Madda Walabu University

Department of Accounting and

Finance
Course Title: Accounting Information System
Course Code: ACFN 633
Course load: 3 Credit Hours
CHAPTER 1:- Accounting Information System:
Overview

Instructor:- Dr.Suheyli R. (Asst Prof)

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 INTRODUCTION

Hello students, my name is Dr.Suheyli Reshid (Asst Prof)

I am your instructor for the course Accounting Information
System (ACFN 633)
 Accounting Information System Course Contents

 Chapter 1: Accounting Information System: Overview

 Chapter 2: Data Storage Approach

 Chapter 3: The Revenue Cycles: Sales to Cash Collections

 Chapter 4: The Expenditure Cycle: Purchasing To Cash

Disbursements

 Chapter 5: Production Cycle

 Chapter-6:Control and Accounting Information Systems

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 CHAPTER-I
Accounting Information System: Overview

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 FLOW OF THE CHAPTER
Explain what an accounting information system (AIS) is and
describe the basic functions it performs.
Explain sub systems of AIS
Discuss why studying accounting information systems are
important.
Explain the different types of information systems.
Identify factors attribute for good accounting information
system
Identify the steps required for systems development life cycle
Identify the difference between manual accounting procedure
and computerized accounting system
1.1. Introduction
A system is a set of two or more interrelated
components that interact to achieve a goal.
Systems are almost always composed of smaller
subsystems, each performing a specific function
important to and supportive of the larger system of
which it is a part.
For example, the College of Business is a system
composed of various departments, each of which is
a subsystem. Yet, at the same time, the college itself
is a subsystem of the university.
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Introduction (Cont’d)
When the Systems Concept is used in systems
development, changes in subsystems cannot be
made without considering the effect on other
subsystems and the system as a whole.
Goal Conflict occurs when a decision or action of
a subsystem is inconsistent with another subsystem
or the system as a whole.

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Introduction (Cont’d)
Goal Congruence is achieved when a subsystem
achieves its goals while contributing to the
organization’s overall goal.
The systems concept also encourages Integration,
which is eliminating duplicate recording, storage,
reporting, and other processing activities in an
organization.

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1.2. What is an Accounting Information System?

An Accounting Information System (AIS) is a

system that collects, records, stores, and processes
data to produce information for decision-makers.
Another definition: “An accounting information
system is a unified structure within an entity, such
as a business firm, that employs physical
resources and other components to transform
economic data into accounting information, with
the purpose of satisfying the information needs of
a variety of users.

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 What is an Accounting Information System
(Cont’d)
It can be manual or computerized
Consists of
▪ People who use the system
▪ Processes
▪ Technology (data, software, and information
technology)
▪ Controls to safeguard information
Thus, transactional data is collected and stored into
meaningful information from which business decisions
are made and provides adequate controls to protect and
secure the organizational data assets.
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1.3. Components and Functions of AIS
 Six components of an Accounting Information
System
1) The people who operate the system and perform
various functions
2) The procedures and instructions, both manual and
automated, involved in collecting, processing, and
storing data about the organization’s activities
3) The data about the organization and its business
processes

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Components and Functions of AIS (Cont’d)

4) The software used to process the organization’s

data
5) The information technology infrastructure,
including computers, peripheral devices, and
network communications devices used to collect,
store, process, and transmit data and information
6) The internal controls and security measures that
safeguard the data in the AIS.

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Components and Functions of AIS (Cont’d)
These six components enable an Accounting
Information System to fulfill three important business
functions:
a) Collect and store data about organizational activities,
resources, and personnel
b) Transform data into information that is useful for
making decisions so management can plan, execute,
control and evaluate activities, resources and personnel
c) Provide adequate controls to safeguard the
organization’s assets, including its data, to ensure that
the assets and data are available when needed and the
13 data are accurate and reliable.
1.4. Sub Systems of AIS
Most organizations engage in many similar and
repetitive transactions.
A transaction is an agreement between two
entities to exchange goods or services or any other
event that can be measured in economic terms by
an organization.
The process that begins with capturing transaction
data and ends with an informational output such as
the financial statements is called transaction
processing.
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 Sub Systems of AIS (Cont’d)
Business activities are pairs of events involved in a give-
get exchange. These transaction types can be grouped into
the five basic cycles, each of which constitutes a basic
subsystem in the AIS:
a) The revenue cycle consists of the activities involved in
selling goods or services and collecting payment for those
sales.
b) The expenditure cycle consists of the activities involved in
buying and paying for goods or services used by the
organization.
c) The human resources/payroll cycle consists of the activities
involved in hiring and paying employees.(part of expenditure
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cycle)
Sub Systems of AIS (Cont’d)
d) The production cycle consists of the activities
involved in converting raw materials and labor into
finished products. (Only manufacturing companies
have a production cycle; retail organizations buy
finished goods for resale to others.
e) The financing cycle consisted of those activities
involved in obtaining the necessary funds to run the
organization and in repaying creditors and distributing
profits to investors.

