Chapter 1

ACCOUNTING INFORMATION SYSTEMS: AN OVERVIEW

Systems, Data, and Information
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.
F For example, the college of business is a system composed of various departments, each of which
is a subsystem. Yet the college itself is a subsystem of the university.
The subsystems should be designed to maximize achievement of the organization’s goals even to the
detriment of the subsystem itself.
F For example, the production department (a subsystem) of a company might have to forego its
goal of staying within its budget in order to meet the organization’s goal of delivering product on
time.
Goal conflict occurs when a decision or action of a subsystem is inconsistent with the goals of another
subsystem or the system as a whole.
Goal congruence is achieved when a subsystem achieve its goals while contributing to the
organization`s overall goal. In other words, goal congruence occurs when the subsystem’s goals are in-
line with the organization`s goals.
F The larger the organization and the more complicated the system, the more difficult it is to achieve
goal congruence.
The systems concept also encourages integration, which eliminates duplicate recording, storage,
reporting, and other processing activities in an organization.
F For example, companies that used to have separate program to prepare customer statements, collect
cash, and maintain accounts receivable records now combine these functions into a single
application.
Data are facts that are collected, recorded, stored, and processed by an information system. Data
usually represent observations or measurements of business activities that are of important to
information system users.
Several kinds of data need to be collected in businesses, such as:
 Facts about the activities that take place (i.e., events that occur) For example, data need to
be collected about a sales event (e.g., the date of sale, total amount)
 The resources that are affected by the activities. For example, the resources being sold
(e.g., the identity of the goods or services, the quantity sold, unit price)
 The people (agents) who participate in the activity. For example, the people who
participated in the sale (e.g., the identity of the customer and the salesperson).

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Information is data that have been organized and processed to provide meaning to a user. Users
typically need information to make decisions or to improve the decision making process. As a general
rule, users can make better decisions as the quantity and quality of information increase.
However, there are limits to the amount of information the human mind can effectively absorb and
process. Information overload occurs when those limits are passed. For example, your final exams
week.
Information overload is costly, because decision-making quality declines while the costs of providing
that information increase. Consequently, information system designers must consider how advances in
information technology (IT) can help decision makers more effectively filter and condense
information, thereby avoiding information overload.
For example, Wal-Mart has over 500 terabytes (trillion of bytes) of data in its data warehouse. That
is equivalent to 2000 miles of bookshelves or about 100 million digital photos. Wal-Mart has
invested heavily in technology so that it can effectively collect, store, and manage these data. Most
important, it has spent a great deal of time and money figuring out how to turn all of these data into
useful information.
The value of information is the benefit produced by the information minus the cost of producing it.
The major benefits of information are:
 A reduction of uncertainty
 Improved decisions and
 A better ability to plan and schedule activities
The costs are the time and resources spent on:
 Collecting data
 Processing data
 Storing data
 Distributing information to decision makers
Information costs and benefits can be difficult to quantify, and it is difficult to determine the value of
information before it has been produced and utilized. Nevertheless, the expected value of information
should be calculated as effectively as possible; so information is not produced whose costs exceed its
benefits.

Information can be provided to both internal and external users.

F The information supplied to external users is either mandatory information required by a

governmental entity (such as a report to the Internal Revenue Service (IRS) on taxable income
and withholdings) or essential information required to conduct business with external parties
(such as purchase orders and customer billings).
In providing mandatory or essential information, the focus should be on:
Minimizing costs.
Meeting regulatory requirements.
Meeting minimum standards of reliability and usefulness.

