ACCOUNTING INFORMATION SYSTEMS

Introduction

Definitions and Key terms

Accounting information system

 An accounting information system is a collection of data and processing
procedures that creates needed information for its users.
 Is a unified structure that employs physical resources and components to
transform economic data into accounting information for external and internal
users. To that end an accounting system is used to identify, analyze, measure,
record, summarize and communicate relevant economic information to interested
parties.

 Collection of data and processing procedures

 Creates needed information for users

 The AIS today should be: an enterprise-wide information system; focused on

business processes

 AIS don’t just support accounting and finance business processes, they often
create information that is useful to non accountants.

Let us examine in greater detail what this definition really means. For our discussion,
we’ll examine each of the words in the term ‘‘accounting information systems’’
separately.

ACCOUNTING INFORMATION
ACCOUNTING
INFOR. SYSTEMS SYSTEMS

Accounting – is data identification, collection and storage process as well as an

information development, measurement and communication process. It is a principal
way of organizing and reporting financial information. Accounting is an information
system since it collects, records, stores and processes accounting and other data to
produce information for decision makers.

Accounting could be identified into 3 components, namely information system,

“language of business” and source of financial information.

Information – is a valuable data processing that provides a basis for making decisions,
taking action and fulfilling legal obligation. In other words, information is data that have
been organized and processed to provide meaning and improve the decision making
process.

The combination of the 3 words Accounting Information Systems indicate an integrated

framework within an entity (such as a business firm) that employs physical resources (ie
materials, supplies, personnel, equipment, funds) to transform economic data into
financial information for:

 Conducting the firm’s operations and activities and,

 Providing information concerning the entity to a variety of interested users.

Indeed, the combination or interaction between human, technology and techniques

would permit an organization to administer its knowledge effectively.

Information System – is a framework in which data is collected, processed, controlled

and managed through stages in order to provide information to users. It evolves
overtime and becomes more formalized as a firm grows and become more complex. It
can be a manual or computerized system.

Value of information

Benefits > Costs

 Reduce Uncertainty  Time & Resources

 Improve Decisions -Produce Information
 Improve Planning -Distribute Information
 Improve Scheduling
Information needs and business processes

A business process is a set of related, coordinated and structured activities and tasks
that are performed by a person or by a computer or a machine and that help accomplish
a specific organizational goal. To make effective decisions, organizations must decide
what decisions they need to make, what information they need to make the decisions
and how to gather and process the data needed to produce information.

Business Processes Key decisions Information needs

Acquire building & Size of building, rent or buy, Building & equipment
equipment location, how to depreciate prices, capacity needs, tax
tables and depreciation
regulations
Collect payments from What terms of credit to Customer account status,
customers offer, how to handle cash accounts receivable aging
receipts report,
Accounts receivable
records
Hire & train employees Experience requirements, Job descriptions, applicant
how to train employees, job history & skills
how to assess integrity &
competence of applicants
The Accounting Information System & its Sub systems

Objectives of AIS

 Central information collection

AIS collect information from various purposes in a business. Large organizations
often use this system to gather and organize financial and other information from
multiple business departments and divisions. This system allows for the
electronic transference of information from many sources into a central location.
 Improving the flow of work
Improving the flow of work in individual departments often gets a boost by the
implementation of an accounting information system. Source documents such as
 invoices, purchase orders, employee expense reports, time cards for payroll
input, bills and asset acquisition forms, must find their way from the originator to
the accounting department.

 to sustain and reinforce organisational operations – that is transaction

processing management/support day to day operation,
 to support decision making by internal decision makers and ensure the objective
transformation of economic/financial data into accounting information – that is
information management,
 to discharge obligations relating to stewardship and control the acquisition,
management and disposal of organisational resources – that is internal systemic
control, and
 to fulfil legal, social and political responsibilities and encourage alignment with
extant regulatory
requirements – that is external systemic control.

Uses of AIS

 Producing external reports

 Supporting routine activities
 Decision support
 Planning and control
 Implementing internal control

Components of an AIS

1. People – users who operate on the system ( human resources & personnel)
2. Procedures & instructions – policies/processes involved in collecting,
processing and storing data.
3. Data – data that is related to the organization and its business processes.
4. Software – application and programs that process data.
5. Information technology infrastructure – the actual physical devices and
systems that allows the AIS to operate and perform its functions ( hardware
components: input & output devices)
6. Internal controls & security measures – procedures and or policies
implemented to safeguard the AIS data.

