Accounting Information Systems

Chapter 1
Accounting Information Systems: An Overview
How to gain a higher GPA:

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Chapter Outline
Learning Objectives
when you’ve finished studying this chapter, and completing the
activities at its conclusion, you should be able to:
1. Define several terms such as System, Data, and Information.
2. Define Accounting Information Systems.
3. Discuss why AIS is an important area of study for future
accountants.
4. Explain the structure of most accounting information systems.
5. Explain the role of the AIS in the value chain.
6. Discuss how an AIS adds value to an organization
Introduction
▪ Welcome to the study of accounting information systems (AIS)!
AIS is a critically important area of study for future accountants.
▪ It ties together what accounting students often see as separate,
unrelated areas of accounting: financial, managerial, tax, and
governmental.
▪ Additionally, AIS brings in considerations from management,
finance, and information systems. Finally, a deep, fundamental
comprehension of accounting information systems is a great
help in the study of auditing.
System, Data, and Information

System
▪ “is a set of two or more interrelated components that interact
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 of which it is a part.
▪ For example, the college of business is a system composed of
various departments, each of which is a subsystem. Yet college
itself is a subsystem of the university
System, Data, and Information
▪ Each subsystem is designed to achieve one or more
organizational goals.
▪ When the systems concept is used in system development,
changes in subsystems cannot be made without considering the
effect on other subsystems and the system as a whole.
▪ Goal conflict occurs when a decision or action of a subsystem is
inconsistent with another subsystem or the system as a whole.
System, Data, and Information
▪ Goal congruence is achieved when a subsystem achieves its
goals while contributing to the organization's overall goal.
▪ Subsystems should maximize organizational goals, even if
subsystem goals are not maximized.
▪ The larger the organization and the more complicated the
system, the more difficult it is to achieve goal congruence.
System, Data, and Information
▪ The systems concept also encourages integration, which is
eliminating duplicate recording, storage, reporting, and other
processing activities in an organization.
▪ For example, companies that used to have separate programs to
prepare customer statements, collect cash, and maintain
accounts receivable records now combine these functions into a
single application.
System, Data, and Information

Data
▪ “Are facts that are collected, recorded, stored, and processed by an
information system”.
▪ Data usually represent observations or measurements of business
activities that are of importance to information system users.
▪ Several kinds of data need to be collected in business, such as:
➢Facts about the activities that take place
➢The resources affected by the activities
➢The people who participate in the activity
System, Data, and Information
▪ For example,
i. Data need to be collected about a sales event (e.g., the date of
the sale, total amount),
ii. The resource being sold (e.g., the identity of the goods or
services, the quantity sold, unit price),
iii. The people who participated in the sale (e.g., the identity of
the customer and the salesperson)
System, Data, and Information

Information
▪ “Is data that have been organized and processed to provide
meaning to a user”.
▪ Users typically need information to make decisions or to
improve the decision-making process.
▪ As a general rule, users can make better decisions as the
quantity and quality of information increase.
System, Data, and Information

▪ The value of information is the benefit produced by the

information minus the cost of producing it.
▪ The major benefits of information are a reduction of
uncertainty, improved decisions, and a better ability to plan and
schedule activities.
▪ The costs are the time and resources spent collecting,
processing, and storing data as well as distributing information
to decision makers.
System, Data, and Information
▪ Information costs and benefits are difficult to quantify, and it is
difficult to determine the value of information before it has been
produced and utilized.
▪ Nevertheless, the expected value of information should be
calculated as effectively as possible, so information is not
produced whose costs exceed its benefits
▪ The following table presents Six characteristics that make
information useful and meaningful for decision making.
System, Data, and Information
Relevant Information is relevant if it reduces uncertainty, improves decision
maker’s ability to make prediction, or confirms or corrects their prior
expectation.

Reliable Information is reliable if it is free from error or bias and accurately

represents the events or activities of the organization.

Complete Information is complete if it does not omit important aspects of the

underlying events or activities that it measures.

Timely Information is timely if it is provided in time for decision makers to

make decisions.

Understandable Information is understandable if it is presented in a useful and

intelligible format.

