Chapter # 1 : Accounting Information

Systems: An Overview
1 INTRODUCTION
In this chapter we will study important terms and discussing the kinds of information that
organizations need and the business processes used to produce that information. How an
AIS adds value to an organization, how an AIS and corporate strategy affect each other,
and the role of the AIS in the value chain.
1.1 System
Two or more interreated components that interact to achieve a goal, often composed of
subsystems that support the larger system. Each subsystem is designed to achieve one or
more organizational goals.
For Example:
- A college of business is a system composed of various departments, each of which is
a subsystem. Moreover, the college itself is a subsystem of the university.
- National Database and Registration Authority (NADRA) manages the sensitive
registration database of all the national citizens of Pakistan
- QuickBooks helps you organize your business finances all in one place so you can
complete your frequent tasks in fewer steps.
1.2 Goal Conflict
When a subsystem’s goals are inconsistent with the goals of another subsystem or with
the system as a whole.
For Example:
- When an individual wishes to go to the gym daily and maintain a social life although
the individual has study commitments.
- Dan is an accountant for a software production company. He requires the sales
numbers each month to create his reports. One of his colleagues on the sales team,
Bill, is consistently late with his numbers, which affects Dan's report.
1.3 Goal congruence
When a subsystem achieves its goals while contributing to the organization’s
overall goal.
The larger the organization and the more complicated the system, the more
difficult it is to achieve goal congruence.
For Example:
- A way of helping to achieve goal congruence between shareholders and managers
is by the introduction of carefully designed remuneration packages for managers
which would motivate managers to take decisions which were consistent with the
objectives of the shareholders‫۔‬

2 | Page
1.4 Data
Facts that are collected, recorded, stored, and processed by an information
system. Businesses need to collect several kinds of data, such as the activities that
take place, the resources affected by the activities, and the people who participate
in the activity.
For Example:
- Data might include individual prices, weights, addresses, ages, names,
temperatures, dates, or distances.
- The business needs to collect data about a sale (date, total amount), the resource
sold (good or service, quantity sold, unit price), and the people who participated
(customer, salesperson).
1.5 Information
Information is data that have been organized and processed to provide meaning
and improve the decision-making process.
As a rule, users make better decisions as the quantity and quality of information
increase.
For Example:
- Time table, merit lists, report card, pay slips, receipts, reports, meeting schedules,
etc.
- The business needs to collect list of potential customers, records of commercial
transactions e.g., purchase, employee data e.g., skills, salary, tracking inventory in
storage and transport etc.
There are limits to the amount of information the human mind can absorb and
process. Information overload occurs when those limits are passed, resulting in
a decline in decision-making quality and an increase in the cost of providing that
information.
Information Technology computers and other electronic devices used to store,
retrieve, transmit, and manipu- late data. Information system designers use
information technology (IT) to help decision makers more effectively filter and
condense information.
For Example:
- Walmart has over 500 terabytes (trillions of bytes) of data in its data warehouse.
That is equivalent to 2,000 miles of bookshelves, or about 100 million digital photos.
Walmart has invested heavily in IT so it can effectively collect, store, analyze, and
manage data to provide useful information.
1.5.1 Value of Information
▪ Benefit produced by the information minus the cost of producing it.
▪ Benefits of information include reduced uncertainty, improved decisions, and
improved ability to plan and schedule activities.
3 | Page
 ▪ The costs include the time and resources spent to produce and distribute the
information.
▪ 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.
1.5.2 Characteristics of 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.

2 INFORMATION NEEDS AND BUSINESS PROCESSES

Organizations need information in order to make effective decisions. In addition,
all organizations have certain business processes in which they are continuously
engaged.
2.1 Business Process
A set of related, coordinated, and structured activities and tasks, performed by a
person, a computer, or a machine, that help accomplish a specific organizational goal.
The data gathering and processing is often tied to the basic business processes in
an organization.
For Example:
- Revenue Collection
- Accounts Payable Settlement
- Pay Role Disbursement
- Sales Return
- Tax Settlement

Business organizations conduct business transactions between internal and

external stakeholders.
Internal stakeholders are employees in the organization (e.g., employees and
managers).

4 | Page
 External stakeholders are trading partners such as customers and vendors as
well as other external organizations such as banks and government.

Business processes are organized into groups of related 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
informational output, such as the financial statements, is called transaction
processing.
Many business activities are pairs of events involved in a give-get exchange.
Most organizations engage in a small number of give-get exchanges, but each type of
exchange happens many times.
These exchanges can be grouped into five major business processes or
transaction cycles:
2.1.1 Revenue Cycle
The revenue cycle, where goods and services are sold for cash or a future
promise to receive cash. Major activities include:
• Receive and answer customer inquiries
• Take customer orders and enter them into the AIS
• Approve credit sales
• Check inventory availability
• Initiate back orders for goods out of stock
• Pick and pack customer orders
• Ship goods to customers or perform services
• Bill customers for goods shipped or services performed
• Update (increase) sales and accounts receivable
• Receive customer payments and deposit them in the bank
• Update (reduce) accounts receivable
• Handle sales returns, discounts, allowances, and bad debts
• Prepare management reports
• Send appropriate information to the other cycles

