CHAPTER ONE
AN INTRODUCTION TO AIS
Prepared By: Fitsum Kidane (Phd)
Department of Accounting and Finance
Mekelle University
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SYSTEM, Data and Information
• A System is a group of two or more interrelated
components or subsystems that serve a common
purpose.
• Systems are almost always composed of smaller
subsystems, each performing a specific function
supportive of the larger system.
• System or subsystem?
– A system is called a subsystem when it is viewed as a
component of a larger system.
– A subsystem is considered a system when it is the focus
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SYSTEM, Data and Information
• The subsystems should be designed to
maximize achievement of the organization’s
goals.
• 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.
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SYSTEM, Data and Information
• Data are raw facts and figures that are
processed to produce information
• Data are raw facts about events that have no
organization or meaning.
– A fact could be a number, date, name, and so
on.
– For example: 2/22/14, ABC Company, 123
Information is data that have been
processed and are meaningful and useful
to users.
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Data vs. Information
The previous slide just showed facts, if
we put those facts within a context of
a sales invoice, for example, it is
meaningful and considered
information.
Invoice Date : 2/22/14 Invoice #: 123
Customer: ABC company
Item # Qty Price Total Invoice Amount
99 3 $20 $60
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What Makes Information Useful?
There are seven general characteristics that make
information useful:
1. Relevant: information needed to make a
decision
2. Reliable: information free from error and bias
3. Complete: does not omit important aspects of
events or activities
4. Timely: information needs to be provided in
time to make the decision
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What Makes Information Useful?
5. Understandable: information must be
presented in a meaningful manner
6. Verifiable: two independent people can
produce the same conclusion
7. Accessible: available when needed
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SYSTEMS, DATA, AND INFORMATION
• The term information system suggests the use
of computer technology in an organization
• An information system is the set of formal
procedures by which data are collected,
processed into information, and distributed to
users.
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SYSTEMS, DATA, AND INFORMATION
• Types of Information Systems:-
– Transaction Processing Systems (TPS)
– Management Information Systems (MIS)
– Decision Support Systems (DSS)
– Expert Systems (ES)
– Executive Information Systems (EIS)
– Accounting Information Systems (AIS)
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Transaction Processing Systems (TPS)
A computerized system that performs
and records daily routine
transactions necessary to the conduct of
the business
• Examples:
– ATM Machine System – Banking Transactions
– Cash Register System – Point of Sale Transactions
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Management Information Systems (MIS)
Converts raw data from transaction processing
system into meaningful form
• Examples:
– SCT Banner – Managing College Information
– Spreadsheet (Excel) – One of the first and most basic
– Oracle's Corporate Performance Management
• Subsystems include:
– Marketing information system
– Manufacturing information system
– Human resource information system
– Financial information system
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Decision Support Systems (DSS)
Is a computer program application that analyzes
business data and presents it so that users
can
make business decisions more
easily.
– an interactive information system that provides information,
models, and data manipulation tools to help make decisions in
semi-structured and unstructured situations
• Examples
– Enterprise Decision Manager 2.0 Fair Isaac Corporation
– AIMMS 3.6- Solving large scale optimization
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Expert Systems (ES)
Is a computer system that
emulates the decision-making
ability of a human expert
Are designed to solve complex
problems by reasoning about
knowledge
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Executive Information System (EIS)
Executive information systems tailor
information to the strategic needs of top-level
management.
Much of the information used by top-level
management comes from sources outside the
organizations information system. (i.e.,
meetings, memos, television, periodicals, and
social activities).
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What Is an AIS?
• An Accounting Information System is a
unified structure that employs physical
resources and components to transform
economic data into accounting
information for external and internal
users.
• An accounting information system (AIS) consists of:
– People
– Procedures
– Data
– Software
– Information technology infrastructure
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What Is an AIS?
• An AIS is a subset of an organization’s MIS
that provides:
– accounting and financial information
– other information obtained in the routine
processing of accounting transactions
• It can:
– Use advanced technology; or
– Be a simple paper-and-pencil system; or
– Be something in between.
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INTERACTION WITH EXTERNAL AND
INTERNAL PARTIES
• The AIS interacts with external parties, such as
customers, vendors, creditors, and
governmental agencies.
• The AIS also interacts with internal parties
such as employees and management.
• The interaction is typically two way, in that the
AIS sends information to and receives
information from these parties.
