Accounting

Information System
Course Material No. 1

Ramelo C. Gloria
Course Instructor
2 ACCOUNTING INFORMATION SYSTEM

Information System on an
Accountant’s Perspective 1
LEARNING OUTCOMES

Here’s what I will teach you in this course material:

LESSON OUTLINE
• Understand how information flows within the business
• The Information
Environment • Determine the differences between management information
system and accounting information system
Unit Outline
• Organizational
Structure • Be oriented on the evolution of information systems
• Know the features of the information systems model
• The Evolution of
Information
Systems Model RESOURCES NEEDED

• The Role of the For this lesson, you would need the following resources:
Accountant
• PowerPoint: AIS BSA2 MC 1
• Course Module 1
Accountant’s Perspective of Information System • NU LAGUNA 3

TABLE OF CONTENTS

Pretest 4 The Information Environment

Before you start, try answering the following

questions.
10 Organizational Structure

1. Recall the accounting cycle. What are the steps

involved in the accounting process?

_________________________________________ 15 Evolution of Information

2. What is the essential function of the management?

________________________________________
3. What are the key functions of an organization? 18 The Role of the Accountant

________________________________________
4. What is the difference between a financial and non-
Lesson Summary
financial transaction? 19
________________________________________
5. How does MIS and AIS work together?
19 Posttest
________________________________________
6. What is the importance of information systems to
accounting?

________________________________________
19 Key Terms

20 References

Key Point
Put a short paragraph that
acts as the summary of the
lesson. Point out its relevance
4 ACCOUNTING INFORMATION SYSTEM

The Information Environment

Vast quantities of information flow to and from a business, be it internal

or external. These information are needed by the different levels of
organization to be able to perform their respective jobs in the operations
level, middle management, and top management levels. Information can flow
vertically or horizontally within an organization, and as such, understanding
and interpreting information is a must.

Horizontal flow of information supports highly detailed tasks for

operations; vertical information meanwhile flows through the different tiers
in the organization, either upward or downward; and a third flow exists when
the organization exchanges information from its external environment.

Below illustrate the flows of information within a business:

For the reason that each user group has differing sets of requirements, the
number or details of information as it flows upward decreases, as the
management needs only the summarized report to know the overall
performance of the company, and steer it in the desired direction.
Accountant’s Perspective of Information System • NU LAGUNA 5

WHAT IS A SYSTEM?
Systems exist in the environment – it can be natural or artificial; yet all
those systems possess common elements. Accordingly, a system is a group of
two or more interrelated components or subsystems that serve a common
purpose. As such, the following are its elements:

Multiple Components. A system consists of more than one part. For

example, a yoyo carved from wood attached to a string, in itself is a system.
Without the string however, the yoyo is merely a piece of wood.

Relatedness. A common purpose ties all the parts of the system. Although
each function of an organization can acts independently of others, all parts
however, work for a common objective.

Subsystems. A system can be subsystem when it is viewed in relation to a

larger system to which it belongs. For example, the respiratory system is
itself a system, but it belongs to a larger system which is the human body.

Purpose. A system serves one or more purpose, without it, nothing binds the
parts together.

ARTIFICIAL SYSTEMS
Artificial systems simply put is a system that dies not exist naturally
in an environment. For example, an automobile that exists for mobility:
6 ACCOUNTING INFORMATION SYSTEM

System Decomposition. Decomposition is the process of dividing system

into smaller subsystem parts to conveniently represent, view, and understand
the relationship among systems and show its hierarchy. Each subordinate in
the hierarchy performs a task that is relevant in the achievement of the
higher-level system.

Subsystem Interdependency. A system serves one or more purpose,

without it, nothing binds the parts together. For this reason, the system must
interact harmoniously and function effectively so that each part can serve
another.

FRAMEWORK OF INFORMATION SYSTEMS

An information system is the set of formal procedures by which data
are collected, processed into information and distributed to users. The
information system of a firm consists of two broad classes: The Accounting
Information System (AIS) and the Management Information System (MIS).
It’s primary difference rests upon the nature of transactions accommodated
by each system, as can be illustrated below:
Accountant’s Perspective of Information System • NU LAGUNA 7

Sarbanes-Oxley Act requires that the management design and

implement controls over the financial reporting process, such that inter-
related information systems has its risks identified and mitigated.

Information systems accepts inputs in the form of transactions, that

are converted to outputs in the form of information consumed by users. For
this reason, transactions are defined as an event that affects or is of interest to
the organization and is processed by its information system as a unit of work.

Transactions can cover both financial and non-financial transactions:

Financial Transactions. Financial transactions are economic events that

affects the assets and equities of the organization is reflected in its accounts,
and is measured in monetary terms. Some example of transactions that are
financial in nature include purchases of inventory, cash disbursements for
expenses, or sales to customers.

