Chapter One

Fundamentals of Accounting
Information Systems
 Points should be addressed in this
chapter

IS from the accountant’s perspective

Strategic Planning and IS
Accountant’s role in the current business
environment
E-business systems and AIS
 Information system from the accountant’s perspective

 Meaning if information system

Information is data that have been organized
and processed to provide meaning to a user.
Usually, more information and better
information translates into better decisions.
 System is a set of two or more interrelated
components that interact to achieve a goal.
 Information system mean the system that
provides information to users.
 Information system …..
 An AIS is an Accounting system that collects,
records, stores, and processes data to produce
information for decision makers.
 An accounting information system (AIS) consists of:
– People
– Procedures
– Data
– Software
– Information technology infrastructure like computer
 Technology is simply a tool to create, maintain, or
improve a system.
 Information system …..
The Three functions of an AIS are to:
1. Collect and store data about events, resources,
and agents.
2. Transform that data into information(process
data to information) that management can use to
make decisions about events, resources, and
agents.
3. Provide adequate controls or safeguard to ensure
that the entity’s resources (including data) are:
• Available when needed
• Accurate and reliable
 Information system …..
 AIS recognizes that information as business
resource. Like other business resource of
capital, labor and raw material
 Every individual in organizations , from the
operational managers to top level managers
needs information to accomplish his or her task.
 The information need and level of detail varies
from user to user and from period to period.
 Information system ………
Accountants provides Information to both:
o External users
 Both trading partners and stakeholders
including government
o Internal Users
 Includes users of information with the
organization like managers
 External users of information
 External users primarily use information that is
either:
MANDATORY INFORMATION—Required
by a governmental entity E.g. maintaining
Books of account for category A and B tax
payers
ESSENTIAL INFORMATION—Required to
conduct business with external parties, such
as purchase orders.
 External users of information
 In providing mandatory or essential
information, the focus should be on:
– Minimizing costs
– Meeting regulatory requirements
– Meeting minimum standards of reliability
and usefulness
 Internal users of information
 Internal users primarily use discretionary
information(detail information's). E.g. Managers

 The primary focus in producing this information

is ensuring that benefits exceed costs, i.e., the
information has positive value.
 WHY ACOUNTANTS STUDY (AIS)?

A. It’s fundamental to accounting.

According to both IFRS and GAAP , 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
 WHY STUDY ACCOUNTING INFORMATION
SYSTEMS?
A. It's fundamental to accounting.
 Other accounting courses focus on how the
information is provided and used.
 An AIS course places greater emphasis
on:
– How the data is collected and
transformed to information
– How the availability, reliability, and
accuracy of the data is ensured
 AIS courses are not number-crunching
courses
 WHY STUDY ACCOUNTING INFORMATION
SYSTEMS?
A. It’s fundamental to accounting.
B. The skills are critical to career success.
 Auditors need to evaluate the accuracy and
reliability of information produced by the
AIS.
 WHY STUDY ACCOUNTING INFORMATION
SYSTEMS?
A. It’s fundamental to accounting.
B. The skills are critical to career success.
 Tax accountants must understand the client’s
AIS adequately to be confident that it is
providing complete and accurate information
for tax planning and compliance work.
 WHY STUDY ACCOUNTING INFORMATION
SYSTEMS?
A. It’s fundamental to accounting.
B. The skills are critical to career success.
 In private industry and not-for-profits
organizations, systems work or system
development is considered the most
important activity performed by accountants.
 WHY STUDY ACCOUNTING INFORMATION
SYSTEMS?
A. It’s fundamental to accounting.
B. The skills are critical to career success.
 In management consulting, the design,
selection, and implementation of
accounting systems is a rapid growth area.
 WHY STUDY ACCOUNTING INFORMATION
SYSTEMS?
A. It’s fundamental to accounting.
B. The skills are critical to career success.
C. The AIS course complements other systems
courses.
 Other systems courses focus on design and
implementation of information systems.
 AIS courses focus on accountability and
control.
 WHY STUDY ACCOUNTING INFORMATION
SYSTEMS?
A. It’s fundamental to accounting.
B. The skills are critical to career success.
C. The AIS course complements other systems
courses.
D. AIS topics are tested on the new CPA exam.
 WHY STUDY ACCOUNTING INFORMATION
SYSTEMS?
A. It’s fundamental to accounting.
B. The skills are critical to career success.
C. The AIS course complements other systems
courses.
D. AIS topics are tested on the new CPA exam.
E. One of the fastest growing types of consulting services is
the design, selection, and implementation of new
Accounting Information Systems.
F. AICPA’s(American institute of CPA) recognizes the
importance and interrelationship of IT with accounting
 What Makes Information Useful?
Relevant
 “The capacity of information to make a difference in a decision
by helping users to form predictions about the outcomes of past,
present, and future events or to confirm or correct prior
expectations.”
Reliable
 “The quality of information that assures that information is
reasonably free from error and bias and faithfully represents what
it purports to represent.”
Complete
 “The inclusion in reported information of everything material that
is necessary for faithful representation of the relevant
phenomena.”
 What Makes Information Useful?

