Chapter One

Accounting Information Systems: An Overview

1.1. Introduction
Businesses engage in a variety of business processes,
including:
– Acquiring capital
– Buying buildings and equipment
– Hiring and training employees
– Purchasing inventory
– Doing advertising and marketing
– Selling goods or services
– Collecting payment from customers
– Paying employees
– Paying taxes
– Paying vendors
Each activity requires different types of decisions.
Each decision requires different types of information.
Business activities and Information needs
The activities can be summarized in to the following categories which
are historically called as transaction cycles.
The revenue cycle which includes the sales and cash receipt events
The expenditure cycle which includes purchase and cash
disbursement events
The human resource (payroll) cycle which includes events of hiring
and paying of employees.
The production cycle includes the event of transforming raw
material and labor into finished product
The financial cycle includes the events of obtaining funds from
investors and creditors and repaying them.
These various transaction cycles relate to one another and interface
with the general ledger and reporting system, which is used to generate
information for both internal and external users.
What is decision making?
Decision making involves the following steps:
1.Identify the problem.
2.Select a method for solving the problem.
3.Collect data needed to execute the decision model.
4.Interpret the outputs of the model.
5.Evaluate the merits of each alternative.
6.Choose and execute the preferred solution.
Types of information needed for decisions:
– Some is financial
– Some is nonfinancial
– Some comes from internal sources
– Some comes from external sources
• An effective AIS needs to be able to integrate
information of different types and from different
sources.
SYSTEMS, DATA, AND INFORMATION
• A system is:
– A set of interrelated components
– That interact together
– To achieve a goal
• Most systems are composed of smaller
subsystems . . .
• . . . and vice versa!
Every organization has goals
– The subsystems should be designed to
maximize achievement of the organization’s
goals.
– Even to the detriment of the subsystem itself.
– 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 the activity of a
subsystem is not consistent with another
subsystem or with the larger system.
• Goal congruence occurs when the subsystem’s
goals are in line with the organization’s goals.
• The larger and more complicated a system, the
more difficult it is to achieve goal congruence.
• The systems concept encourages integration
(i.e., minimizing the duplication of recording,
storing, reporting, and processing).
Data and Information
• Data are facts that are collected, recorded,
stored, and processed by an information system.
• Organizations collect data about:
– Events that occur
– Resources that are affected by those events
– Agents who participate in the events
• Information is different from data.
• 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.
• However, when you get more information than
you can effectively assimilate, you suffer from
information overload.
– Example: Final exams week!
• When you’ve reached the overload point, the
quality of decisions declines while the costs of
producing the information increases.
What is the 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)
Characteristics of Useful Information
Relevant: Reduces uncertainty, improves
decision making, or confirms or corrects prior
expectations.
 Reliable: Free from error or bias; accurately
represents organization events or activities.
 Complete: Does not omit important aspects of
the events or activities it measures.
 Timely: Provided in time for decision makers to
make decisions.
 Understandable: Presented in a useful and
intelligible format.
 Verifiable: Two independent, knowledgeable
people produce the same information.
 Accessible: Available to users when they need it
and in a format they can use.
1.2 Accounting Information Systems and its basic
Functions
What Is An AIS?
• An AIS is a system that collects, records,
stores, and processes data to produce
information for decision makers.
• AIS is generally a computer-based method for
tracking accounting activity in conjunction
with information technology resources.
• It can:
– Use advanced technology; or
– Be a simple paper-and-pencil system; or
– Be something in between.
• Technology is simply a tool to create,
maintain, or improve a system.
1.3 Scope of accounting information system (AIS)
•It has often been said that accounting is the language of business. If that is the
case, then the accounting information system (AIS) is the intelligence—the
information-providing vehicle— of that language.
•Accounting is a data identification, collection, and storage process as well as an
information development, measurement, and communication process.
•By definition, accounting is an information system, since an AIS collects, records,
stores, and processes accounting and other data to produce information for decision
makers. This is illustrated in Figure 1-3.