2.1.2 Expenditure Cycle

The expenditure cycle, where companies purchase inventory for resale or
raw materials to use in producing products in exchange for cash or a future
promise to pay cash.
• Request goods and services be purchased
• Prepare, approve, and send purchase orders to vendors

5 | Page
 • Receive goods and services and complete a receiving report
• Store goods
• Receive vendor invoices
• Update (increase) accounts payable
• Approve vendor invoices for payment
• Pay vendors for goods and services
• Update (reduce) accounts payable
• Handle purchase returns, discounts, and allowances
• Prepare management reports
• Send appropriate information to the other cycles
2.1.3 Production Cycle
The production or conversion cycle, where raw materials are transformed
into finished goods.
• Design products
• Forecast, plan, and schedule production
• Request raw materials for production Manufacture products
• Store finished products
• Accumulate costs for products manufactured Prepare
management reports
• Send appropriate information to the other cycles

2.1.4 Human Resource / Payroll Cycle

The human resources/payroll cycle, where employees are hired, trained,
compensated, evaluated, promoted, and terminated.
• Recruit, hire, and train new employees
• Evaluate employee performance and promote employees
• Discharge employees from functional roles
• Update payroll records
• Collect and validate time, attendance, and commission data
• Prepare and disburse payroll
• Calculate and disburse taxes and benefit payments
• Prepare employee and management reports
• Send appropriate information to the other cycles
2.1.5 Finance Cycle
The financing cycle, where companies sell shares in the company to
investors and borrow money, and where investors are paid dividends and
interest is paid on loans.

6 | Page
 • Forecast cash needs
• Sell stock/securities to investors
• Borrow money from lenders
• Pay dividends to investors and interest to lenders Retire debt
• Prepare management reports
• Send appropriate information to the other cycles
3 ACCOUNTING INFORMATION SYSTEMS
Accounting is the systematic and comprehensive recording of an organization’s
financial transactions.
3.1 Accounting Information System
A system that collects, records, stores, and processes data to produce information
for decision makers.
It includes people, procedures and instructions, data, software, information
technology infrastructure, and internal controls and security measures.
The AIS must collect, enter, process, store, and report data and information.
3.2 Components of an AIS
The AIS can and should be the organization’s primary information system and that
it provides users with the information they need to perform their jobs.
There are six components of an AIS:
1) The people who use the system
2) The procedures and instructions used to collect, process, and store data
3) The data about the organization and its business activities
4) The software used to process the data
5) The information technology infrastructure, including the computers,
peripheral devices, and network communications devices used in the AIS
6) The internal controls and security measures that safeguard AIS data

These six components enable an AIS to fulfill three important business functions:
1) Collect and store data about organizational activities, resources, and
personnel. Organizations have a number of business processes, such as
making a sale or purchasing raw materials, which are repeated frequently.
2) Transform data into information so management can plan, execute,
control, and evaluate activities, resources, and personnel. Decision making
is discussed in detail later in this chapter.
3) Provide adequate controls to safeguard the organization’s assets and data.

Since accounting data comes from an AIS, AIS knowledge and skills are critical to
an accountant’s career success. Interacting with an AIS is one of the most important
7 | Page
activities that accountants perform. Other important AIS-related activities include
design- ing information systems and business process improvements
3.3 How Does an AIS Add Value to an Organization?
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, reduces waste, and lowers costs.
2) Improving efficiency.
For Example
- Timely information makes a just-in-time manufactur- ing approach possible,
as it requires constant, accurate, up-to-date information about raw materials
inventories and their locations.
3) Sharing Knowledge. Sharing knowledge and expertise can improve
operations and pro- vide a competitive advantage.
For Example
- CPA firms use their information systems to share best practices and to support
communication between offices. Employees can search the corporate database
to identify experts to provide assistance for a particular client; thus, a CPA firm’s
international expertise can be made available to any local client.
4) Improving the efficiency and effectiveness of its supply chain.
For Example
- Allowing customers to directly access inventory and sales order entry systems
can reduce sales and marketing costs, thereby increasing customer retention
rates.
5) Improving the internal control structure. An AIS with the proper
internal control structure can help protect systems from fraud, errors,
system failures, and disasters.
For Example
- A good example of an improved internal control structure is the separation of
duties within an accounting information system (AIS). This principle prevents
any single employee from having too much control over a process, which
reduces the risk of fraud and errors.
6) Improving decision making. Improved decision making is vitally
important.
For Example
- Identify situations requiring management action.
- Store information about the results of previous decisions.
8 | Page
 - Provide accurate information in a timely manner.
- Analyze sales data to discover items that are purchased together and it can use
such information to improve the layout of merchandise or to encourage
additional sales of related items.
3.4 THE ROLE OF THE AIS IN THE VALUE CHAIN

To provide value to their customers, most organizations perform a number of

different activities that can be conceptualized as forming a value chain consisting of
five primary activities that directly provide value to customers:

