Chapter One

Accounting Information systems- An Overview

Introduction
A system is a set of two or more interrelated components 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 for which it is a part.

An accounting information system is a collection of resources such as people and equipment

designed to transform financial data into information. The information is communicated to a wide
variety of decision makers. AISs perform this transformation whether they are essentially manual or
computerized.
Organizations depend on information systems in order to stay competitive. Information is just as
much as a resource as plant and equipment. Productivity, which is crucial to staying competitive, can
be increased through better information systems. Accounting as an information system identifies,
collects, processes and communicates economic information about an entity to a wide variety of
people.

AIS consists of five components :

1. The people who operate the system and perform various functions.
2. The procedures both manual and automated involved in collecting, processing, and storing
data about organization’s activities.
3. The data about the organization’s transactions
4. The software used to process the organization’s data
5. The information technology infrastructure including computers, peripheral devices, and
network communication devices.

The function together enable AIS to fulfill three important functions in any organization.
1. Collecting and storing data
2. transferring data into information
3. Providing adequate controls to safeguard the organization’s assets including its data, to
ensure that the data are available when needed and are accurate and reliable.
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.
Characteristics that make information useful are:
1. Relevance: It reduces uncertainty by helping you predict what will happen or confirm what
already has happened.
2. Reliability : It’s dependable, i.e., free from error or bias and faithfully portrays events and
activities
3. Completeness: It doesn’t leave out anything that’s important
4. Timeliness: You get it in time to make your decision.

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 5. Understandability: It’s presented in a manner you can comprehend and use.
6. Verifiability: A consensus notion—the nature of the information is such that different people
would tend to produce the same result.
7. Accessibility: You can get to it when you need it and in a format you can use.

Information Systems
The term information system suggests the use of computer technology in an organization to provide
information to users. A computer based information system is a collection of computer hardware and
software designed to transform data into useful information. There are several types of computer
based information systems. These include the following:
1. Data processing- electronic data processing (EDP) - is the use of computer
technology to perform an organization’s transaction oriented data processing. EDP is a
fundamental accounting information system application in every organization. As computer
technology has become commonplace, the term data processing has come to have the same
meaning as EDP.
2. Management Information Systems (MIS)- describes the use of computer technology to
provide decision-oriented information to managers. MIS provides a wide variety of
information beyond that which is associated with data processing in organizations. It
recognizes that managers within organizations use and require information in decision-
making, and that computer based information systems can assist in providing information to
managers.

Functional MIS Systems- many organizations apply the MIS concept to specific
functional areas within the organization. This indicates the tailoring of MIS concept to the
development of specific information systems to support decision-making in a particular well-
defined organization subunit.
a. Marketing Information System- is an MIS that provides information to be used by
a marketing function. Much of the information is obtained from the organization’s
accounting information system. Examples are sales summaries and cost information.
Other information must be gathered from the organization’s environment. Examples of
environmental information would include customer preference data, customer profiles,
and information on competitor’s products.
b. A Manufacturing Information System- is an MIS that provides information to be
used by the manufacturing function. Much of the information is obtained from the
organization’s accounting information system. Examples are inventory summaries and
cost information. Other information must be gathered from the organization’s
environment. Examples of environmental information would include raw materials
data, potential new vendor profiles, and information on new manufacturing techniques.
c. A Human Resource Information System- is an MIS that provides information to
be used by the human resource (personnel) function. Much of the information is

