falls outside acceptable quality limits
relevant personnel are immediately notified hence maintaining product quality, waste
reduction, and lower production costs.
ii. Improves efficiency. For instance, timely information makes a just-in-time
manufacturing approach possible, as it requires constant, accurate, up-to-date
information about raw materials inventories and their locations.
iii. Sharing knowledge. Sharing knowledge and expertise can improve operations and
provide a competitive advantage. For example, accounting firms use their information
systems to share best practices and to support communication between offices.
Employees can search the corporate database to identify experts to provide assistance
for a particular client; thus, an accounting firm’s international expertise can be made
available to any local client.
iv. Improving the efficiency and effectiveness of its supply chain. For example, allowing
customers to directly access inventory and sales order entry systems can reduce sales
and marketing costs, thereby increasing customer retention rates.
v. Improving the internal control structure. AIS with the proper internal control structure
can help protect systems from fraud, errors, system failures, and disasters.

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 vi. Improving decision making. Improved decision making is vitally important and is
discussed below in more detail.

1.7 Ethical considerations

Ethical consideration is at the heart of accounting information systems. Detecting fraud may be
difficult in a computerized environment, especially when there are a limited number of people
responsible for maintaining the computer systems. Accountants must recognize the opportunities
for unethical behavior within computerized processes, and must carefully monitor those systems.
Note: Be familiar with suspicious activity reporting.

1.8 Problems

1. Think about your most recent appointment at the dentist’s office. Describe the business
processes that affected you as the patient/customer. In addition, describe the administrative and
accounting processes that are likely to support this business.

2. Describe the purpose of each of the following parts of a manual system:

a. Source document
b. Turnaround document
c. General ledger
d. General journal
e. Special journal
f. Subsidiary ledger

3. Using the Internet or other research tool, search for the term ‘accounting information systems’.
From your results summarize (three paragraphs) how accounting has changed since the advent of
computers.

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