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Most internal information is discretionary (flexible) information, since choices must be made
regarding what information should be made available, to whom, and how frequently.
F Internal reporting is more difficult than external reporting because most managerial decisions
demand more detailed information than does external reporting and there are more ways to
report information to internal users than to external users.
F The benefit of producing information should exceed its costs i.e., the information has positive
value.
Characteristics of Useful Information
 Relevance—information is relevant if it reduces uncertainty, improves decision makers` ability to
make predictions, or confirms or correct their prior expectations. For example, an accounts
receivable aging report used in credit granting functions.
 Reliable— information is reliable if it is free from error or bias and accurately represents the events
and activities of the organization. That means; it’s dependable. For example, a report checked by
3 different people for accuracy.
 Complete— information is complete if it does not omit important aspects of the underlying events
or activities that it measures. No piece of information essential to a decision or task should be
missing. For example, a report should provide all necessary calculations and present its message
clearly and unambiguously. Another example would be an accounts receivable aging report that
included all customer accounts.
 Timely— information is timely if it is provided in time for decision makers to make decision. The
age of information is a critical factor in determining its usefulness. Information must be no older
than the time period of the action it supports. For example, if a manager makes decisions daily to
purchase inventory from a supplier based on an inventory status report, then the information in
the report should be no more than a day old. Another example would be an accounts receivable
aging report was received before the credit manager had to make a decision whether to extend
customer credit.
 Understandable— information is understandable if it is presented in a useful and intelligible
format. For example, the report was carefully designed so that the data contained on the report
became information to the reader.
 Verifiable— information is verifiable if two knowledgeable people acting independently would
each produce the same information. For example, the data on a report was checked by two clerks
working independently.
 Accessible— information is accessible if it is available to users when they need it and in a format
they can use. For example, the manager was working one weekend and needed to find some
information about production requests for a certain customer. He was able to find the report on
the company’s network.

 To what extent can all the characteristics of useful information be simultaneously met?
Sometimes several of the criteria can be met simultaneously. For example, more timely
information is also to be more relevant. Verifiable information is likely to be more reliable. Often,
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 however, achieving more of one objective requires sacrificing another. For example, ensuing more
complete information is likely to reduce its timeliness and relevance. Verifiability and reliability
often requires the sacrifice of relevance. The decision maker must decide which-trade-offs are
warranted in a given situation.
What is AIS?
Accounting Information System (AIS) is a system that collects, records, stores, and processes data to
produce information for decision makers.
To produce accounting information we may use two approaches
F Paper-and-pencil-based (or manual system) and
F Use of computer (or information technology)
Regardless of the approach taken, the process is the same. The AIS and the people who use it must still
collect, enter, process, store, and report data and information.
There are six components of AIS:
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.
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
Together, these six components enable an AIS to fulfill three important business functions:
1. Collect and store data about organizational activities, resources, and personnel.
2. Transform that data into information that is useful for making decisions so management can
plan, execute, control, and evaluate activities, resources, and personnel.
3. 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 data are accurate and
reliable.
Why Study Accounting Information Systems?
Study of the AIS is Fundamental to Accounting because of the following reasons
F Accounting is an information system
F The primary objective of accounting is to provide information useful to decision makers.
Therefore, it is not surprising the Accounting Education Change Commission recommended that the
accounting curriculum should emphasize that accounting is an information identification, development,
measurement, and communication process. The commission suggested that the accounting curriculum
should be designed to provide students with a solid understanding of three essential concepts:

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 1. The use of information in decision making
2. The nature, design, use, and implementation of an AIS
3. Financial information reporting
In other words, accounting is an information-providing activity, so accountants need to understand:
 How the system that provides that information is designed, implemented, and used.
 How financial information is reported.
 How information is used to make decisions.
The other accounting courses you take (financial, managerial, tax, and auditing) focus on your role as
a user or provider of information (making journal entries, preparing or reading financial statements or
other reports, etc.). It is assumed that you have access to certain data and can address questions about
how to account for, report, or audit the information. For example, a managerial accounting class may
discuss how to use information to make decisions but never discuss how information is collected,
stored, or made available to the decision maker. The question of where the information comes from is
often not even asked in these classes. The answer is that the AIS provide the information.
In contrast, the AIS course focuses on understanding how the accounting system works:
 How to collect data about an organization`s activities and transactions;
 How to transform that data into information that management can use to run the
organization;
 How to ensure the availability, reliability, and accuracy of that information.
Thus, the AIS course complements the other accounting system courses you take.
The accounting information systems class is unlike most other accounting classes. The course is more
concept driven than numbers driven.
AIS Skills are Important to Your Career Success
You may intend to pursue a career in public accounting. Auditors need to evaluate the accuracy and
reliability of information produced by the AIS. To do so they must understand how a system is
developed, how it operates, and how it can be properly controlled. They must be able to evaluate and
understand the strengths and weaknesses of an AIS.
If you specialize in tax, you need to understand enough about your client’s AIS adequately to be
confident that the information used for tax planning and compliance work is complete and accurate.
Many students work in private industry or for not-for-profit organizations. Accounting systems
work is one of the most important activities performed by corporate accountants. Other important
activities include designing internal control systems, business process improvements, and long-term
strategic planning.
A third career option is management consulting. One of the fastest-growing types of consulting
services entails the design, selection, and implementation of a new AIS.
The Impact of the AIS on Corporate Strategy and Culture
Three factors that influence the design of an AIS includes:
1. Developments in information technology (IT)
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 2. Business strategy and
3. Organizational (occupational) culture
Figure 1.1: Factors influencing design of the AIS