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Sub Systems of AIS (Cont’d)
The basic activities in each of the five cycles can be
described in terms of a give-to-get relation.
▫ Revenue: give goods / give service—get cash
▫ Expenditure: get goods / get service—give cash
▫ Production: give labor and give raw materials—get
finished goods
▫ Payroll: give cash—get labor
▫ Financing: give cash—get cash

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1.5. Data versus Information
 Data are facts, which may or may not be processed
(edited, summarized, or refined) and have no direct
effect on the user. Raw facts, no organization or
meaning. A fact could be a number, date, name, and
so on. For example:
2/22/2023
ABC Company, 123,
99, 3, 20, 60
 By contrast, information causes the user to take an
action that he or she otherwise could not, or would not,
have taken. Information is often defined simply as
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processed data and meaningful to users.
Data versus Information (Cont’d)
The previous slide just showed facts, if we put those
facts within a context of a sales invoice, for example,
it is meaningful and considered information.
Invoice Date : 2/22/2023 Invoice #: 123

Customer: ABC company

Item # Qty Price

99 3 $20
Total Invoice Amount $60
 Value of Information
 Information is valuable when the benefits exceed
the costs of gathering, maintaining, and storing the
data.

 Benefit (i.e., improved decision making)

> Cost (i.e., time and resources used to get
the information)

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 1.6. What Makes Information Useful?
There are seven general characteristics that make
information useful:
1. Relevant: information needed to make a decision
(e.g., the decision to extend customer credit would
need relevant information on customer balance
from an A/R aging report)
2. Reliable: information free from bias
3. Complete: does not omit important aspects of
events or activities
4. Timely: information needs to be provided in time
to make the decision
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What Makes Information Useful? (Cont’d)
5. Understandable: information must be presented in
a meaningful manner
6. Verifiable: two independent people can produce
the same conclusion
7. Accessible: available when needed

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1.7. Why Study AIS?
The Study of AIS is Fundamental to Accounting
According to statement of financial accounting concepts
No. 2, the primary objective of accounting is to provide
information useful to decision makers.
A well designed AIS can add value to an organization by:
1) Improving the quality and reducing the costs of products or
services.
2) Improving efficiency.
3) Sharing knowledge
4) Improving the efficiency and effectiveness of its supply
chain.
5) Improving the internal control structure.
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 How Does an AIS Add Value?

❖A well thought out AIS can add value through

effective and efficient decisions.
Having effective decisions means quality
decisions
Having efficient decisions means reducing
costs of decision making

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1.8. Principles of an Accounting Information System

In designing and developing an efficient and effective

accounting information system (or simply referred to
as an accounting system), it is important that
certain basic principles be followed.
These principles or design features make
accounting systems run efficiently.
 A good and an effective system whether
computerized or manual-includes the following
features: control, compatibility, flexibility, a favorable
cost/benefit relationship, and useful output.

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 Principles of an AIS (Cont’d)

Control
▪ Managers need control over operations. Internal
controls are the methods and procedures used to
authorize transactions and safeguard assets.
Compatibility
▪ A compatible is one that works smoothly with the
business’s operations, personnel, and organizational
structure. A compatible accounting information system
conforms to the needs of the business.

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 Principles of an AIS (Cont’d)

Flexibility
▪ Organizations evolve. They develop new products, sell
off unprofitable operations and acquire new ones, and
adjust employee pay scales.
▪ Changes in the business often call for changes in
accounting system.
▪ A well-designed system is flexible if it accommodates
changes without needing a complete overhaul.

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 Principles of an AIS (Cont’d)

Favorable Cost-Benefit Relationship

 Achieving control, comparability, and flexibility
costs money. These costs reduce a company’s net
income, so managers often must settle for less than
the perfect accounting system.
 They strive for a system that offers maximum
benefits at a minimum cost-that is, a favorable
cost/benefit relationship.

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 Principles of an AIS (Cont’d)

Useful output
▪ To be successful, information must be
understandable, relevant, reliable, timely, and
accurate.
▪ Designers of accounting systems must consider the
needs and knowledge of the various users so that the
systems out put (reports and statements) will be
useful

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 1.9. The Systems Development Life Cycle
Companies in a very competitive global business world are
constantly looking for new, faster and more reliable ways of
obtaining information.
Companies usually change their systems for one of the following
reasons:
▪ Changes in user or business needs
▪ Technological changes
▪ Improved business processes
▪ Competitive advantage
▪ Productivity gains
▪ Growth
▪ Downsizing
▪ Systems integration
30 ▪ Systems age and need to be replaced
 The Systems Development Life Cycle (Cont’d)
Whether systems changes are major or minor, most
companies go through a systems development life cycle.
There are five steps for the Systems Development Life
Cycle (SDLC). These are discussed as follows:
1) Systems Analysis
2) Conceptual Design
3) Physical Design
4) Implementation and conversion
5) Operations and Maintenance

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 The Systems Development Life Cycle (Cont’d)