Non-Financial Transactions. These are events that do not meet the

definition of a financial transaction (residual definition). For example, a new
supplier or new customer is encoded to the system.

Incidentally, financial and non-financial transactions are closely related. For

example, in order to record the purchase of goods, the supplier information
should have been made available beforehand.

ACCOUNTING INFORMATION SYSTEMS

Accounting Information Systems consist of three major subsystems:

Transaction Processing System. This supports daily business operations

such as reports, documents, and messages throughout the organization. Its
function is to convert economic events into financial transactions, record the
said transactions, and distribute to the essential users.

General Ledger/ Financial Reporting System. This produces the produces

the traditional accounting reports: income statement, balance sheet, statement
of cash flows, and all other customized accounting report.

Management Reporting System. This produces special purpose financial

statement and all other information needed for decision making, such as
budgets, variance reports, and responsibility reports.
8 ACCOUNTING INFORMATION SYSTEM

MANAGEMENT INFORMATION SYSTEM

Management Information Systems has capabilities that are beyond
that of the AIS, as it caters to more specialized functions needed by
production planning and control, sales forecasting, inventory warehouse
planning, market research and the likes. Generally, it processes information
not normally processed in the AIS, as follows:

GENERAL MODEL FOR AIS

Information Systems can be customized to fit the needs of business, however,
there is a general model that describes all information systems, as follows:
Accountant’s Perspective of Information System • NU LAGUNA 9

END USERS. End Users can be external or internal. External Users include
creditors, stockholders, potential investors, regulatory agencies, suppliers and
customers. Internal users include the management and operations personnel.

DATA SOURCES. Data Sources are the economic transactions from both
internal and external sources that enter the information system. External
sources are those that economic exchanges happen with other entities.
Internal transactions meanwhile are the movement of resources within the
organization, such as the conversion of raw materials, application of labor,
and depreciation.

DATA COLLECTION. This is the first operational stage in the information

system where data is ensured to be valid, complete, and free from material
errors. Data collection should be relevant and efficient, as such, information
captured must be the relevant data, and information need not be redundantly
entered into the system.

DATA PROCESSING. This is the translation of simple data into complex

information, where mathematical algorithms are applied to summarize the
data.

DATABASE MANAGEMENT. The organization’s database is the physical

infrastructure where data is stored, according to hierarchy: attribute, record,
file.

• Data attribute – this is the logical and relevant characteristic of

the data captured. For example, accounts receivable.
• Record – This refers to the complete set of attributes for a
single occurrence within a class. In the accounts receivable, a
record can include the customer’s name, address and account
balance.
• Files – This is a complete set of records of an identical class,
such that all records in the AR are called a file; and the same
is applied to accounts payable, inventory, and payroll. The
organization’s database can be said to be a collection of files.
• Database Management Tasks – this includes storage, retrieval,
and deletion.
o Storage – new records stored in the proper location in
the database
10 ACCOUNTING INFORMATION SYSTEM

o Retrieval – locating and extracting existing records

o Deletion – permanent removal of obsolete or
redundant records

INFORMATION GENERATION. The process of compiling, arranging,

formatting, and presenting information to users, and has the following
characteristics:

• Relevance. Reports must serve a purpose, as such information given

out must be useful to the users work
• Timeliness. Information must not be older than the time of action it is
needed.
• Accuracy. Information must be free from material errors.
• Completeness. All essential information must be present to give out
the message clearly and with no ambiguity.
• Summarization. Information must be suited to the user’s needs. As
previously discussed, the detail of information decreases as it moves
upward vertically.

FEEDBACK. This is the output sent back to the source of data that signals the
users to perform a task. For example, inventory reports state that the
company is running low on raw materials, this will prompt the warehouse
manager to request for the purchase of stocks.

Organizational Structure

The structure of the organization shows the distribution of responsibility,

authority and accountability throughout the organization, and is essential in
assessing the user’s needs.

Organizations can be broken down to smaller units called segments that

promote efficiencies, depending on the goal of the management, as follows:

• Geographic location – organizations with operations in different

location manage by setting up firms that has familiarity over the
location, resulting to gaining access to resources, markets, and
distribution
Accountant’s Perspective of Information System • NU LAGUNA 11

• Product line – for companies with a wide range of product offering,

labor and resources are devoted especially to the product as if it is a
separate firm
• Business function – this is the segmentation according to tasks, such
as accounting, marketing, and production

FUNCTIONAL SEGMENTATION
While titles of functions can vary among firms, usually the tasks revolve
around a single resource such as materials, labor, financial capital, and
information. To know how it impacts with information systems, below
discusses a more detailed treatment of the functions.