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INTERACTION WITH EXTERNAL AND
INTERNAL PARTIES
Internal External
Parties AIS Parties
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Basic Subsystems in the AIS
1. The revenue cycle: involves activities of
selling goods or services and collecting
payment for those sales.
2. The expenditure cycle: involves activities of
buying and paying for goods or services used
by the organization.
3. The human resources/payroll cycle: involves
activities of hiring and paying employees.
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Basic Subsystems in the AIS
4. The production cycle: involves activities
converting raw materials and labor into
finished goods.
5. The financing cycle: involves activities of
obtaining necessary funds to run the
organization, repay creditors, and distribute
profits to investors.
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Basic Subsystems in the AIS
Financing Expenditure Human
Cycle Cycle Resources
General Ledger & Reporting System
Production Revenue
Cycle Cycle
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Scope of an (AIS)
Overlap of Subsystems
• All subsystems of (MIS) are important and
different information is needed to carry out
their respective function,
• Substantial overlaps in the information system
requirements have arose between these
subsystems because they use data about the
same underlying business processes.
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Scope of an (AIS)
Scope of an (AIS)
• (AIS) is a subsystem that provides accounting
and financial information,
Marketing Production
Human Accounting
Resources & Finance
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Uses of AIS
Producing External Reports
• Businesses use (AIS) to produce special reports that
follow a required structure established by
organizations such as (FASB). These reports include
financial statements, tax returns, etc
Supporting Routine Activities
• Managers need an (AIS) for handling routine
operating activities during the firm’s operating
cycle. Computer systems excel at handling
repetitive transaction by many accounting
software.
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Uses of (AIS)
Decision Support
• Information is needed for nonroutine decision
support at all levels of an organization. Some
information are critical for planning, deciding,
marketing functions.
Planning and Control
• Historical data can be extracted from the database
and used to forecast growth and cash flows.
• Planners can use data mining to reveal long-term
trends and relationships.
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Uses of (AIS)
Implementing Internal Control
• the policies, procedures, and information
system used to protect a company’s assets
from loss and to maintain accurate financial
data.
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Basic Features/ Attributes of Good AIS
• Control –
– Internal controls are established to ensure that
your assets are safeguarded and not
being wasted.
– They are also established to ensure that
employees follow company
procedures
• Compatibility - Use an accounting system that
is appropriate for the size of the company
and the complexity of transactions
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Basic Features/ Attributes of Good AIS
• Flexibility- Can your company respond to
change effectively?
• Cost/benefit relationship – The cost of an
accounting system should not outweigh the
benefits
• Useful output- information must be
understandable, relevant, reliable, timely, and
accurate.
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Accounting Applications and Software
Accounting Applications
• Applications are computer programs that are
used to serve particular purpose.
• Accounting applications are organized
according to transaction cycles.
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Uses of Accounting Applications
1. Recording events- Often using on-screen forms.
2. Intering Information- About suppliers,
customers, employees, and product.
3. Printing documents- Such as purchase orders
and sales invoices.
4. Printing reports - Such as financial statement
and sales analyses.
5. Conducting ad hoc inquiries- Conducting
special inquiries
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Accounting Applications and Software
Two types of accounting applications
(1) Off-the-shelf- Commercial software that is
ready made and available for sale to the
general public.
2)Developed using (DBMS)- Applications
developed using database management
system software.
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Roles of Accountants With Respect to an
AIS
• Financial accountants prepare financial
information for external decision-making in
accordance with GAAP
• Managerial accountants prepare financial
information for internal decision-making
• Auditors - evaluate controls and attest to the
fairness of the financial statements.
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Roles of Accountants With Respect to an
AIS
• Accounting managers - control all accounting
activities of a firm.
• Tax specialists - develop information that
reflects tax obligations of the firm.
• Consultants - devise specifications for the AIS.
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1.2 Business Process
• is a logically related set of activities that define
how specific business tasks are performed.
• A sequence of activities: for acquiring
goods and services, for producing goods
and services, and for selling goods and
services
• is a picture of workflow with a beginning,
middle and end.
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Continued
• “is a collection of activities that takes one or
more kinds of input and creates an output
that is of value to the customer”
• “A flow of work passing from one person to
the next, and for larger processes probably
from one department to the next”.