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 obtained from the organization’s accounting information system. Examples are wage
and payroll tax summaries and benefit information. Other information must be gathered
from the organization’s environment. Examples of environmental information would
include government regulation data, and general labor market information.
d. A Financial Information System- is an MIS that provides information to be used
by the finance function. Much of the information is provided by the organization’s
accounting information system. Examples are cash flow summaries and payment
information. Other information must be gathered from the organization’s environment.
Examples of environmental information would include interest rate data, lender
profiles, and information on credit markets.
3. Decision Support Systems (DSS)- provide data processed into a decision making format
for the end user. A DSS requires the use of decision models and specialized databases, and
differs significantly from a DP system. A DSS is designed for specific types of decisions for
specific users. It is directed at serving specific non-routine information requests by mangers.
A familiar example is the use of spreadsheet software to perform what if analysis of
operating or budgeted data such as sales forecasts by marketing personnel.
4. Expert Systems (ES) – are knowledge based information systems that use the knowledge
about a specific application area to act as an expert consultant to end-users. Like DSSs an ES
requires the use of decision models and specialized databases. Unlike DSSs an ES is also
requires the development of a knowledge base- the special knowledge that an expert
possesses in a decision area and an inference engine- the process by which the expert makes
a decision. An ES attempts to replicate the decisions that would be made by an expert, human
decision maker in the same decision situation. An ES differs from DSS in that the DSS
assists the user in making a decision, whereas an ES makes the decision.
5. Executive Information Systems (EISs) - are systems tailored to the strategic
information needs of top-level management. Much of the information used by top-level
management comes from sources other than an organization’s information systems.
Examples are meetings, memos, television, periodicals, and social activities. But some
information must be processed by the organization’s information systems. An EIS provides
top-level management with easy access to selective information that has been processed by
the organization’s information systems. This selective information concerns the key success
factors that top-level management has identified as being critical to the organization’s
success. Actual versus projected market share for product groups and budget versus actual
profit and loss data for divisions might be key success factors for top-level executive.
6. Accounting Information Systems - are computer-based systems designed to transform
accounting data into information. However, AIS is used broadly to include transaction
processing cycles, the use of information technology and the development of information
systems.

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Why Study the AIS?
An effective AIS is essential to the organization’s long run success.
 It enables monitoring the events that occur and how well an organization works.
 It also tracks the effect of various events on the resources that the organization controls.
 Information about the agents who participate in the events is used to assign responsibility for
actions taken.
The AIS course fits into both the accounting and information system curricula. Study of AIS
fundamental to accounting because change shall be incorporated in the accounting curricula. It is
recommended that the accounting curricula should be designed to provide the following three
essential concepts.
 The use of information in decision making
 The nature, design, use and implementation of AISs
 Financial information reporting

The other accounting courses such as financial or tax accounting focus on how to provide
information. In contrast, the AIS course focuses on understanding how the accounting system works
i.e. how to collect data about the organization’s activities and transactions; how to transform that
data into information that management can use to run the organization; and how to ensure the
availability, reliability and accuracy of that information. Hence, it complements the other accounting
courses.

There are many other systems courses that cover the design and implementation of information
systems and which help develop specialized skills in such areas as databases, expert systems, and
telecommunications. The AIS course differs from these other information systems courses in its
focus on accountability and control.

These issues are important because in most large organizations, the managers are not owners.
Instead, the owners have entrusted the management with assets (including data and information) and
hold them accountable for their proper use. Hence, the AIS course complements the other systems
course.

Three factors influence the design of AIS:

 Developments in information technology (IT)
 The organization’s strategy
 The development culture

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 Organizational Strategy
Culture

AIS

Information
Technology

IT is profoundly changing the way that accounting and many other business activities are performed.
It is also essential to know the costs and benefits of new IT developments. This requires developing
basic understanding of business strategies and how IT can be used to implement those strategies as
well as how new developments in IT create an opportunity to modify those strategies.
Moreover, because the AIS functions within an organization, it should be designed to reflect the
values of that organizational culture. The design of AIS also influences the organizational 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
decentralized and autonomy.
The Role of the AIS in the Value Chain
The objective of most organizations is to provide value to their customers. This requires performing
a number of different activities. These activities are conceptualized as forming a value chain. An
organization’s value chain consists of five primary activities that directly provide value to its
customers. These are:
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.
2. Operations- activities that transform inputs into final products or services.
3. Outbound logistics- are the activities involved in distributing finished products or services
to customers.
4. Marketing and sales- refers to the activities involved in helping customers to buy the
organization’s products or services.
5. Service- activities that provide post sale support to customers. Examples are repairs and
maintenance services.

1. Firm Infrastructure
5|Page 2. Human Resources
3. Technology
4. Purchasing
 1. Inbound 2. Operations 3. Outbound 4. Marketing 5. Services
logistics logistics and sales

Organizations also perform a number of other support activities that enable the five primary
activities to be performed efficiently and effectively. Those support activities can be grouped into
four categories:

1. Firm Infrastructure- refers to the accounting, finance, legal support, and general
administrative activities that are necessary for any organization to function. The AIS is part of
the firm infrastructure.
2. Human resources- activities that include recruiting, hiring, training, and providing employee
benefits and compensation.
3. Technology- activities that improve a product or service. Examples include research and
development, improvements in information technology, web site development, and product
design.
4. Purchasing- includes all the activities involving in procuring raw materials, supplies,
machinery, and the buildings used to carry out the primary activities.

