AE 20 - ACCOUNTING INFORMATION SYSTEM accounting information systems are often highly

secured platforms with preventative measures

LESSON 1: Introduction to Accounting taken against viruses, hackers, and other external
Information System and the business sources attempting to collect information.
environment - Cybersecurity is increasingly important as more
and more companies store their data
ACCOUNTING INFORMATION SYSTEM (AIS) electronically.
- involves the collection, storage, and processing - The various outputs of an accounting
of financial and accounting data used by internal information system exemplify the versatility of its
users to report information to investors, data manipulation capabilities.
creditors, and tax authorities. - An AIS produces reports including:
- generally a computer-based method for tracking 1. Accounts receivable aging reports based on
accounting activity in conjunction with customer information.
information technology resources. 2. Depreciation schedules for fixed assets, and
- An AIS combines traditional accounting trial balances for financial reporting.
practices, such as the use of Generally Accepted 3. Customer lists, taxation calculations, and
Accounting Principles (GAAP), with modern inventory levels may also be reproduced.
information technology resources. - However, correspondences, memos, or
presentations are not included in the AIS
HOW AN ACCOUNTING INFORMATION because these items are not directly related to a
SYSTEMS (AIS) IS USED? company’s financial reporting or bookkeeping.
- An accounting information system contains
various elements important in the accounting DIFFERENCE BETWEEN MANUAL AND
cycle. Although the information contained in a COMPUTERIZED ACCOUNTING
system varies among industries and business - In accounting, the financial transactions are
sizes, a typical AIS includes data relating to recorded, processed and presented to generate
revenue, expenses, customer information, financial statements that are useful to the
employee information, and tax information. readers in making decisions.
- Specific data includes sales orders and analysis - Traditionally, accounting is done manually, by a
reports, purchase requisitions, invoices, check trained accountant, with the use of registers,
registers, inventory, payroll, ledger, trial balance, account books, vouchers etc. But with the
and financial statement information. emerging technology, nowadays, computerized
- An accounting information system must have a accounting is in vogue, due to its accuracy,
database structure to store information. This convenience and speed.
database structure is typically programmed with - Both manual and computerized systems are
query language that allows for table and data based on the same principles, conventions and
manipulation. concept of accounting. However, they differ only
- An AIS has numerous fields to input data as well in their mechanism, in the sense that manual
as to edit previously stored data. In addition, accounting uses pen and paper to record
 transactions, whereas computerized accounting accurate results. Moreover, adjustment entries
makes use of computers and the internet to are also made to comply with the matching
enter transactions electronically. principle, i.e. the expenses of the accounting
period should match the respective revenues. On
KEY DIFFERENCES BETWEEN MANUAL AND the other hand, in computerized accounting, to
COMPUTERIZED ACCOUNTING comply with the matching principles journal and
1. Manual Accounting refers to the accounting vouchers are prepared, but adjustments entries
method in which physical registers for journal are not passed for rectification of error unless the
and ledger, vouchers and account books are error is an error of principle.
used to keep a record of the financial 6. One of the merits of computerized accounting
transactions. On the other hand, computerized which manual accounting lacks is that in manual
accounting implies the method of accounting, accounting there is no way to back-up all the
which uses an accounting software or package, entries and financial statements, but in
to record the monetary transactions, which computerized accounting, the accounting
happen to an organization. records can be saved and backed up.
2. In manual accounting, recording of the 7. In manual accounting, the trial balance is
transaction can be done through the book of prepared only when it is required, whereas, in
original entry, i.e. journal day book. Conversely, computerized accounting, instant trial balance is
in computerized accounting, the transactions are provided on a daily basis.
recorded in the form of data, in the customized 8. In a manual accounting system, the financial
database. statement is prepared at the end of the period,
3. In manual accounting, all the calculations, i.e. i.e. financial year. On the contrary, the financial
addition, subtraction, etc. with respect to the statement is provided at the click of a button, in
transactions are performed manually. In contrast, the computerized accounting system.
in computerized accounting, there is no need to
perform calculations, as the calculations are Conclusion
performed by the computer automatically. As the number of business transactions increases, it
4. In manual accounting, a person remains involved is difficult to manage accounts manually, as it takes
all the time, with the accounts, to enter and a lot of time to update a single transaction in all the
update transactions, which is tedious and time- accounts that it affects. In computerized accounting,
consuming too. As against, in computerized a number of limitations of manual accounting have
accounting, once the transaction is entered, it is been removed. Whenever the transactions occur, the
automatically updated in all the accounts to entry is made and it is updated automatically in all
which it relates and thus, the process is the accounts that it affects, in the computerized
comparatively faster. accounting.
5. In the manual accounting method, if an error
occurs while entering and posting the
transaction in the books of accounts, then
adjustment entries can be passed, for getting
 LESSON 2: The Role of AIS in Value Chain, 5. SERVICE - post-sale support provided to
Definition of Data and Information and Their customers (repair and maintenance
Differences, and Introduction to Business Design function)

