Module 1: Introduction to Accounting Information Systems

Introduction

This chapter begins by answering the question “why should you study accounting information systems?”
There are many reasons, but one of the most important is because of the special career opportunities
that will enable you to combine your study of accounting subjects with your interest in computer
systems. In today’s job market, accounting employers expect new hires to be computer savvy. A large
number of specialized and highly compensated employment opportunities are only available to those
students who possess an integrated understanding of accounting and information systems and can bring
that understanding to bear on complicated business decisions.

Organizations today are more information dependent and conscious of the pervasive nature of
technology across the business enterprise. The increased connectivity and availability of systems and
open environments have proven to be the lifelines of most business entities. Information technology (IT)
is now used more extensively in all areas of commerce around the world. Information technology is so
pervasive today that it is nearly impossible to do anything that does not in some way involve technology.
So ask yourself the question, “how can you possibly be a successful accountant if you do not have a
basic understanding of how technology influences the profession?”

Learning Outcomes

 Better understand the huge impact information technology (IT) has on the accounting
profession and why you need to study accounting information systems (AIS)
 Learn how IT influences accounting systems
 Define AIS and describe its role in financial accounting
 Be able to distinguish “data” from “information” and how it is utilized in AIS
 Define system and the IPO model

Accounting and IT

Information technology is pervasive and impacts every area of accounting. Instantaneous access is
available to the Internet via mobile communication devices such as cell phones, iPads, smart phones,
and so on, which enable activities to take place anytime, anywhere. For example, managerial
accountants can complete important work tasks while traveling in the field, auditors can communicate
with each other from remote job sites (while auditing the same client), staff accountants can text
message one another from various locations, and tax experts can download current information on tax
rulings.

Financial Accounting. The major objective of financial accounting information system is to provide
relevant information to individuals and groups outside an organization’s boundaries—for example,
investors, federal and state tax agencies, and creditors. Accountants achieve these informational
objectives by preparing such financial statements as income statements, balance sheets, and cash flow
statements. Of course, managers within a company might also use financial reports for planning,
decision-making, and control activities. However, for most decisions within the firm, managers likely use
managerial accounting reports.
Recall from your financial accounting course, an organization’s financial accounting cycle begins with
analyzing and journalizing transactions (e.g., captured at the point of sale) and ends with its periodic
financial statements. Accounting clerks, store cashiers, or even the customers themselves input relevant
data into the system that stores these data for later use. In financial AISs, the processing function also
includes posting these entries to general and subsidiary ledger accounts and preparing a trial balance
from the general ledger account balances.

Another impact of IT on financial accounting is the timing of inputs, processing, and outputs. Financial
statements are periodic and most large companies traditionally issue them quarterly, with a
comprehensive report produced annually. With advances in IT that allow transactions to be captured
immediately, accountants and even the AIS itself can produce financial statements almost in real time.

A transaction as an event that affects or is of interest to the organization and is processed by its
information system as a unit of work.

This definition encompasses both financial and nonfinancial events. Because financial transactions are of
particular importance to the accountant’s understanding of information systems, we need a precise
definition for this class of transaction:

A financial transaction is an economic event that affects the assets and equities of the organization, is
reflected in its accounts, and is measured in monetary terms.

Sales of products to customers, purchases of inventory from vendors, and cash disbursements and
receipts are examples of financial transactions. Every business organization is legally bound to correctly
process these types of transactions.

Nonfinancial transactions are events that do not meet the narrow definition of a financial transaction.
For example, adding a new supplier of raw materials to the list of valid suppliers is an event that may be
processed by the enterprise’s information system as a transaction. Important as this information
obviously is, it is not a financial transaction, and the firm has no legal obligation to process it correctly—
or at all.

What is Accounting Information System?

Accounting information systems (AISs) stand at the crossroads of three disciplines: “accounting”,
“information”, and “systems.” As a result, the study of AISs is often viewed as the study of computerized
accounting systems. Thus, we define an accounting information system as a collection of data and
processing procedures that creates needed information for its users. Let us examine in greater detail
what this definition really means. For our discussion, we’ll examine each of the words in the term
“accounting information systems” separately:

 Accounting - the accounting field includes financial accounting, managerial accounting, taxation,
and so forth. Accounting information systems are used in all these areas—for example, to
perform tasks in such areas as payroll, accounts receivable, accounts payable, inventory, and
budgeting. In addition, AISs help accountants maintain general ledger information, create
spreadsheets for strategic planning, and distribute financial reports.
 Information - the processed, organized and structured data. It provides context for data.
  Systems - an organized set of principles or procedures created and used to carry out a specific
activity.