Verifiable Information is verifiable if two knowledgeable people acting

independently would each produce the same information.
Quick Check

True or False:
1- Information is organized and processed data that provides
meaning.
2- System is a set of two or more unconnected components that
interact to achieve a goal.
3- The major benefits of information are an increase of
uncertainty, improved decisions, and a better ability to plan and
schedule activities.
Quick Check
4- Which of following is not a characteristic that makes
information useful
a. It is reliable. b. It is timely.
c. It is inexpensive. d. It is relevant
5- The report was carefully designed so that the data contained in
the report became information to the reader. Match this
description with the information characteristic
a. timely. b. complete.
c. understandable. d. verifiable.
Quick Check
6- ---------- occurs when a decision or action of a subsystem is
inconsistent with another subsystem or the system as a whole.
a. Goal conflict b. Goal congruence
c. Integration d. The value of information
Definition of AIS
Definition of AIS
▪ Is a set of interrelated activities, documents and technologies
designed to collects data, process it, and report information to
a interest group of internal and external decision makers in
organizations.
▪ A well designed AIS can significantly enhance decision making in
organization by responding to many elements of International
Accounting Standards Board (IASB Conceptual Framework).
Definition of AIS
▪ The International Accounting Standards Board (the IASB or the
Board) issued the Revised Conceptual Framework for Financial
Reporting (the Revised Conceptual Framework) on 29 March
2018.
▪ The revised version includes comprehensive changes to the
previous Conceptual Framework, issued in 1989 and partly
revised in 2010.
Definition of AIS
▪ The previous Conceptual Framework (the 2010 Conceptual
Framework) was criticized for its lack of clarity, the exclusion of
certain important concepts and for being outdated in terms of
the IASB’s current thinking.
▪ Following the IASB’s agenda consultation in 2011, the
Conceptual Framework project was added to the IASB’s work
plan in September 2012. Since then, the IASB has issued a
Discussion Paper in July 2013 and an Exposure Draft in June
2015.(reading)
Definition of AIS
The purpose of the Conceptual Framework is
1- To assist the Board in developing standards,
2- To help preparers develop consistent accounting policies where
there is no applicable standard in place
3- Finally, to assist all parties to understand and interpret the
standards.
Definition of AIS
The conceptual framework is arranged in eight chapters, as follows
(reading):
▪ Chapter 1 – The objective of financial reporting
▪ Chapter 2 – Qualitative characteristics of useful financial information
▪ Chapter 3 – Financial statements and the reporting entity
▪ Chapter 4 – The elements of financial statements
▪ Chapter 5 – Recognition and derecognition
▪ Chapter 6 – Measurement
▪ Chapter 7 – Presentation and disclosure
▪ Chapter 8 – Concepts of capital and capital maintenance
Definition of AIS
▪ The Conceptual Framework states that the objective of financial
reporting is
“ to provide financial information about a reporting entity that is
useful to existing and potential investors, to lenders, and to
other creditors who want to make decisions about providing
resources to the entity”.
Definition of AIS
▪ The Conceptual Framework identifies:
The qualitative characteristics of usefulness financial
information,
Fundamental qualitative characteristics:
1- Relevance (predictive value, confirmatory value, or both)
2- Faithful Representation (complete, neutral, and free from error)
Enhancing qualitative characteristics:
comparability, verifiability, timeliness, and understandability
Definition of AIS
A well-designed accounting information system relates to the
conceptual framework (How) by
1. Capturing data on the elements of financial statements.
▪ No matter what form they take or information technologies
they use, accounting information systems document changes in
assets, liabilities, equity, revenues, expenses, gains, and losses.
Many continue to use a traditional debit/credit format for
doing so.
Definition of AIS
2. Transforming those data into relevant and reliable
information.
▪ Well-designed accounting information systems also can gather
data beyond the elements of financial statements.
▪ Items like sales by geographic area, customer characteristics
and transaction histories, demand for inventory items, can
improve decision making by enhancing the elements of
relevance: predictive value, feedback value, comparability,
timeliness, and understandability
Definition of AIS
▪ Additionally, internal controls in the accounting information