These six components enable an AIS to fulfill three important business functions

 Collect and store data about organizational activities, resources and personnel.
  Transform data into information so management can plan, execute, control and
evaluate activities, resources and personnel.
 Provide adequate controls to safeguard the organization’s assets and data.

Functions of an Accounting Information System

Accounting information systems have three basic functions:

1. The first function of an AIS is the efficient and effective collection and storage of
data concerning an organization’s financial activities, including getting the
transaction data from source documents, recording the transactions in journals,
and posting data from journals to ledgers.
2. The second function of an AIS is to supply information useful for making
decisions, including producing managerial reports and financial statements.
3. The third function of an AIS is to make sure controls are in place to accurately
record and process data.

AIS for non-accounting functions of a business

 Finance – cash forecasts and actual payment and receipt information.

 Marketing – sales, summary analyses, cost information, and sales forecasts

 Human resources – payroll analyses (including employee benefit information)

and projections of future personnel costs

 Production – inventory summaries and product cost analyses

Management information system versus Accounting information system

 A MIS provides to internal users (management): financial information; and non-

financial information.

 An AIS provides to both external and internal users financial information.

 Now the two systems overlap to provide the same information focusing on
business processes.
Internal influences of corporate accounting information systems

Such influences include issues relating to:

 the size of the company,
 the knowledge base and intellectual capacity of the company (and its
employees),
 the structure/organisation of the company and the complexity of information
demands and requirements,
 internal management factors/features and, of course,
 the availability of company resources.

External influences of corporate accounting information systems

Such influences would include issues relating to:
 political influences such as company law requirements and other legal/political
requirements imposed by quasi-governmental organisations,
 social influences such as professional reporting standards requirements such as
GAAP and other professional pronouncements,
 economic influences such as market regulatory requirements (Stock Exchange
requirements) and other industry standards/regulations and, of course,
 technological influences such as hardware/software technology constraints.

AIS and organizational value addition

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

1. Improving the quality and reducing the costs of products or services. Eg an AIS
can monitor machinery so operators are notified immediately when performance
falls outside acceptable quality limits. This helps maintain product quality,
reduces waste, and lowers costs.
2. Improving efficiency. Eg timely information makes just in time manufacturing
approach possible as it requires constant, accurate, up to date information about
raw materials inventories and their locations.
3. Sharing knowledge. An expertise can improve operations and provide a
competitive advantage. Eg share best practices and support communication
between offices.
4. Improving the efficiency and effectiveness of its supply chain. Eg allowing
customers to directly access inventory and sales order entry systems can reduce
sales and marketing costs, thereby increasing customer retention rates.
5. Improving the internal control structure. An AIS with the proper internal control
structure can protect systems from fraud, errors, system failures and disasters.
6. Improved decision making. Improved decision making is vitally important. An AIS
can help improve decision making in several ways:
a) It can identify situations requiring management action.
 b) It can reduce uncertainty and thereby provide a basis for choosing among
alternative actions.
c) It can store information about the results of previous decisions which provides
valuable feedback that can be used to improve future decisions.
d) It can provide accurate information in a timely manner.
e) It analyses sales data to discover items that are purchased together and it
uses such information to improve the layout of merchandise to encourage
additional sales of related items.

Value Chain
 Is a set of activities a product or service moves along before as output/it is
sold to a customer
 At each activity the product or service gains value

Role of Accountants in relation to AIS

 Financial accountants – prepare financial information for external decision-

making in accordance with GAAP.
 Managerial accountants – prepare financial information for internal decision
making.
 Auditors – evaluate controls and attest to the fairness of the financial statements.
 Accounting managers – control all accounting activities of a firm.
 Tax specialists – develop information that reflects tax obligations of the firm.
 Consultants – devise specifications for the AIS.
 Evaluator

Planning for disaster

-Planning assumes that operations continue after disaster
-Information technology is particularly vulnerable to man-made attacks such as viruses
and worms
-Under auditing standard number 60, absence of disaster plan needs to be reported
-Plan needs to be tested regularly