Materials Management. Its objective is to plan and control the materials

inventory of the company to meet the needs of production and prevent
excessive storage of inventory, with the following subfunctions:

• Purchasing – responsible for ordering inventory when the stock levels

fall to the pre computed re-order points. This involves the task
knowing the specifications of raw materials and selecting vendors
with most reasonable bid.
• Receiving – This task involves accepting the items previously
ordered, and includes validating if the quantity and specifications
ordered are the same with what was received.
12 ACCOUNTING INFORMATION SYSTEM

• Stores – This is the physical safekeeping of inventory and are

responsible for releasing as needed

Production. This involves the activities that convert materials, labor and
overhead into finished products.

Marketing. Deals with promotion, advertising, market research, and sales

order entry.

Distribution. This is the activity of getting the product to its customer safely
and quickly.

Personnel. Personnel is a resource valuable to any business and is obtained

through recruiting, training, continuing education, counseling, evaluating,
and compensation.

Finance. This function manages the financial resources of the firm through
banking and treasury activities, portfolio management, credit evaluation, cash
disbursements, and cash receipts, in making sure that the company stays
liquid with no deficits or excessive available cash.

ACCOUNTING FUNCTION
Accounting captures and records the financial effects of transactions and
distributes this information to concerned personnel in the coordination of
their tasks. For this reason, accounting has played a major role in managing
information.

Value of Information. To be valuable, an information needs to be reliable in

order for the user to use it for a desired action. For this reason, reliable
information also has the following attributes: relevance, accuracy,
completeness, summarization and timeliness.

Accounting Independence. Accounting activities must be independent from

all other functional areas to maintain integrity of information.

INFORMATION TECHNOLOGY FUNCTION

Information Technology is also associated with the management of
information, and its activities can be handled in a centralized or data
processing approach.
Accountant’s Perspective of Information System • NU LAGUNA 13

CENTRALIZED DATA PROCESSING. In this approach, data is stored a

central site that serve users throughout the organization, as can be seen
below:

• Data Base Administration. This unit is responsible for the security

and integrity of the database
• Data Processing. This group manages the computer resources used in
the day-to-day operations and processing of transactions, and consists
further of: data control, data conversion, computer operations, and
data library. Due to the current trends in information technology,
these functions have disappeared from organizations, but were
eliminated and replaced with automated systems and larger storage
for files.
• System Development and Maintenance. This group analyzes the
needs of users and designs a system to address user needs. Upon
implementation of the system, maintenance takes over and assumes
responsibility in ensuring that the system still answers the needs of
users.

DISTRIBUTED DATA PROCESSING. In this approach, meanwhile, the IT

function is reorganized into smaller units called IPU (Information Processing
Units), and are placed under the end users’ control. IPU’s may be distributed
14 ACCOUNTING INFORMATION SYSTEM

according to the segmentation of the business. During the recent years, DDP
has become the preferred structure of the IT function.

• Disadvantages of the DDP. The disadvantages of the DDP was said to

be the advantages of the Centralized approach, as follows:
o Mismanagement of organization-wide resources
o Hardware and software incompatibility
o Redundant tasks
o Consolidating incompatible activities
o Hiring qualified professionals
o Lack of standards
• Advantages of DDP
o Cost reductions
o Improved control responsibilities
o Improved user satisfaction
o Back up
For these reasons, a organizations must carefully decide the structure of their
information technology infrastructure, and consider its economic benefit and
operational feasibility.
Accountant’s Perspective of Information System • NU LAGUNA 15

The Evolution of Information

An accountant must be familiar with the evolution of accounting

information system to know what a current system’s limitations are.

Manual Process Order. This is the oldest and most traditional form of
accounting system, such that record keeping is a physical task. However, it is
to be understood that the logic of the manual process closely resembles the
automated process.

Flat File Model. This is associated with legacy systems, such as the large
mainframe systems implemented from the 1960s to 1980s. Modern database
systems eventually replaced these, due to problems on redundancy in data
storage, data updating, and currency information. For example, marketing
encodes sales, but this information is only reflected on their database but not
with Accounting.

• Task Data Dependency. This is an attribute of Flat File Model where

additional information cannot be obtained by users in case his set of
needs changes
• Flat Files Limit Data Integration. Data encoded to the system are
structured in such a way that it suits the need of a primary user, but
lacks structuring available to make it useful to other users.