Organizational Business
Culture Strategy

AIS

Information
Technology

The business press frequently report ways IT is changing the way accounting and other business
activities are performed. The AIS course, however, is more than a “computer course”.
Information technology affects the company’s choice of business strategy. For example, an important
IT developments include the widespread deployment of wireless networking and the move to replace
bar code technologies with radio frequency identification (RFID) tags because such development`s
affect business processes and often cause organizations to redesign their accounting systems to take
advantage of new capabilities. To perform cost-benefit analyses on IT changes, you need to understand
business strategy. This requires developing a basic understanding of business strategies and how IT
can be used to implement them, as well as how new IT developments create an opportunity to modify
those strategies. Developments in IT affect both an organization`s strategy and the design of its AIS.
Although a company can try to identify the benefits of a new IT initiative and compare those benefits
to the associated costs, this is often easier said than done. Usually, it is difficult to precisely measure
the benefits of new uses of IT. Nevertheless, companies should gather as much data as possible about
changes in market share, sales trends, cost reductions, and other results that can plausibly be associated
with an IT initiative and that were predicted in the planning process.
Although the organization`s culture should influence the design of its AIS, it is important to
recognize that the design of the AIS can also influence the organization`s culture by controlling the
flow of information within the organization. For example, an AIS that makes information easily
accessible and widely available is likely to increase pressures for more decentralization and autonomy.
Organizational culture and the design of an AIS influence one another. Since people are one of the
basic components of any system, it will always be difficult to successfully transfer a specific
information systems design intact to another organization. Considering in advance how aspects of the
new organizational culture are likely to affect acceptance of the system can increase the chances for
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 successful transfer. Doing so may enable the organization to take steps to mitigate likely causes of
resistance. The design of an AIS, however, itself can influence and change an organization`s culture
and philosophy. Therefore, with adequate top management support, implementation of a new AIS
can be used as a vehicle to change an organization. The reciprocal effects of technology and
organizational culture on one another, however, mean that it is unrealistic to expect that the
introduction of a new AIS will produce the same results observed in another organization.
An organization’s AIS must reflect its line of business. For example:

 Manufacturing companies will need a set of procedures and documents for the production cycle;
non-manufacturing companies do not.
 Government agencies need procedures to separately track all inflows and outflows from various
funds, to ensure that legal requirements about the use of specific funds are followed.
 Financial institutions do not need extensive inventory control systems.
 Passenger service companies (e.g., airlines, bus, and trains) generally receive payments in advance
of providing services. Therefore, extensive billing and accounts receivable procedures are not
needed; instead, they must develop procedures to account for prepaid revenue.
 Construction firms typically receive payments at regular intervals, based on the percentage of
work completed. Thus, their revenue cycles must be designed to carefully track all work performed
and the amount of work remaining to be done.
 Service companies (e.g., public accounting and law firms) do not sell physical goods and,
therefore, do not need inventory control systems. They must develop and maintain detailed records
of the work performed for each customer to provide backup for the amounts billed.
Tracking individual employee time is especially important for these firms because labor is the major
cost component.

The Role of AIS in the Value Chain

The objective of most organizations is to provide value to their customers. While “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. 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, or customizing it. Value is provided by performing a series of activities
referred to as the value chain. These include primary and support activities (sometimes referred to as
“line” and “staff” activities respectively).
Figure 1.2: The Value Chain
Firm infrastructure
Human resources
Support Activities
Technology
Purchasing