ROLE OF AIS IN THE VALUE CHAIN ➔ Support Activities - Staff Activities

❖ The objective of most organizations is to provide 1. FIRM INFRASTRUCTURE - accountants,
value to their customers. lawyers, and administration (includes the
❖ “Value-added” in the conversation is the company’s AIS)
CUSTOMER SERVICE. 2. HUMAN RESOURCES - involves
❖ Although “adding value” is a commonly used recruiting and hiring new employees,
buzzword, in its genuine sense, it means making training, paying and handling employee
the value of the finished component greater than benefits
the sum of its part. 3. TECHNOLOGY - activities to improve the
❖ It may mean: products or services (RND, Website
1. Making it faster Development)
2. Making it more reliable 4. PURCHASING - buying the resource
3. Providing better service or advice needed to carry out the primary acts
4. Providing something in limited supply (like
O-negative blood or rare gems) ❖ Information Technology can significantly
5. Providing enhanced features impact the efficiency and effectiveness with
6. Customizing it which the preceding activities are carried out.
❖ An org’s value chain can be connected with the
❖ Value is provided by performing a series of value chains of its customers, suppliers, and
activities referred to as VALUE CHAIN which distributors.
includes ❖ Supply chain - larger system created by linking
➔ Primary activities - Line Activities of separate value chains
1. INBOUND LOGISTICS - receiving, ❖ IT can facilitate linkages that improve the
storing, and distributing materials that performance of each value chain
are inputs to the organization's product
or service. SYSTEMS, DATA, AND INFORMATION
2. OPERATIONS - transforming those ❖ A SYSTEM is a set of interrelated components
inputs into products or services. that interact to achieve a goal; composed of
3. OUTBOUND LOGISTICS - distributing smaller subsystems and vice-versa.
products or services to customers ❖ Each org has goals, and the sub-systems should
4. MARKETING AND SALES - helping be designed to maximize achievement of the
customers to buy the org’s products or org’s goal – even to detriment of the subsystem
services itself
❖ GOAL CONFLICT occurs when activity of a 7. ACCESSIBILITY - available when needed in a
subsystem is not consistent with another useable format
subsystem or with larger system ❖ Information provides to both external and
❖ GOAL CONGRUENCE occurs when subsystem internal users
goals are in line with org’s goal; the larger and ➔ External users primarily use information
more complicated the system, the more difficult that is either MANDATORY or ESSENTIAL.
to achieve goal congruence. ➔ In providing mandatory or essential
❖ SYSTEMS CONCEPT encourages integration information, the focus should be on
(minimizing the duplication of recording, storing, minimizing costs, meeting regulatory
reporting, and processing) requirements, and meeting minimum
❖ DATA - facts that are collected, recorded, stored, standards of reliability and usefulness.
and processed by an information system. ❖ Internal users primarily use Discretionary
❖ Organizations collect data about EVENTS that Information – the primary focus is to ensure
occur, RESOURCES that are affected by those that benefits exceed costs (positive value).
events, and AGENTS who participate in the
events THE ACCOUNTING CYCLE
❖ INFORMATION - data that have been organized ❖ Refers to the process of generating financial
and processed to provide meaning to a user; statements, beginning with a business
more info and better info translated into better transaction and ending with the preparation of
decisions the report.
❖ INFORMATION OVERLOAD - when you get ➔ The first step is to analyze the data collected
more info than you can effectively assimilate from many sources.
hence quality of decisions declines while costs of ➔ All transactions that have a financial impact
producing the info increases on the firm (sales, payments to employees
❖ VALUE OF INFORMATION = Benefits - Costs ( and suppliers, interest and tax payments,
more difficult to quantify) purchases of inventory) must be
❖ Characteristics that make information useful: documented.
1. RELEVANCE - reduces uncertainty by ➔ Accountant must review the documents to
helping predict or confirm make sure they’re complete.
2. RELIABILITY - dependable and free from ➔ JOURNAL - a listing of financial transactions
error or bias in chronological order.
3. COMPLETENESS - doesn’t leave out ➔ LEDGERS - shows increases and decreases in
anything important specific asset, liability, and owner’s equity
4. TIMELINESS - received in time to affect the accounts
decision ➔ TRIAL BALANCE - summarized totals for
5. UNDERSTANDABILITY - presented so it’s each account which is used to confirm the
comprehensible and useful accuracy of the figures.
6. VERIFIABILITY - independent people would
produce the same result
 ➔ STEPS: activities necessary to accomplish
1. Analyze business transactions organizational objectives
documents c. Top Management – responsible for
2. Record business transactions in journals. long-term planning and setting
3. Post journal entries to ledgers. organizational objectives
4. Prepare the trial balance.
5. Prepare FS and Management reports INTERNAL AND EXTERNAL FLOWS OF
from account data. INFORMATION
6. Analyze reports.