1) Systems Analysis
▪ The information needed to purchase or develop a new system is
gathered.
▪ Requests for systems development are prioritized.
▪ If a project passes, the current system is surveyed to define the
nature and scope of the project and to identify its strengths and
weaknesses.
▪ Then an in-depth study of the proposed system is conducted to
determine its feasibility.
▪ If the system is found feasible, the information needs of system
users and managers are identified and documented.
▪ A report is prepared and submitted to the information systems
steering committee.
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 The Systems Development Life Cycle (Cont’d)

2) Conceptual Design
During the conceptual design, the company decides how to
meet user needs. The first step is to identify and evaluate
appropriate design alternatives:
Purchase the software
Develop the software in-house
Outsource system development to someone else

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 The Systems Development Life Cycle (Cont’d)

3) Physical Design
Input and output documents are designed,
Computer programs are written,
Files and databases are created,
Procedures are developed, and
Controls are built into the new system

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 The Systems Development Life Cycle (Cont’d)

4) Implementation and conversion constitute the

capstone phase during which all the elements and
activities of the system come together.
▪ New hardware or software is installed and tested.
Standards and controls for the new system are
established and system documentation completed.
▪ The final step is to deliver the operational system to
the organization. A final report is sent to the
information systems steering committee.

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 The Systems Development Life Cycle (Cont’d)
5) Maintenance
▪ This step involves changing and updating the system
once it is in place.
▪ Hardware or software may need to be upgraded,
replaced or changed in some way to better fit the needs
of the end-users continuously. Users of the system
should be kept up-to-date concerning the latest
modifications and procedures.
▪ Modifications are made as problems arise or as new
needs become evident.

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 1.10. Manual vs Computerized Accounting System
Computerized accounting systems have replaced
manual systems in many organizations-even small
businesses.
In discussing the three stages of data processing- input,
process and output-we can observe the difference between
a computerized accounting system and a manual
accounting system.
The relationship among the three stages of data processing
is shown in Figure 1.1.

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Manual vs Computerized Accounting System

The Three Stages of Data Processing

 Manual vs Computerized Accounting System (Cont’d)

A. Inputs represent data from source documents, such

as sales receipts, bank deposit slips, and fax orders
and other telecommunications.
 Inputs are usually grouped by type. For example, a
firm would enter cash-sale transactions separately
from credit sales and purchase transactions.

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Manual vs Computerized Accounting System (Cont’d)

Data Input….
 Steps in Processing Input are:
▪ Capture transaction data triggered by a business activity
(event).
▪ Make sure captured data are accurate and complete.
▪ Ensure company policies are followed (e.g., approval of
transaction).
 Manual vs Computerized Accounting System (Cont’d)

B. In manual accounting system, processing

includes journalizing transactions, posting to the
accounts, and preparing the financial
statements.
A computerized system also processes but
without the intermediate steps (journal, ledger, and
trial balance).

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Manual vs Computerized Accounting System (Cont’d)
Data Processing…..
Four types of processing (CRUD):
▪ Creating new records (e.g., adding a customer)
▪ Reading existing data
▪ Updating previous record or data
▪ Deleting data

Data processing can be batch processed (e.g., post

records at the end of the business day) or in real-time
(process as it occurs).
 Manual vs Computerized Accounting System (Cont’d)

C. Outputs are the reports used for decision-

making, including the financial statements
(income statement, balance sheet, and so on).
Many companies make better decisions-and
prospering –because of the reports produced by their
accounting system.
From computer’s viewpoint, a trial balance is also a
report. But a manual system would treat the trial
balance as a processing step leading to the
statements.

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Manual vs Computerized Accounting System (Cont’d)

Information Output….
The data stored in the database files can be viewed
Online (soft copy)
Printed out (hard copy)
▪ Document (e.g., sales invoice)
▪ Report (e.g., monthly sales report)
▪ Query (question for specific information in a
database, e.g., What division had the most sales for
the month?)
 Manual vs Computerized Accounting System (Cont’d)
Overview of a Computerized Accounting System

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 Manual vs Computerized Accounting System (Cont’d)
The following table summarizes the accounting cycle under both systems;
Computerized System Manual System

Start with the account balances in Same.

the ledger at the beginning of the
period.
Analyze and classify business Analyze and journalize
transactions by type. Access transactions as they occur.
appropriate means for data entry.
Computer automatically posts Post journal entries to the
transactions as a batch or when ledger accounts.
entered on-line.
The unadjusted balances are Compute the unadjusted
available immediately after each balance in each account at
posting. the end of the period.
 Manual vs Computerized Accounting System (Cont’d)
Computerized System Manual System

The trial balance, if needed, can be Enter the trial balance on

accessed as a report. the work sheet, and
complete the work sheet.
Enter and post the adjusting entries. Prepare the financial
Print the financial statements. Run statements. Journalize and
automatic closing procedure after post the adjusting entries.
backing up the period’s accounting Journalize and post the
records. closing entries.

The next period’s opening balances Prepare the post closing

are created automatically as a result trial balance. This trial
of closing balance becomes step 1 for
the next period.
 End of Chapter 1

Thank you
Until we meet again in the next chapter goodbye!!

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