1. Inbound 2. Operations 3. Outbound 4. Marketing 5. Services

Logistics Manufacturing Logistics and Sales Repair
Receiving and Repackaging Distribution Advertising Maintenance Page 7 of 12
Storing Shipping Selling
Materials
 Primary Activities
An organization`s value chain consists of five primary activities that directly provide value to its
customers:
1. Inbound logistics—consists of receiving, storing, and distributing the materials that are inputs
used by the organization to create the services and products that it sells. For example, the activities
of receiving, handling, and storing the steel, glass, and rubber comprise the inbound logistics
activities for an automobile manufacturer. For a pharmaceutical company, for example, this
activity might involve handling incoming chemicals and elements that will be used to make their
drugs.
2. Operations activities—transform inputs into final products or services (outputs). For example, the
assembly line activities at an automobile manufacturer convert raw materials into a finished car.
For the pharmaceutical company, for example, this step involves combining the raw chemicals
and elements with the work of people and equipment to produce the finished drug product that
will be sold to customers.
3. Outbound logistics—are the activities involved in distributing goods or services to customers. For
example, shipping automobiles to car dealers is an outbound logistics activity. For the
pharmaceutical company, for example, this step involves packaging and shipping the goods to
drug stores, doctors, and hospitals.
4. Marketing and sales—refers to the activities involved in helping customers to buy the
organization`s products and services. Advertising is an example of a marketing and sales activity.
For the pharmaceutical company, for example, a pharmacy representative may visit with drug
stores, doctors, etc. to inform them about their products and take orders.
5. Service activities—provide post-sale support to customers. Examples include repair and
maintenance services. A pharmaceutical firm will typically not be repairing it’s product (though
the product may be periodically reformulated). The pharmaceutical company is more likely to
be providing advisory services to pharmacists, etc.
Support activities allow the five primary activities to be performed efficiently and effectively. They
are grouped into four categories:
1. Firm infrastructure─ refers to the accounting, finance, legal and general administration activities
that allow an organization to function. The AIS is part of the firm infrastructure.
2. Human resources activities─ include recruiting, hiring, training, and providing employee benefits
and compensation.
3. Technology activities─ improve a product or service. Examples include research and
development, investments in new information technology, web site development, and product
design. For the pharmaceutical company, for example, these activities would include research
and development to create new drugs and modify existing ones.
4. Purchasing activities─ procures raw materials, supplies, machinery, and the buildings used to
carry out the primary activities. In the pharmaceutical company, the purchasing folks are trying
to get the best combination of cost and quality in buying chemicals, supplies, and other assets the
company needs to run its operations.
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The primary and support activity systems are subsystems of the value chain system. In addition, an
organization`s value chain is itself a part of a larger system called a supply chain, which is an extended
system that includes an organization`s value chain as well as its suppliers, distributors, and customers.
Figure 1-3: The Supply Chain

Raw Materials
Supplier

Manufacturer

Distributor

Retailer

Consumer

By paying attention to the interorganizational linkages in its supply chain, a company can improve its
performance by helping the other organizations in the supply chain to improve their performance.
Forward integration: integration with a later production stage (i.e., integration between
manufacturer and consumer)
Backward integration: integration with an earlier stage of production (i.e., integration
between manufacturer and supplier)
How an AIS Can Add Value to an Organization
As a support activity, the AIS adds value by providing accurate and timely information so the five
primary value chain activities can be performed more effectively and efficiently. A well-designed AIS
can do this by:
1. Improving the quality and reducing the costs of products or services. For example, an AIS can
monitor machinery so operators are notified immediately when performance falls outside
acceptable quality limits. This helps maintain product quality. It also reduces the amount of wasted
materials and the costs of having to rework anything.
2. Improve efficiency. A well-designed AIS can make operations more efficient by providing more
timely information. For example, a just-in-time manufacturing approach requires constant,
accurate, up-to-date information about raw materials inventories and their locations.
3. Sharing knowledge. A well-designed AIS can make it easier to share knowledge and expertise,
perhaps thereby improving operations and even providing a competitive advantage. For example,
the largest public accounting firms all use their information systems to share best practices and to
support communication between people located at different offices. Employees can search the
corporate database to identify the relevant experts to provide assistance for a particular client; thus,
all of a public accounting firm`s accumulated international expertise can be made available to
service any local client.
4. Improving the efficiency and effectiveness of its supply chain. For example, allowing customers
to directly access the company`s inventory and sales order entry systems can reduce the costs of