Timely
 “Having information available to a decision maker before it loses its
capacity to influence decisions.”
Understandable
 “The quality of information that enables users to perceive its
significance.”
Verifiable
 “The ability through consensus among measurers to ensure that
information represents what it purports to represent or that the
chosen method of measurement has been used without error or bias.”
Accessible
 Available when needed (see Timely) and in a useful format (see
Understandable).
 ROLE OF THE AIS IN THE VALUE CHAIN
• In Value chain there are five primary activities
which consist of the activities performed in order
to create, market, and deliver products and
services to customers and also to provide post-
sales services and support.
• In addition to primary activities , there are four
support activities in the value chain to make it
possible for the primary activities to be
performed efficiently and effectively.
• These activities are sometimes referred to as
“line” and “staff” activities respectively.
 The Value Chain

Five Primary Activities

Inbound Outbound
Operations
Logistics Logistics

Marketing
Post sale-Service
and Sales
 The Value Chain

Four Support Activities

Infrastructure Technology

Human
Purchasing
Resources
 How An AIS Can Add Value
To An Organization
An AIS adds value by:
 by providing accurate and timely information
so that five primary value chain activities can
be performed more effectively and efficiently.
 Improving the quality and reducing the costs of
products or services.
 Improving efficiency.
 How An AIS Can Add Value
To An Organization

 Improving decision making capabilities.

 Increasing the sharing of knowledge.
 A well-designed AIS can also help an
organization profit by improving the efficiency
and effectiveness of its supply chain.
 THE AIS AND CORPORATE STRATEGY
 Michael Porter suggests that there are two basic business
strategies companies can follow:
 Product-differentiation strategy
A product differentiation strategy involves setting your
product apart from those of our competitors, i.e., building a
“better” product by offering to the customer with different
sizes of pickings, or with enhanced features, etc.
 Low-cost strategy
A low-cost strategy involves offering a cheaper product
than our competitors. The low cost is made possible by
operating more efficiently.
 THE AIS AND CORPORATE STRATEGY
The company can choose other strategies like:
 Needs-based strategic position
• Serve most or all of the needs of a particular group of
customers in a target market.
 Access-based strategic position
• Serve a subset of customers who differ from others in terms
of factors such as geographic location or size..
 THE AIS AND CORPORATE STRATEGY
 The AIS should help a company adopt and
maintain its strategic position by:
Requires that data be collected about each
activity.
Requires the collection and integration of both
financial and nonfinancial data.
 E-business systems and AIS

 Businesses process that supports buying and

selling activities through electronic media.
 The term Electronic Business and E-business are
used interchangeably.
 E-commerce Refers of key business processes
through the use of Internet technologies
 Advantages of Electronic Commerce
 Electronic commerce can increase sales and decrease
costs
 If advertising is done well on the Web, the messages
reach to potential customers in every country
 Using e-commerce sales support and order-taking
processes, a business can:
Reduce costs of handling sales inquiries
Provide price quotes
 It increases purchasing opportunities for buyers
 Negotiating price and delivery terms is easier
Disadvantages of Electronic Commerce

 Perishable grocery products are much harder

to sell online
 It is difficult to:
Calculate return on investment
Integrating existing databases into software
 Cultural and legal obstacles.
 Major Types of E-Commerce
 Market relationships
 Business-to-Consumers (B2C)
 Business-to-Business (B2B)
 Consumer-to-Consumer (C2C)
 Technology-based
 Peer-to-Peer (P2P)
 Mobile Commerce (M-commerce)
Major Types of E-Commerce

Skype
 Revenue Model in E- commerce
 Describes how the firm will earn revenue,
produce profits, and produce a superior
return on invested capital.
 E-commerce revenue models include:
 advertising model
 subscription model
 transaction fee model
 sales model
 Revenue Model
 Advertising revenue model
 a company provides a forum for advertisements and
receives fees from advertisers (Yahoo)
 Subscription revenue model
 a company offers it users content or services and
charges a subscription fee for access to some or all of it
offerings (Consumer Reports or Wall Street Journal)
 Transaction fee revenue model
 a company receives a fee for enabling or executing a
transaction (eBay or E-Trade)
 Sales revenue model
 a company derives revenue by selling goods,
information, or services (Amazon or DoubleClick)
Five Primary Revenue Models
 The role of accountants in current business
world
In current business enviroment Accountants can act in three ways:
1. User of Information system
 Accountants should use modern information systems to provide relevant and
quality information to users.
2. As system designers
 In todays word system design divided between accountants and IT professional.
 Accountants develop conceptual system by using accounting standards and
concepts and IT professional develop physical system based on the accountants
system design.
3. As system Auditor
 As modern business internal control is computerized, IT audit covers larger
portion of over all audit.
Always take time to smile!
End of Chapter One