system promote verifiability, and representational faithfulness
(free from error, complete, neutral ).
Definition of AIS
3. Recognizing and adapting to the cost–benefit constraint.
▪ Accounting information systems are all about choices and trade-
offs: What data should I capture? What information
technologies should I use to process them? What information
should I report?
▪ According to the conceptual framework (BC 2.73): it state that
cost is a pervasive constraint that standard-setters, as well as
providers and users of financial information, should keep in
mind when considering the benefits of a possible new financial
reporting requirement.
Definition of AIS
▪ So, cost-effectiveness reminds us that we can’t design the
world’s perfect accounting information system. Even in the best
organizations with the most effective systems, you’ll find
managers who want more data or different data and who want
business processes to be structured differently.
Importance of AIS
AIS is an important area of study for future accountants because
▪ It cuts across traditional functional lines in accounting.
▪ It provides the “big picture” and allows students to develop
their critical-thinking and problem-solving skills.
Importance of AIS
▪ It skills are important to your career success specially in audit
career because auditors needs to evaluate the accuracy and
reliability of information produced by the AIS.
▪ To do so, they must understand how a system is developed, how
it operates, and how it can be properly controlled. They must be
able to evaluate and understand the strengths and weaknesses
of an AIS.
Quick Check
True or False:
1. The AIS is a system that collects, records, stores, and processes
data to produce data for decision makers.
2. A well-designed accounting information system relates to the
conceptual framework by capturing information on the
elements of financial statements.
3. AIS is an important area of study for future accountants
because it provides the “big picture” and allows students to
develop their critical-thinking and problem-solving skills.
Quick Check
4. A well-designed accounting information system relates to the
conceptual framework when internal controls in the
accounting information system promote relevance,
comparability, and understandability of information.
5. The purpose of the Conceptual Framework is to assist the
preparers in developing standards.
6. A well-designed accounting information system relates to the
conceptual framework by recognizing and adapting to the
cost–benefit assumption.
AIS Structure
Most accounting information systems comprise six parts.
▪ Each part of the AIS structure plays a vital role in its overall
efficiency and effectiveness.
▪ And each part is filled with the kinds of design choices and
cost–benefit trade-offs.
AIS Structure
1- Inputs (Data)
▪ The data about organization and its business processes.
▪ The type of data included in an AIS depends on the nature of the
business, but it may consist of the following:
• Sales orders • Customer billing statements • Sales analysis
reports • Purchase requisitions • Vendor invoices • Check
registers • General ledger • Inventory data • Payroll information •
Timekeeping • Tax information
AIS Structure
▪ The data can be used to prepare accounting statements and
financial reports, including accounts receivable aging,
depreciation or amortization schedules, a trial balance, and a
profit and loss statement.
▪ Having all of this data in one place—in the AIS—facilitates a
business's record-keeping, reporting, analysis, auditing, and
decision-making activities. For the data to be useful, it must be
complete, accurate, and relevant.
AIS Structure
▪ On the other hand, examples of data that would not go into an
AIS include memos, correspondence, and presentations. These
documents might have a relationship to the company's finances.
AIS Structure
2- Processes
▪ The software used to process the organization’s data.
▪ The software component of an AIS is the computer programs
used to store, retrieve, process, and analyze the company's
financial data.
▪ Before there were computers, an AIS was a manual, paper-based
system, but today, most companies are using computer software
as the basis of the AIS.
AIS Structure
▪ Small businesses might use Intuit's QuickBooks or Sage's Sage 50
Accounting, but there are others.
▪ Small to mid-sized businesses might use SAP's Business One.
▪ Mid-sized and large businesses might use Microsoft's Dynamics
GP, Sage Group's MAS 90, or MAS 200, Oracle's PeopleSoft,10 or
Epicor Financial Management.
This slide (reading)
AIS Structure
▪ Quality, reliability, and security are key components of
effective AIS software.
▪ Managers rely on the information it outputs to make decisions
for the company, and they need high-quality information to
make sound decisions.
AIS Structure