An information system is a formal process for collecting data, processing the data into information, and
distributing that information to users. The purpose of an accounting information system (AIS) is to
collect, store, and process financial and accounting data and produce informational reports that
managers or other interested parties can use to make business decisions. Although an AIS can be a
manual system, today most accounting information systems are computer-based.

Functions of AIS

Accounting information systems have three basic functions:

1. The first function of an AIS is the efficient and effective collection and storage of data
concerning an organization’s financial activities, including getting the transaction data from
source documents, recording the transactions in journals, and posting data from journals to
ledgers.

2. The second function of an AIS is to supply information useful for making decisions, including
producing managerial reports and financial statements.

3. The third function of an AIS is to make sure controls are in place to accurately record and
process data.

Parts of AIS

An accounting information system typically has six basic parts:

1. People who use the system, including accountants, managers, and business analysts

2. Procedure and instructions are the ways that data are collected, stored, retrieved, and
processed

3. Data including all the information that goes into an AIS

4. Software consists of computer programs used for processing data

5. Information technology infrastructure includes all the hardware used to operate the AIS

6. Internal controls are the security measures used to protect data

Data vs Information

Many believe that the terms “data” and “information” can be used interchangeably and mean the same.
However, there is a subtle difference between the two.

Data can be a number, symbol, character, word, and if not put into context, individual pieces of data
mean nothing to humans.
On the other hand, information is a data put into context. Information is utilized by humans in some
significant way. A good example of information would be a computer. A computer uses programming
scripts, formulas, or software applications to turn data into information.

Although the terms data and information are often used interchangeably, they do not have the same
meaning. Data (the plural of datum) are raw facts about events that have little organization or meaning
—for example, a set of raw scores on a class examination. To be useful or meaningful, most data must
be processed into useful information. An example might be to take the raw scores of a class exam and
compute the class average.

Data Information
Unorganized raw facts that need processing A processed, organized data presented in a given
without which it is seemingly random and useless context and is useful to humans
to humans
An individual unit that contains raw material A group of data that collectively carry a logical
which does not carry any specific meaning meaning
It is measured in bits and bytes It is measured in meaningful units like time,
quantity, etc
Raw facts relating to or describing a single Summarized data with application of rules or
business transaction or event knowledge which serves as a guiding tool for
decision-making
Example: A data relation to a sale such as sales Example: Weekly sales summaries, sales by
date, salesperson, customer involved, item customer reports, profit margins per customer,
purchased, sales price, sales discount, etc sales by geographic region, sales by product, etc

System and IPO Model

System

A system is an organized set of principles or procedures created and used to carry out a specific
activity. For the purposes of this text, the systems we discuss rely on the input–processing–
output (IPO) model used in information systems. Information systems receive inputs, process
those inputs, and use those processed inputs to generate outputs.

Input

Inputs are the starting point of a system. The primary inputs for an accounting information
system are the data extracted from each business transaction as it occurs. For example, each
time a sales transaction occurs, a new sales record is input. Transactions are often recorded
initially on source documents that an organization generates and receives in its normal business
operations. Examples of various source documents are described in detail in later chapters of
this text. These source documents are used to provide documentary evidence for transactions
input into the accounting information system. Transactions can be input into an accounting
system in a number of different ways, including the following:

 Manual keying - requires a person to enter data into a system via a keyboard. This could
introduce errors in the data if items such as names and amounts were incorrectly keyed.
 As any errors are the result of human error, mistakes in the data tend to be random and
inconsistent.
 Scanning through barcode technology - involves scanning a barcode with a laser device.
The barcode number is then searched for on a database and appropriate details
returned to the system. Examples of this include scanners at a supermarket, where
universal product codes are used. As errors are the result of technology error, mistakes
in the data tend to be systematic and consistent.
 Scanning through image scanners - image scanners are a useful input approach where
the input is in the form of a diagram or graphic image. Scanners are used to capture the
image, which is then stored electronically.
 Magnetic ink character recognition (MICR) - This technology is used on bank checks. A
special ink and character set is used, with computers able to read the ink due to its
magnetic properties. MICR offers a security control for banks and provides a quick
method for scanning information into a system.
 Voice recognition - Using voice recognition technology allows a computer to convert
spoken words and commands into data inputs. Issues with voice recognition technology
can include training the system to recognize words and deal with accents and different
voice intonations.
 Optical mark readers - Data inputs are coded onto a sheet by coloring in the
appropriate space, and the sheet is then fed through a machine that identifies where
the dots are and, based on their location, converts them into data that can be stored
electronically. All marks made on the sheet need to be precise and unambiguous,
otherwise high error rates can be experienced.

