Chapter 1

The Information System: An Accountant’s Perspective

Accounting Information Systems
James A. Hall

Internal & External Information Flows – A system is called a subsystem when it

is viewed as a component of a larger
system.
– A subsystem is considered a system
when it is the focus of attention.

System Decomposition versus System

Interdependency
• System Decomposition
– the process of dividing the system
into smaller subsystem parts
• System Interdependency
– distinct parts are not self-contained
– they are reliant upon the
Internal Information Flows functioning of the other parts of the
• Horizontal flows of information used system
primarily at the operations level to – all distinct parts must be
capture transaction and operations data functioning or the system will fail
• Vertical flows of information
– downward flows — instructions, quotas, What is an Information System?
and budgets An information system is the set of formal
– upward flows — aggregated transaction procedures by which data are collected,
and operations data processed into information, and distributed to
users.
Information Requirements
• Each user group has unique information Transactions
requirements. • A transaction is a business event.
• The higher the level of the organization, • Financial transactions
the greater the need for more aggregated – economic events that affect the
information and less need for detail. assets and equities of the
organization
Information in Business – e.g., purchase of an airline ticket
• Information is a business resource that: • Nonfinancial transactions
– needs to be appropriately managed – all other events processed by the
– is vital to the survival of organization’s information system
contemporary businesses – e.g., an airline reservation — no
commitment by the customer
What is a System?
• A group of interrelated multiple
components or subsystems that serve a
common purpose
• System or subsystem?
 AIS Subsystems
• Transaction processing system (TPS)
– supports daily business operations
• General Ledger/ Financial Reporting
System (GL/FRS)
– produces financial statements and
reports
• Management Reporting System (MRS)
What is Accounting Information Systems? – produces special-purpose reports for
• Accounting is an information system. internal use
– It identifies, collects, processes, and
communicates economic information The General AIS Model
about a firm using a wide variety of
technologies.
– It captures and records the financial
effects of the firm’s transactions.
– It distributes transaction information
to operations personnel to coordinate
many key tasks.

AIS versus MIS

• Accounting Information Systems (AIS)
process
– financial transactions; e.g., sale of
goods
– and nonfinancial transactions that
directly affect the processing of Data Sources
financial transactions; e.g., addition of • Data sources are financial transactions that
newly approved vendors enter the information system from internal
• Management Information Systems (MIS) and external sources.
process
– nonfinancial transactions that are not – External financial transactions are the
normally processed by traditional AIS; most common source of data for most
e.g., tracking customer complaints organizations.
• E.g., sale of goods and services,
purchase of inventory, receipt of
cash, and disbursement of cash
(including payroll).

– Internal financial transactions involve

the exchange or movement of
resources within the organization.
• E.g., movement of raw materials
into work-in-process (WIP),
application of labor and overhead
to WIP, transfer of WIP into
finished goods inventory, and
depreciation of equipment.
 Transforming the Data into Information – the stewardship function of
Functions for transforming data into management
information according to the general AIS model: – management decision making
– the firm’s day-to-day operations
1. Data Collection
• Capturing transaction data Organizational Structure
• Recording data onto forms • The structure of an organization helps to
• Validating and editing the data allocate
– responsibility
2. Data Processing – authority
• Classifying – accountability
• Transcribing • Segmenting by business function is a very
• Sorting common method of organizing.
• Batching
• Merging Functional Areas
• Calculating • Inventory/Materials Management
– purchasing, receiving and stores
• Summarizing
• Production
• Comparing
– production planning, quality control,
and maintenance
3. Data Management
• Marketing
• Storing
• Distribution
• Retrieving
• Personnel
• Deleting • Finance
• Accounting
4. Information Generation • Computer Services
• Compiling
• Arranging Accounting Independence
• Formatting • Information reliability requires accounting
• Presenting independence.
– Accounting activities must be separate
Characteristics of Useful Information and independent of the functional areas
• Regardless of physical form or technology, maintaining resources.
useful information has the following – Accounting supports these functions
characteristics: with information but does not actively
– Relevance: serves a purpose participate.
– Timeliness: no older than the time – Decision makers in these functions
period of the action it supports require that such vital information be
– Accuracy: free from material errors supplied by an independent source to
– Completeness: all information essential ensure its integrity.
to a decision or task is present
– Summarization: aggregated in
accordance with the user’s needs

Information System Objectives in a Business

Context
• The goal of an information system is to
support
An REA Data Model Example Accountants as System Auditors
• External Auditors
– attest to fairness of financial statements
– assurance service: broader in scope than
traditional attestation audit
• IT Auditors
– evaluate IT, often as part of external
audit
• Internal Auditors
– in-house IS and IT appraisal services

REA Model
• The REA model is an accounting framework
for modeling an organization’s
– economic resources; e.g., assets
– economic events; i.e., affect changes in
resources
– economic agents; i.e., individuals and
departments that participate in an
economic event
– Interrelationships among resources,
events and agents
• Entity-relationship diagrams (ERD) are
often used to model these relationships.

Accountants as Information System Users

• Accountants must be able to clearly convey
their needs to the systems professionals
who design the system.
• The accountant should actively participate
in systems development projects to ensure
appropriate systems design.

Accountants as System Designers

• The accounting function is responsible for
the conceptual system, while the
computer function is responsible for the
physical system.
• The conceptual system determines the
nature of the information required, its
sources, its destination, and the
accounting rules that must be applied.