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Continued
• A process is a logical, related, sequential
(connected) set of activities that takes an input
from a supplier, adds value to it, and produces an
output to a customer;
• A major process is one that usually involves more
than one function within the organizational
structure, and its operation has a significant
impact on the way the organization functions;
• A sub process is a portion of a major process that
accomplishes a specific objective in support of
the major process;
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Continued
• Activities are things that go on within a process or
sub process; they are usually performed by units of
one (one person or one department);
• Task is an activity that needs to be accomplished
within a defined period of time or by a deadline to
work towards work-related goals.
• A task can be broken down into assignments which
should also have a defined start and end date or a
deadline for completion.
• Event is something that happens during the course
of a process which affects the flow of the process
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Characteristics of the process
Inputs of all types, such as raw materials,
information, knowledge, commitments, and
status are transformed into outputs ,
Transformation occurs according to process
guidance, such as policies, standards,
procedures, rules, and individual knowledge;
Reusable resources are employed to enable
the change to happen, such as facilities,
equipment, technologies, and people.
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Continued
• An organization’s AIS must reflect its business
processes and its line of business.
• Manufacturing companies will need a set of
procedures and documents for the production
cycle; non-manufacturing companies do not.
• Government agencies need procedures to track
separately all inflows and outflows from various
funds, to ensure that legal requirements about the
use of specific funds are followed.
• Financial institutions do not need extensive
inventory control systems.
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Continued
• Passenger service companies (e.g., airlines, bus,
and trains) generally receive payments in advance
of providing services.
• Therefore, extensive billing and accounts
receivable procedures are not needed; instead,
they must develop procedures to account for
prepaid revenue.
• Construction firms typically receive payments at
regular intervals, based on the percentage of work
completed. Thus, their revenue cycles must be
designed to track carefully all work performed and
the amount of work
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Continued
• Service companies (e.g., public accounting
and law firms) do not sell physical goods and,
therefore, do not need inventory control
systems.
• They must develop and maintain detailed
records of the work performed for each
customer.
• Tracking individual employee time is
especially important for these firms because
labor is the major cost component.
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RELATIONSHIP BETWEEN INFORMATION
SYSTEMS AND BUSINESS PROCESSES
• The information systems department is the
formal organizational unit responsible for
information technology services.
• The information systems department is
responsible for maintaining the hardware,
software, data storage, and networks that
comprise the firm’s IT infrastructure.
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Continued
• Information technology enhances business
processes in two main ways:
1. Increasing efficiency of existing processes
• Automating steps that were manual
2. Enabling entirely new processes
Change flow of information
Replace sequential steps with parallel
steps
Eliminate delays in decision making
Support new business models
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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.
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Business Cycles
• The business transaction cycle is a process
that:
– Begins with capturing data about a transaction.
– Ends with an information output, such as financial
statements.
• Thousands of transactions can occur within
any of these cycles. But there are relatively
few types of transactions in a cycle.
• EXAMPLE: In the revenue cycle, the basic give-
get transaction is: Give goods and Get cash.
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Business Cycles
• 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.
EXAMPLES: Sell goods to customers,
Depreciate equipment.
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1.3 Accounting file
File
• A file is a complete set of records of an
identical class.
• For example, all the Account receivable
records of the organization constitute the
Account receivable file.
• The organization’s database is the entire
collection of such files.
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Types of Files
• Accounting records in computer-based
systems are represented by four different
types of magnetic files: master files,
transaction files, reference files, and archive
files.
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MASTER FILE
• It is a file that stores cumulative information
about an organization’s entities.
• It is conceptually similar to a ledger in a
manual AIS in that:
– The file is permanent.
– The file exists across fiscal periods.
– Changes are made to the file to reflect the effects
of new transactions.
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TRANSACTION FILE
• is a file that contains records of individual
transactions (events) that occur during a fiscal
period.
• It is conceptually similar to a journal in a
manual AIS in that:
– The files are temporary.
– The files are usually maintained for one fiscal
period.
• Sales orders, inventory receipts, and cash
receipts are examples of transaction files.
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TRANSACTION FILE
• Transaction files capture detailed transaction
data. They are counterparts to general and
special journals in manual systems
• Transaction data are periodically posted to
related master file(s) and are then either
purged or archived
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REFERENCE FILE
• A reference file stores data that are used as
standards for processing transactions.