It shall be recalled that systems are often composed of subsystems. Thus, each step in an
organization’s value chain is itself a system consisting of a set of activities. For example, the sales
and marketing step includes such activities as market research, calling on customers, order
processing, and credit approval. In addition, an organization’s value chain is itself a part of a larger
system. Organizations interact with suppliers, distributors, and customers.

How Can AIS Add Value to an Organization?

The value chain model shows that the AIS is a support activity. Thus, AIS can add value to the
organization by providing accurate and timely information so that 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 cost of products and services - an AIS for
example can monitor machinery so that operators are notified immediately when the process
falls outside acceptable quality limits. This helps not only maintain product quality but also
reduces the amount of wasted materials and the costs of having to rework anything.

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 2. Improving efficiency- a well designed AIS can help improve the efficiency of operations 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
costs.
3. Improved decision making- an AIS can improve decision making by providing accurate
information in a timely manner.
4. Sharing of knowledge- a well-designed AIS can make it easier to share knowledge and
expertise, perhaps thereby improving operations and even providing a competitive advantage.
Well-designed AIS can also help an organization profit by 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 cost of sales and marketing activities.
Moreover, if such access reduces customers’ costs and time of ordering, both sales and customer
retention rates may increase.

Data and Information

Data refers to any and all of the facts that are collected, stored, and processed by an information
system. Three kinds of data need to be collected for any activity. These are facts about the event
itself, the resources affected by the event, and the agents who participated in that event. Consider
selling process as an example. Data need to be collected about the sale event itself (such as date of
sale, total amount etc), data about the resources being sold (identity of the goods or services), and
data about the agents who participated in the sale event (the identity of the customer and the
salesperson). Once data have been collected, the AIS will transform the facts so that they will be
used to make decisions. Thus information is data that have been organized and processed to provide
meaning.

Decision Making
There are different models of decision-making and problem solving process. All those models depict
that decision-making is a complex, multistep activity.
 First the problem has to be identified.
 Then the decision maker must select a method for solving the problem
 Next the decision maker must collect the data needed to execute the decision model and,
interpret the outputs of the model evaluating the merits of each alternative
 Finally, the decision maker chooses and executes the preferred solution.

The AIS can provide assistance in all phases of decision-making. 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 interfaces can help the
decision maker interpret the results of a decision model and evaluate and choose among alternative
course of action. Finally the AIS can provide feedback on the results of actions.

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The degree to which AIS can support decision-making depends, however, on the type of decision
being made. Decisions may be categorized either in terms of the degree of structure or by their
scope.

Decision Structure
Decisions vary in terms of the degree they are structured. Decisions are classified into three in this
regard.
 Structured decisions- are repetitive, routine, and understood well enough that they can be
delegated to lower level employees in the organization. For example, the decision about
extending credit to established customers require only knowledge about the customer’s credit
limit and current balance. Structured decisions can often be automated.
 Semi structured decisions- are characterized by incomplete rules for making the decisions
and the need for subjective assessments and judgments to supplement formal data analysis.
Setting a marketing budget for a new product is a typical example. Although such decisions
can’t be fully automated, they are often supported by computer based decision aids.
 Unstructured decisions - are nonrecurring and nonroutine decisions. For example, choosing
the cover of a magazine, hiring senior management, and selecting basic research projects to be
undertaken. No framework or model exists to solve such problems. Instead, they require
considerable judgment and intuition. Nevertheless, unstructured decisions can be supported by
computer based decision aids that facilitate gathering information from diverse sources.
Decision Scope
Decisions vary in terms of the scope of their effect. This will include:
 Operational control- concerns the effective and efficient performance of specific tasks.
Decisions relating to inventory management and extending credit are examples of operational
control activities.
 Management control- concerns the effective and efficient resources for accomplishing
organizational objectives. Budgeting, developing human resource practices, and deciding on
research projects and product improvements are examples of management control activities.
 Strategic planning- concerns the establishing of organizational objectives and policies for
accomplishing those objectives. Setting financial and accounting policies, developing new
product lines, and acquiring new businesses are examples of strategic planning decisions.
There exists a correspondence between a manager’s level in an organization and his decision making
responsibilities.
 Top management---unstructured and semi structured decisions, involving strategic decisions
 Middle managers---deal with semi structured decisions, involving management control
 Lower level supervisors and employees--- face semi structured or unstructured decisions
involving operational control.