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 sales and marketing activities. Moreover, if such access reduces customers` costs and time of
ordering, both sales and customer retention rates may increase. Of course, creating such
interorganizational information systems raises new control concerns that must be addressed. It also
requires increased reliability and accuracy of the data in the accounting information system.
5. Improving the internal control structure. Security, control, and privacy are important issues in
today`s world. An AIS with the proper internal control structure can protect systems from problems
such as fraud, errors, equipment and software failures, and natural and political disasters.
6. Improving decision making.
Providing Information for Decision Making
Decision making is a complex, multistep activity:
 Identify the problem,
 Collect and interpret information,
 Evaluate ways to solve the problem,
 Select a solution methodology, and
 Implement the solution.
An AIS can provide assistance in all phases of decision making. Reports can help to identify potential
problems. Different decision models and analytical tools can be provided to users. Query languages
can facilitate the gathering of relevant data upon which to make the decision. Various tools, such as
graphical inferences, can help the decision maker interpret decision model results and evaluate and
choose among alternative courses of action. In addition, the AIS can provide feedback on the results of
actions.

Information can improve decision making in several ways:

 It identifies situations requiring management action. For example, a cost report with a large
variance might stimulate management to investigate and, if necessary, take corrective action.
 It provides a basis for choosing among alternative actions by reducing uncertainty. For
example, information is used to set prices and determine credit policies.
 Information about the results of previous decisions provides valuable feedback that can be
used to improve future decisions. For example, if a particular marketing strategy is tried and the
information gathered indicates that it did not succeed, a different marketing strategy is selected.
 An AIS can improve decision making by providing accurate information in a timely manner.
For example, Wal-Mart has created an enormous database that contains detailed information about
sales transactions at each of its stores. It uses this information to optimize the amount of each
product carried at each store. It also analyzes the data to discover patterns of items that seem to be
purchased together, and it uses such information to improve the layout of merchandise to
encourage additional sales of related items. In a similar vein, Amazon. Com uses its database of
sales activity to suggest additional books that customers may want to purchase.
The degree to which an AIS can support decision making depends, however, on the type of decision
being made. Decisions can be categorized either in the terms of the degree of structure that exists or
by their scope.
Decision Structure
Decisions vary in terms of the degree to which they are structured.

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a. Structured decisions—are repetitive, routine and understood well enough that they can be
delegated to lower-level employees in the organization. Structured decisions can often be
automated (i.e., done by prior arrangement). For example:
 The decision about extending credit to established customers only requires knowledge
about the customer`s credit limit and current balance.
 Deciding whether to write an auto insurance policy for a customer with a clean driving
history.
b. Semi-structured decisions— are characterized by incomplete decision making rules and the need
for subjective assessments and judgments to supplement formal data analysis. Although such
decisions usually cannot be fully automated, they are often supported by computer-based decision
aids. Examples include:
 Setting a marketing budget for a new product
 Deciding whether to sell auto insurance to a customer with a tainted driving history

c. Unstructured decisions— are non-recurring and non-routine. No framework or model exists to

solve such problems. Instead, they require considerable judgment and intuition (i.e., it requires a
great deal of subjective assessment). Nevertheless, unstructured decisions can be supported by
computer-based decision aids that facilitate gathering information from diverse sources. Examples
include:
 Choosing the cover for a magazine
 Hiring senior management
 Selecting basic research projects to undertake
 Deciding whether to begin selling a new type of insurance policy
Decision Scope
Decisions vary in terms of their scope.
a. Occupational (operational) control decisions—relates to the effective and efficient performance
of specific tasks. It often of a day-to-day nature. For example,
 Decisions relating to inventory management and extending credit
 Deciding whether to order inventory
b. Management control decisions—relates to the effective and efficient use of resources for
accomplishing organizational objectives. Examples include decisions relating to:
 Budgeting
 Developing human resource practices and
 Deciding on research projects and product improvements
c. Strategic planning decisions—relates to establishing organizational objectives and policies for
accomplishing those objectives. The “what do we want to be when we grow up” types of
questions relates to strategic planning. Examples include decisions relating to:
 Setting financial and accounting policies
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  Developing new product lines and
 Acquiring new businesses
A correspondence exists between a manager`s level in an organization and his or her decision-making
responsibilities.
 Top management faces unstructured and semi-structured decisions involving strategic
planning issues.
 Middle managers deal with semi-structured decisions involving management control.
 Lower-level supervisors and employees face semi-structured or structured decisions
involving operational control.

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