• For example, the payroll program may refer to
a tax table to calculate the proper amount of
withholding taxes for payroll transactions.
• Other reference files include price lists used for
preparing customer invoices, lists of authorized
suppliers, employee rosters, and customer
credit files for approving credit sales.
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ARCHIVE FILE
• An archive file contains records of past
transactions that are retained for future
reference.
• These transactions form an important part of
the audit trail.
• Archive files include journals, prior period
payroll information, lists of former
employees, records of accounts written off,
and prior-period ledgers.
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1.4 Transaction Processing Systems
• A fundamental task in any AIS is to process
transactions affecting the organization
• Transaction processing systems) involve three
stages:
– Data entry
– Data and file processing
– Output preparation
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Data Entry
• Most transactions are initiated by business events
triggered by various agents or by instructions
within a computer program
• Other transactions are initiated by the passage of
time, e.g., interest accruals
• Computer-based systems employ an off-line or on-
line approach to data entry
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Off-line Data Entry
• Off-line refers to input devices not directly connected
to the computer. Examples are key-to-tape, key-to-
disk, and OCR readers
• Data must be first captured on source documents and
similar transactions are batched together
• Batched transactions are transcribed into machine-
readable form using an off-line device
• Turnaround documents may be used as direct input
into a system
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On-line Data Input
• On-line refers to devices that are directly and continuously connected to
a computer system
• In on-line data entry, transaction data are entered into the computer
directly as they occur
• Characteristics of on-line data entry may include:
– nonexistence of source documents (telephones, face-to-face
conversations)
– input of data using source data automation (scanners at POS
terminals)
– origination of data by parties external to the firm (ATM machines,
telephone touch-tone based transactions)
– capture of data at remote sites (remote job entry or remote batch
processing)
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DATA PROCESSING
• Once data about a business activity has been
collected and entered into a system, it must be
processed.
• There are four different types of file processing:
– Updating data to record the occurrence of an event,
the resources affected by the event, and the agents
who participated, e.g., recording a sale to a customer.
– Changing data, e.g., a customer address.
– Adding data, e.g., a new customer.
– Deleting data, e.g., removing an old customer that
has not purchased anything in 5 years.
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Continued
• Updating can be done through several
approaches:
– Batch processing
– Online batch processing
– Online, real-time processing
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Batch processing
Source documents are grouped into batches, and
control totals are calculated.
Periodically, the batches are entered into the
computer system, edited, sorted, and stored in a
temporary file.
The temporary transaction file is run against the
master file to update the master file.
Output is printed or displayed, along with error
reports, transaction reports, and control totals.
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Online batch processing
Transactions are entered into a computer system
as they occur and stored in a temporary file.
Periodically, the temporary transaction file is run
against the master file to update the master file.
The output is printed or displayed.
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Online, real-time processing
Transactions are entered into a computer
system as they occur.
The master file is immediately updated
with the data from the transaction.
Output is printed or displayed
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INFORMATION OUTPUT
• The final step in the information process is
information output.
• This output can be in the form of:
– Documents,
– Reports,
– Queries.
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Documents
• Documents are records of transactions or other
company data.
• EXAMPLE: Employee paychecks or purchase
orders for merchandise.
• Documents generated at the end of the
transaction processing activities are known as
operational documents (as opposed to source
documents).
• They can be printed or stored as electronic
images.
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Reports
• Reports are used by employees to control
operational activities and by managers to
make decisions and design strategies.
• They may be produced: On a regular basis, On
an exception basis, On demand
• Organizations should periodically reassess
whether each report is needed.
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Queries
• Queries are user requests for specific pieces
of information.
• They may be requested on periodically or One
time.
• They can be displayed on the monitor, called
soft copy or on the screen, called hard copy.
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Output can serve a variety of purposes:
• Financial statements can be provided to both
external and internal parties.
• Some outputs are specifically for internal use:
• For planning purposes: Examples of outputs for
planning purposes include: Budgets, Sales
forecasts
• For management of day-to-day operations:
Example: Delivery schedules
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Continued
• For control purposes: Performance reports are
outputs that are used for control purposes.
These reports compare an organization’s
standard or expected performance with its
actual outcomes. Management by exception is
an approach to utilizing performance reports
that focuses on investigating and acting on only
those variances that are significant.
• For evaluation purposes: Example: Surveys of
customer satisfaction, Reports on employee
error rates.
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