3.4.1 Inbound Logistics

Consists of receiving, storing, and distributing the materials an organi-
zation uses to create the services and products it sells. For example, an
automobile manu- facturer receives, handles, and stores steel, glass, and rubber.
3.4.2 Operations Activities
Transform inputs into final products or services. For example, assembly
line activities convert raw materials into a finished car and retailers remove
goods from packing boxes and place the individual items on shelves for
customers to purchase.
3.4.3 Outbound Logistics
Activities distribute finished products or services to customers. An
example is shipping automobiles to car dealers.
3.4.4 Marketing and Sales Activities
Help customers buy the organization’s products or ser- vices. Advertising
is an example of a marketing and sales activity.
3.4.5 Service
Activities provide post-sale support to customers. Examples include
repair and maintenance services.

Support activities allow the above discussed five primary activities to be

performed efficiently and effectively. They are grouped into four categories:

- Firm infrastructure is the accounting, finance, legal, and general

administration activities that allow an organization to function. The AIS is part of the
firm infrastructure.

- Human resources activities include recruiting, hiring, training, and

compensating employees.

9 | Page
 - Technology activities improve a product or service. Examples include research
and development, investments in IT, and product design.

- Purchasing activities procure raw materials, supplies, machinery, and the

buildings used to carry out the primary activities.

3.5 Use of Artificial Intelligence and Data Analytics to Improve Decision Making
Decision making is a complex, multistep activity that involves identifying a
problem, collecting and interpreting data, evaluating ways to solve the problem,
selecting a solution methodology, and determining and implementing the solution.
Artificial intelligence and data analytics tools can be used in each of these
decisionmaking activities to help improve decision making.

3.5.1 Artificial Intelligence

The use of computer systems to simulate human intelligence processes such as :
- learning (acquiring information and rules for using it)
- reasoning (interpreting data and using its rules to arrive at conclusions)
- and self-improvement (learning from the information and past experiences
to improve its rules)
• AI applications include expert systems, intelligent routing of delivery
vehicles, machine vision (used in self-driving cars), and speech
recognition.
• Some popular AI cloud offerings include Amazon AI, Google AI, IBM
Watson, and Microsoft Cognitive Services.
Here are a few examples of the fields where AI is used:
Business AI-driven robots now perform many highly repetitive tasks, especially
in manufacturing. AI algorithms determine how to better serve customers.
Website chatbots provide immediate customer service.
Education AI software automatically grades student work, assesses student
performance and progress, and provides additional support as needed.
Finance Robo-based stock picking algorithms give advice on what stocks to buy
and sell. Software executes most stock market trades. Personal finance
applications use AI to advise their users and keep track of their finances.
Healthcare AI can make better and faster diagnoses than humans, thereby
improving patient outcomes and reducing costs. For example, doctors can use
IBM Watson to mine patient data, evaluate their symptoms, access external
databases, communicate a diagnosis and how confident Watson is in the
diagnosis, and receive and answer doctor questions.

10 | P a g e
 3.5.2 Data Analytics
Use of software and algorithms to find and solve problems and improve
business performance.
For example, a retail store analyzes sales data and finds soft drink sales are 40%
higher on weekends. It increases weekend stock and offers promotions to boost
revenue.
3.5.3 Data Dashboard
A display of important data points, metrics, and key performance indicators in
easily understood line or bar charts, tables, or gauges.
For example, A company’s AIS dashboard shows:
- Total daily sales (₨, with trend graph)
- Top 5 selling products
- Outstanding customer invoices
- Cash balance in bank accounts
Managers can instantly see performance and spot issues (e.g., rising
receivables).

3.6 Cloud Computing, Virtualization and the Internet of Things

3.6.1 Virtualization
Virtualization takes advantage of the power and speed of modern computers
to run multiple systems simultaneously on one physical computer.
• This cuts hardware costs because fewer computers need to be
purchased.
• Fewer machines means lower maintenance costs.
• Data center costs also fall because less space needs to be rented, which
also reduces utility costs.
For example, A software developer installs VMware/VirtualBox on a single PC
to run Windows, Linux, and macOS simultaneously as virtual machines.
3.6.2 Cloud Computing
Using a browser to remotely access software (as a service), data storage,
hardware (infrastructure as a service), and applications (infrastructure as a
service).
The arrangement is referred to as a “private,” “public,” or “hybrid” cloud,
depending on whether the remotely accessed resources are entirely owned by
the organization, a third party, or a mix of the two
For example, you can either make and bake a pizza in house, buy a frozen pizza
and bake it, have a pizza delivered to your home, or go out to eat a pizza.
Another example, a company uses QuickBooks Online (cloud-based AIS) to
manage accounts. Employees can access financial records securely anytime,
anywhere via the internet, without installing software on every computer.
3.6.3 Internet of Things (IoT)
Refers to the embedding of sensors in a multitude of devices (lights, heating
and air conditioning, appliances, etc.) so that those devices can now connect to
the Internet. The IoT has significant implications for information security.

11 | P a g e