Processing

Processing refers to activities that are performed on the inputs into the system. Again using the
sales system as an example, once sales data are entered into the system, various processing is
undertaken, including checking format and validity, manipulating inputs, and finally storage.
Examples of format and validity checks are discussed in the chapters on the different transaction
cycles, as well as the internal controls chapter, but the basic aim of data processing is ensuring
that data are correct and in a valid format. Manipulations refer to the act of performing
calculations and adjusting the data inputs. As an example, if a sales order is entered and the unit
prices and the quantity of units sold are keyed in, the system can then manipulate these two
figures to generate the total price (sales price × units sold). Other checks and manipulations
performed on the data can be hash checks, to ensure that inputs like credit card numbers and
customer numbers are valid.

Output

Outputs refer to what is obtained from a system, or the result of what the system does. In the
sales system, outputs will typically include reports for decision making. Some examples of
outputs from the sales system could be receipts and invoices that are given to customers when
a sale is executed, or sales summary reports used by management to assess performance. When
designing a system, it is important to consider what outputs will eventually be required to
ensure sufficient data input to the system to meet the end-user needs. If, for example, customer
 details are not gathered when sales data are input into the sales system, then it will be
impossible to generate a sales report that breaks sales down by customer.

Summary

5.1 Critically evaluate accounting practices, reflecting on how accounting information systems
enrich and extend the role of the accountant.

The traditional role of accounting and accountants was recording the details of an organization’s
transactions. The accounting process, and the accountants who were part of that process, acted
as a data classification and storage system. Transactions were classified based on the accounts
they affected, these accounts were detailed in the general journal and then the amounts were
posted to the respective accounts that appeared in the general ledger. Journalizing and posting
transactions, as well as preparing trial balances and financial statements, is now performed in a
highly efficient manner by computerized information systems. Increasingly, the role of the
accountant is to add value by providing and interpreting information for the organization. The
role of the accountant has changed from a recorder of data to a user of information and owner
of the accounting information system.

5.2 Compare and contrast data and information.

Data are raw facts relating to or describing an event. Information is the product of applying rules
to data to make them meaningful. Information is summarized and classified data used by
decision makers. This task of converting data to information is part of the role of a system.

5.3 Critique and synthesize system concepts, giving examples.

A system takes inputs captured through various means, processes these inputs and generates
useful outputs for decision makers and users of information.

5.4 Explain ‘accounting information systems’ and discuss their evolution.

Accounting information systems involved information processing long before the dawn of
computer technology. However, with the advent of computers came the decline in the power of
accounting divisions in organizations. Once having a powerful influence over an organization
since it captured, recorded and stored data, as well as produced information from that data,
accounting has seen its position eroded by the birth of what is now referred to as information
systems. With the emergence of information systems came new storage technologies over
which accountants did not have control, so the two functions were forced to work together. As
technology continued to develop, accounting became increasingly dependent on information
systems to the point where it is now viewed as a subset of business information systems.

5.5 Justify and communicate the role of accounting information in supporting decision makers.

Accounting information is central to many different activities inside and outside an organization.
The information that can be generated by an accounting information system is diverse and
informs the decisions of internal and external stakeholders. Data such as sales, purchases and
 cash flows are used in summarized form by external decision makers and in detailed form by
internal decision makers.

Key Terms

Accounting information system - the application of technology to the capturing, verifying,

Controls - the set of checks and balances that ensures the system is running as expected and
that there are no data errors or exceptional circumstances.

Data - raw facts relating to or describing a single business transaction or event.

External environment - the factors or pressures outside a system that influence its design and
operation.

Inputs - data and other resources that are the starting point for a system.

Outputs - what is obtained from a system, or the result of what the system does.

Processing - activities that are performed on the inputs into the system

System - an organized set of principles or procedures created and used to carry out a specific
activity.