Accounting Information System G.

Ong
Accounting Information System

THE INFORMATION ENVIRONMENT

1. Accounting information systems (AIS) are specialized subset of information systems that processes financial
transactions.
2. Information flows are the flows of information into and out of an organization.
3. Trading partners is a category of external user, including customer sales and billing information, purchase
information for suppliers, and inventory receipts information.
4. Stakeholders are entities either inside or outside an organization that have a direct or indirect interest in the firm.

Internal and External Flows of Information

A system is a set of detailed methods, procedures, and routines that carry out specific activities, perform a duty,
achieve goals or objectives, or solve one or more problems. Most systems are composed of smaller subsystems that
support the larger system. For example, a college of business is a system composed of various departments, each
of which is a subsystem. Each subsystem is designed to achieve one or more organizational goals. Changes in
subsystems cannot be made without considering the effect on other subsystems and on the system as a whole.

Goal conflict occurs when a subsystem’s goals are inconsistent with the goals of another subsystem or with the
system as a whole.

Goal congruence occurs 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.

Data are 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, 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).

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Data sources are financial transactions that enter the information system from external and internal sources.

External financial transactions are the most common source of data for most 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

Information is data that have been organized and processed to provide meaning and context that can improve the
decision-making process. As a rule, users make better decisions as the quantity and quality of information increase.

TRANSFORMING THE DATA INTO INFORMATION

Functions for transforming data into information according to the general AIS model:
1. Data Collection
a. Capturing transaction data
b. Recording data onto forms
c. Validating and editing the data

2. Data Processing
a. Classifying e. Merging
b. Transcribing f. Calculating
c. Sorting g. Summarizing
d. Batching h. Comparing

3. Data Management
a. Storing
b. Retrieving
c. Deleting

4. Information Generation
a. Compiling
b. Arranging
c. Formatting
d. Presenting

14 GENERAL CHARACTERISTICS THAT MAKE INFORMATION USEFUL:

1. Access restricted: limit access to authorized parties.
2. Accurate: accurate, correct, and free of error.
3. Available: available to users when needed.
4. Reputable: perceived as true and credible.
5. Complete: does not omit important aspects of events or activities.
6. Concise: clear, succinct, brief, but comprehensive.
7. Consistent: presented in the same format over time.
8. Current: up to the present data and time.
9. Objective: unbiased, unprejudiced, and impartial.
10. Relevant: reduces uncertainty and improves decision making.
11. Timely: provided in time for decision maker to make decisions.
12. Useable: easy to use for different task.
13. Understandable: easily comprehended and interpreted.
14. Verifiable: two independent people can produce the same information.

OBJECTIVES OF INFORMATION
1. To support the firm’s day-to-day operations.
2. To support management decision making.
3. To support the stewardship function of management.

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AN INFORMATION SYSTEMS FRAMEWORK

 The information system (IS) is the set of formal procedures by which data are collected, processed into information,
and distributed to users.
 A management information system (MIS) is a system that processes nonfinancial transactions not normally
processed by traditional accounting information systems.
 A transaction is an event that affects or is of interest to the organization and is processed by its information system
as a unit of work.
 A financial transaction is an economic event that affects the assets and equities of the organization, is measured in
financial terms, and is reflected in the accounts of the firm.
 Nonfinancial transactions are events that do not meet the narrow definition of a financial transaction.

TRANSACTIONS PROCESSED BY THE INFORMATION SYSTEM

 The transaction processing system (TPS) is an activity composed of three major subsystems—the revenue cycle, the
expenditure cycle, and the conversion cycle.

 The general ledger/financial reporting system (GL/FRS) is a system that produces traditional financial statements,
such as income statements, balance sheets, statements of cash flows, tax returns, and other reports required by law.
It is a type of reporting in which the organization has few or no choices in the information it provides. Much of this
information consists of traditional financial statements, tax returns, and other legal documents. (Nondiscretionary
reporting in nature)

 The management reporting system (MRS) is a system that provides the internal financial information needed to
manage a business. It is a type of reporting in which the organization can choose what information to report and
how to present it. (Discretionary reporting in nature)

TRANSACTIONAL INFORMATION BETWEEN INTERNAL AND EXTERNAL PARTIES IN AN AIS

 Business organizations conduct business transactions, which is an agreement between two entities to exchange
goods, services, or any other event that can be measured in economic terms by an organization.
 Transaction data is used to create financial statements and is called transaction processing.
 The flow of information between these users for the various business activities involves a give-get exchange grouped
into business processes or transaction cycles.

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BASIC BUSINESS PROCESSES

Transactions between the business organization and external parties fundamentally involve a “give – get” exchange.
These basic business processes are:
 Revenue cycle: give goods / give service – get cash
 Expenditure cycle: get goods / get service – give cash
 Production cycle: give labor and give raw materials – get finished goods
 Payroll cycle: give cash – get labor
 Financing cycle: give cash – get cash

TRANSACTION CYCLE MAJOR ACTIVITIES IN THE CYCLE

Transaction Cycle Major Activities in the Cycle
Revenue Cycle 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

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Expenditure Cycle Request goods and services be purchased

Prepare, approve, and send purchase orders to vendors
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

Human Resources/Payroll Recruit, hire, and train new employees

Evaluate employee performance and promote employees
Discharge employees
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

Production 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

Financing 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

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.

The 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.
3. Provide adequate controls to safeguard the organization’s assets and data.
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How Does an AIS Add Value to an Organization?

1. Improving the quality and reducing the costs of products or services.
2. Improving efficiency.
3. Sharing knowledge.
4. Improving efficiency and effectiveness of its supply chain.
5. Improving the internal control structure.
6. Improving decision making.

AIS IN THE VALUE CHAIN

The value chain links together the different activities within an organization that provide value to the customer. Value
chain activities are primary and support activities.
 Primary activities provide direct value to the customer. These are activities that produce, market, and deliver
products and services to customers and provide post-delivery service and support.
1. Inbound logistics consists of receiving, storing, and distributing the materials an organization uses to create
the services and products it sells. For example, an automobile manufacturer receives, handles, and stores
steel, glass, and rubber.
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. Outbound logistics activities distribute finished products or services to customers. An example is shipping
automobiles to car dealers.
4. Marketing and sales activities help customers buy the organization’s products or services. Advertising is an
example of a marketing and sales activity.
5. Service activities provide post-sale support to customers. Examples include repair and maintenance services.

 Support activities enable primary activities to be efficient and effective. These are activities such as firm
infrastructure, technology, purchasing, and human resources that enable primary activities to be performed
efficiently and effectively.
1. 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.
2. Human resources activities include recruiting, hiring, training, and compensating employees.
3. Technology activities improve a product or service. Examples include research and development,
investments in IT, and product design.
4. Purchasing activities procure raw materials, supplies, machinery, and the buildings used to carry out the
primary activities.

A supply chain is an extended system that includes the organization’s value chain as well as its suppliers, distributors,
and customers.

Raw
Materials Manufacturer Distributor Retailer ``
Consumer
Supplier

A manufacturing organization interacts with its suppliers and distributors. By paying attention to its supply chain, a
company can improve its performance by helping the others in the supply chain to improve their performance.

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