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Value of Information for Decision Making
The information produced by a well-designed AIS can improve decision making in several ways:
 First, 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.
 Second, by reducing uncertainty, accounting information provides a basis for choosing
among alternative actions. For example, accounting information is often used to set prices
and determine credit policies.
 Third, information about the results of previous decisions provides valuable feedback that
can be used to improve future decisions.
Nevertheless, although more information is often better, this is only true to a point. There are limits
to the amount of information that the human mind can effectively absorb and process. Information
overload occurs when those limits are passed. Information overload is costly because decision-
making quality declines while the costs of providing that information increase. Thus, information
overload reduces the value of information. Consequently, information system designers must
consider how advances in IT can help decision makers more effectively filter and condense
information thereby avoiding information overload.

Moreover, it is important to recognize that there are costs associated with producing information.
Those costs include the time and resources spent in colleting, processing, and storing data as well as
the time and resources used in distributing the resulting information to decision makers. There are
also many opportunities to invest in additional IT to improve the overall performance of the AIS.
Most organization, however, do not have unlimited resources to invest in imporoving their
information systems. Therefore, another important decision involving identifying which potential
AIS improvements are likely to yield the greatest return. Making this decision wisely requires that
accountants and information system professionals

AIS and Corporate Strategy

Strategies and Strategic Positions
There are two basic strategies that companies can follow:
1. A product differentiation strategy entails adding some features or services to a product that
are not provided by competitors. Doing so allows a company to charge a premium price to its
customers.
2. A low cost strategy entails striving to be the most efficient producer of a product or a service.
Sometimes companies can succeed in both producing a better product than competitors and in doing
at costs below its industry average. Usually, however, companies must choose between the two basic
strategies. If they concentrate on being the lowest cost producers, they will have to forego some
value added features that might differentiate their product. If they focus on product differentiation,
they most likely will not have the lowest costs in the industry. Thus a business strategy involves
making choices.

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The choice of a business strategy involves the selection of a specific strategic position they shall
adopt. There are three strategic positions.
1. A variety based strategic position involves producing or providing a subset of the industry’s
products or services.
2. A needs based strategic position involves trying to serve most or all of the needs of a
particular group of customers. This entails first identifying a target market.
3. An access based strategic position involves serving a subset of customers who differ from
other customers in terms of factors such as geographic locations or size, which creates
different requirements for serving those customers.

The above strategic positions are not mutually exclusive and indeed often overlap. For example, a
company may adopt elements of all the three. Choosing a strategic position is important because it
enables the company to focus its efforts; otherwise, it risks trying to be everything to everybody.

Information Technology and Business Strategy

We have seen that IT can affect strategy. In addition to directly affecting the way that organizations
carry out their value chain activities, IT such as the Internet can also affect significantly both
strategy and strategic positioning. For example, it dramatically cuts costs, thereby helping companies
to implement a low cost strategy.

The Role of the AIS

An organization’s AIS play an important role in helping it adopt and maintain a strategic position.
Achieving a close fit among activities requires that data be collected about each activity. It is also
important that the information system collect and integrate both financial and non-financial data
about the organization’s activities. Traditionally, the AIS was used as transaction processing system
because it was concerned about financial data. To handle non-financial data, other systems were
used leading to redundancy and problem in updating data.
Enterprise resource planning (ERP) systems are designed to overcome these problems as
they integrate all aspects of a company’s operations with its traditional AIS. For example, when a
sales order is entered by the sales force, the effect of the transaction automatically flows to all
affected parts of the company. Inventory is updated, production schedules are adjusted, and purchase
orders of raw materials and supplies are initiated. More over, important non-financial data such as
the time of sale are collected and stored in the same system.

A key feature of ERP systems is the integration of financial with other non-financial operating data.
The value of such integration is to suggest that there may be strategic benefits to more closely
linking traditionally separate functions of information systems and accounting, and many
organizations are beginning to combine these two functions.

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