3- Outputs
▪ System outputs for most organizations would include the
general-purpose financial statements as well as internal reports
such as variance analyses
AIS Structure
4- Storage.
▪ Data in an accounting information system could be stored
locally (as in a cash register or a transactions file) or remotely (as
on an external network).
▪ The information technology infrastructure used to collect, store,
process and transmit data and information.
AIS Structure
▪ Information technology infrastructure is just a fancy name for
the hardware used to operate the accounting information
system.
▪ Most of these hardware items a business would need to have
anyway and can include the following:
• Computers • Mobile devices • Servers • Printers • Surge
protectors • Routers • Storage media • A back-up power supply
AIS Structure
▪ In addition to cost, factors to consider in selecting hardware
include speed, storage capability, and whether it can be
expanded and upgraded.
▪ Perhaps most importantly, the hardware selected for an AIS
must be compatible with the intended software.
▪ A good AIS should also include a plan for maintaining, servicing,
replacing, and upgrading components of the hardware system,
as well as a plan for the disposal of broken and outdated
hardware.
AIS Structure

6- Internal controls
▪ The internal controls of an AIS are the security measures it
contains to protect sensitive data.
▪ These can be as simple as passwords or as complex as biometric
identification.
▪ Biometric security protocols might include storing human
characteristics that don't change over time, such as fingerprints,
voice, and facial recognition.
AIS Structure
▪ An AIS must have internal controls to protect against
unauthorized computer access and to limit access to authorized
users, which includes some users inside the company.
▪ It must also prevent unauthorized file access by individuals who
are allowed to access only select parts of the system.
AIS Structure
▪ An AIS contains confidential information belonging not just to
the company but also to its employees and customers. This data
may include:
• Social Security numbers • Salary and personnel information •
Credit card numbers • Customer information • Company financial
data • Financial information of suppliers and vendors
AIS Structure
▪ All of the data in an AIS should be encrypted, and access to the
system should be logged and monitored.
▪ An AIS also needs internal controls that protect it from computer
viruses, hackers, and other internal and external threats to
network security.
▪ It must also be protected from natural disasters and power
surges that can cause data loss.
AIS Structure

6- People
▪ The people in an AIS are the system users.
▪ An AIS helps the different departments within a company work
together. Professionals who may need to use an organization's
AIS include:
• Accountants • Consultants • Business analysts
• Managers • Chief financial officers • Auditor
Quick Check
True/ False:
1- Customer billing statements is type of data need to be collected
in business.
2- Computers used to storage the organization’s data.
3- Accountant is one of AIS components.
4- The hardware used to process the organization’s data.
5- Quality, reliability, and security are key components of effective
AIS software.
6- presentation is type of data need to be collected in business.
Functions of an Accounting Information
System
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.
Functions of an Accounting Information
System
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
The Role of AIS in the Value Chain

▪ The objective of most organizations is to provide value to their

customers.
▪ This requires performing a number of activities.
▪ An organization's value chain consists of Five Primary Activities
that directly provide value to its customers:
1. Inbound logistics consists of receiving, storing, and
distributing the materials an organization uses to create the
services and products it sells. For example, receiving, handling,
and storing steel, glass, and rubber are some of inbound
logistics activities of an automobile manufacturer.
The Role of AIS in the Value Chain

2. Operations activities transform inputs into final products or

activities. For example, assembly line activities at an
automobile manufacturer convert raw materials into a finished
car.
3. Outbound logistics activities distribute finished products or
services to customers. For example, shipping automobiles to
car dealers is an outbound logistics activity.
The Role of AIS in the Value Chain

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.
The Role of AIS in the Value Chain

▪ Support Activities allow the five primary activities to be

performed efficiently and effectively. They are grouped into
four categories:
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 providing employee benefits and compensation.
The Role of AIS in the Value Chain

3. Technology activities improve a product or service. Examples

include research and development, investment in new
information technology, Web site development, and product
design.
4. Purchasing activities procure raw materials, supplies,
machinery, and buildings used to carry out the primary
activities.
How an AIS Can Add Value to an
Organization?
As a support activity, the AIS adds value by providing accurate
and timely information so the five primary value chain activities
can be performed more effectively and efficiently. (HOW)
Well-designed AIS can do this by:
1. Improve 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. It also reduces the amount
of wasted materials and the costs of having to rework anything.
How an AIS Can Add Value to an
Organization?
2. Improving efficiency. A well-designed AIS can make operations
more efficient 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 locations.
3. Sharing knowledge. A well-designed AIS can make it easier to
share knowledge and expertise, perhaps thereby improving
operations and even providing a competitive advantage.
How an AIS Can Add Value to an
Organization?
4. 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 costs of sales and marketing activities. Moreover, if such
access reduces the customers' costs and time of ordering, both
sales and customer retention rates may increase.
How an AIS Can Add Value to an
Organization?
5. Improving the internal control structure. Security, control,
and privacy are important issues in today's world. An AIS with
the proper internal control structure can protect systems from
problems such as fraud, errors, equipment and software
failures, and natural and political disasters.
6. Improving decision making. An AIS can improve decision
making by providing accurate information in a timely manner.