The Database Model. The problems encountered in the flat file model was
addressed by the database model. In this model, data elements are defined
according to the authorized access of each user. The striking difference
between FFM and DBM is the ability of DBM to pool data that can be shared
by multiple users.
16 ACCOUNTING INFORMATION SYSTEM

Through the database model, the following were achieved:

• Data redundancy was eliminated

• Single update will update all other information
• Current values

The REA Model. REA (Resources, events, and agents) is an accounting

framework to know the relationship among the organization’s critical
resources, and how data is identified, captured, and stored in a relational
database. Below are its key elements:

• Resources. These are economic assets of the organization that is

scarce and are under the under the control of the enterprise.
• Events. Events are the phenomena that affect the changes in the
resources due to normal activities such as production, exchange,
consumption, and distribution.
• Agents. These are individuals and departments that participate in the
economic events.
Below shows Accounting in a non-ERA environment:

Below meanwhile shows accounting in an ERA environment, which goes to

show how REA captures transactions and separates each aspect that may
pertain to other users. These databases are then being linked through
common attributes called primary keys and embedded foreign keys that allow
for the consolidation of data.
While REA is more of a concept than a physical system, advanced database
systems use REA as its model.
Accountant’s Perspective of Information System • NU LAGUNA 17

Enterprise Resource Planning Systems. This is an information system

model that allowed for the automation and integration of its key business
processes, and has broken down traditional barriers by making information
free flowing among the members of the organization. ERP are being sold to
customers based on their needs, but almost all ERP contain the following
modules:

• Asset Management
• Financial Accounting
• Human Resource
• Industry Solutions
• Plant Maintenance
• Production Planning
• Quality Management
• Sales and Distribution
• Inventory Management
As different organizations have differing needs, ERP when purchased are
usually modified to capture the processes of the organization.
18 ACCOUNTING INFORMATION SYSTEM

The Role of the Accountant

Accountants act as the system users, designers, and auditors of systems.

ACCOUNTANT AS USERS
Most organizations consider accountants as the largest users of systems. As
end users accounts must be able to:

• Provide a clear picture of their needs to professionals who design the

system
• Have an active participation in systems development

ACCOUNTANT AS SYSTEM DESIGNERS

The accountant’s knowledge on the information system has given him the
responsibility of specifying criteria for the system design that will closely
resemble the physical system in place.

ACCOUNTANT AS SYSTEM AUDITORS

Auditing is an independent review by an expect to determine an opinion
about a company’s set of assertions, the purpose of which is to obtain
confidence on the reliability of financial statements.

External Auditing. This can include assurance and IT Auditing:

• Assurance. These are professional services designed to improve the

quality of information used by decision makers.
• IT Auditing. This is part of a broader financial audit where risk on IT
is assessed.

Internal Auditing. This is the appraisal function within the organization,

who conducts review of policies and financial statements.
Both external and internal audit perform the same functions, but the
difference lies in the ultimate users of report. External audits sought to
benefit the public, while internal auditors represent the interest of the
management.
 Accountant’s Perspective of Information System • NU LAGUNA 19

LESSON SUMMARY

The first part of deals with the relationship of information with the level of
management, while tackling the characteristics of systems and its elements.
We also tacked the difference between AIS and MIS.
The second part meanwhile deals with the segments of an organization which
has an effect on the AIS, focusing on the functions of both Accounting and
Information Technology.

The third part tackles how information systems evolved to what it is today,
starting from manual, flat file, REA, and ERP, which ultimately lead to the
development of systems that is suitable for use of a wide range of users.
Lastly, the fourth part discussed the significance of accountants during the
development phase, maintenance phase, and checking phase of the system.

KEY TERMS

Accounting Information System Conceptual System Enterprise Resource Planning

Agents Data Events
Assurance services Database Management Financial Transactions
Centralized Data Processing Distributed Data Processing Non-Financial Transactions

COURSE MATERIAL 1 OUTPUTS

A. ESSAY QUESTONS
Directions: Submit your answers in MS form to be posted in our MS Team.

_______ 1. Which of the following is not a financial transaction?

a. Purchase of product c. Update of vendor file
b. Receipt of cash d. Sale of inventory

_______ 2. Which of the following is not a characteristic of an effective information?

a. Relevance c. Summarization
b. Accuracy d. Precision
 20 ACCOUNTING INFORMATION SYSTEM

_______ 3. What is the correct data hierarchy?

a. Attribute, record, file c. File, record, key
b. Record, attribute, key d. key, record, file

_______ 4. Which is not an accountant’s role in information systems?

a. System user c. System designer
b. System Auditor d. System programmer

_______ 5. Which of the following is not a database management task?

a. Retrieval c. Summarization
b. Storage d. Deletion

ESSAY QUESTONS

Instruction: Submit your answers to the following essay problems in power point slides. Upload your answer in
your private channel. This is an individual activity to be discussed in your team. Your required outputs are the
following:
1. Individual power point slides
2. Group summarized answers in pdf format.

1. Review the following diagram. What is the key missing element? Discuss the importance of this key
missing element.

2. Describe each of the following items from the management problem structure:
a. Strategic planning
b. Tactical planning
c. Operations planning

3. Describe the three roles that an accountant can play in the AIS?

REFERENCES

Hall. (2016). Accounting Information System/ c2016

Stair. (2015). Information Systems Essentials/ c2015
Hurt. (2016). Accounting Information System/ c2016
Romney (2015). Accounting Information System/ c2015
Accountant’s Perspective of Information System • NU LAGUNA 21