1-14
Components of accounting information system:
1.People: Those who operate such accounting software systems in
their business.
2.Procedures: It includes both manual and automated procedures of
collection, processing and storage of data relating to organization’s
economic and other activities.
3.Data: About entity and its business activities.
4.Software: computer-based program that performs the accounting
stated functions to transform data in to information.
5.Information technology infrastructure: It includes computer and
its peripheral devices as well as network communication devices.
6.Internal controls and the security measures: To safeguard data in
AIS.
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 data into information so management can
plan, execute, control, and evaluate activities,
resources, and personnel.
3. Provide adequate controls to safeguard the
organization’s assets and data
Why Study AIS?
1. 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.
– How the availability, reliability, and accuracy of the data is
ensured.
2. The skills are critical to career success.
Auditors need to evaluate the accuracy and reliability of
information produced by the AIS.
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.
 In private industry and not-for-profit, systems work
is considered the most important activity performed
by accountants.
 In management consulting, the design, selection,
and implementation of accounting systems is a rapid
growth area.
3. The AIS course complements other systems
courses.
• Other systems courses focus on design and
implementation of information systems, databases,
expert systems, and telecommunications.
• AIS courses focus on accountability and control.
4. AIS topics are tested on the new CPA exam.
Makes up about 25% of the Business Environment &
Concepts section of the CPA exam.
5. AIS topics impact corporate strategy and culture.
Ten Most Important Activities Performed By
Accountants
1. Accounting systems and financial reporting
2. Long-term strategic planning
3. Managing the accounting and finance function
4. Internal Consulting
5.Short-term budgeting
6. Financial and economic analyses
7. Process improvement
8. Computer systems and operations
9. Performance evaluation
10. Customer and product profitability analyses
Benefits of information technology to AIS:
•Security: Information technology provides various tools
and methods of information security such as biometric
devices, password protected systems.
•Internet: The information technology has introduced the
concept of internet that makes the accounting
information system innovative as it gets easier to collect
and share the useful information within and outside the
user entity.
•Cloud computing: Information technology enables the
use of AIS without investing huge cost in acquiring
accounting software. They can rather be accessed from
the cloud (online platform).
 1.4. How an AIS can add value to an Organization
• An AIS adds value...
 By providing accurate and timely information.
 By improving the quality and reducing the costs of products
or services.
 By improving efficiency.
 By increasing the sharing of knowledge.
 By Improving decision making capabilities.
A well-designed AIS can also help an organization profit by
improving the efficiency and effectiveness of its supply chain.
An AIS can help improve decision making in several ways:
 It can identify situations requiring management action.
 It can reduce uncertainty and thereby provide a basis for choosing
among alternative actions.
 It can store information about the results of previous decisions,
which provides valuable feedback that can be used to improve
future decisions.
 It can provide accurate information in a timely manner
1.5. The AIS and Corporate Strategy
•New developments in IT affect the design of an AIS.
Because an AIS functions within an organization, should be
designed to reflect the values of that organizational culture.
•What role does the AIS play in helping organizations to
adopt and maintain a strategic position?
–Data collection about each activity
–Transforming data into information that can be used by
management to coordinate activities
Factors Influencing Design of the AIS

Organizational
Strategy
Culture

AIS

Information
Technology
1.6. The Role of AIS in the Value Chain
The Value Chain
•The ultimate goal of any business is to provide value to its
customers.
•What does it mean to deliver value?
•Let’s peek in on a conversation at Joe’s pharmacy . . .
 That’s true, but we’re
comfortable with that
Well, Mr. because of the value-
Pharmaceutical added that we bring to
Salesman, your this arrangement.
proposal looks good,
but your prices are
about 5% higher than
your competitors.

What is that “value-

added,” and how do you Blah—blah—blah–
convert it into dollars? customer service–
blah—blah—blah
• Although “adding value” 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 enhanced features
– Customizing it and so on….
• Value is provided by performing a series of
activities referred to as the value chain. These
include:
– Primary activities provide direct value to the
customer.
– Support activities enable primary activities to be
efficient and effective.
• These activities are sometimes referred to as
“line” and “staff” activities respectively.
The Value System
•The value chain concept can be extended by
recognizing that organizations must interact with
suppliers, distributors, and customers.
•An organization’s value chain and the value
chains of its suppliers, distributors, and customers
collectively form a value system.
1.7 Uses of AIS and Role of Accounting in Relation to AIS

The accounting function manages the

financial information resource of the firm. In
this regard, it plays two important roles in
transaction processing.
First, accounting captures and records the
financial effects of the firm’s transactions.
Second, the accounting function distributes
transaction information to operations
personnel to coordinate many of their key
tasks. 1-31
 End of Chapter one
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