The Information System – An Accountant’s

Perspective (GROUP 1)

❖ AIS lacks a well-defined body of knowledge.

❖ SARBANES-OXLEY ACT OF 2002 - established
new corporate governance regulations and
standards for public companies registered with
the SEC which impacts public companies, their HORIZONTAL FLOW
management, and their auditors. - supports operation-level tasks with highly
❖ AIS students are the impacts of SOX on internal detailed information about the many business
control standards and related auditing transactions affecting the firm.
procedures. - Sale, shipment of goods, use of labor and
❖ SOX does not define the entire content of AIS; it materials, internal transfer of resources
does identify critical areas of study that need to VERTICAL FLOW OF INFORMATION
be included. - Distributes information downward from senior
managers to junior managers and operations
THE INFORMATION ENVIRONMENT personnel in the form of instructions, quotas, and
❖ INFORMATION – a business resource. budgets
❖ HIEARCHY OF BUSINESS ACTIVITY: 3RD FLOW OF INFORMATION
1. BUSINESS OPERATION (BASE) - these - Exchange between the org and
activities consist of the product-oriented users in the external environment:
work of the organization. 1. Trading Partners - customer sales and billing
2. THREE MANAGEMENT TIERS info, purchase info for suppliers
a. Operations Management – directly 2. External Stakeholders - external entities with
responsible for controlling day-to-day direct or indirect interest in the firm
operations
b. Middle Management – accountable for INFORMATION OBJECTIVE:
short-term planning and coordination of 1. To support the firm day-to-day operations
2. To support management decision making
 3. To support stewardship functions of purpose financial reports and information
management. needed for decision making; Discretionary
> STEWARDSHIP - refers to managers Reporting
responsibility to properly manage the ❖ GENERAL MODEL FOR AIS
resources of the firm and to report on their 1. END USERS – two general groups:
activities a. Internal - management at all levels
as well as operations personnel
AN INFORMATION SYSTEMS FRAMEWORK b. External – include creditors,
❖ INFORMATION SYSTEM - set of formal potential investors, stockholders, etc.
procedures by which data are collected, stored, 2. DATA SOURCES – financial transactions that
processed into info, and distributed to users. enter the information system from either
❖ TWO BROAD CLASSES OF SYSTEMS: internal/external source
1. Accounting Information System 3. DATA COLLECTION – first operational stage
2. Management Information System in AIS (Two Rules: Relevance and Efficiency)
❖ TRANSACTION – event that affects or is of 4. DATA PROCESSING – task range from
interest to the organization and is processed by simple to complex
IS as a unit of work 5. DATABASE MANAGEMENT
❖ FINANCIAL TRANSACTION – economic events ✓ Database – physical repository
that affect the assets and equities of the ✓ Hierarchy of Data
organization, is reflected on its accounts, and is a. Data Attribute (Base) – most
measured in monetary terms elemental piece of potentially useful
❖ NONFINANCIAL TRANSACTION – events that data in the database
don’t meet the narrow definition of a financial - Attribute – logical and relevant
transaction characteristic of an entity about
which the firm captures data.
ACCOUNTING INFORMATION SYSTEM b. Record (Middle) – complete set of
❖ AIS Subsystems process financial and attribute (Primary Key – unique
nonfinancial transactions. identifier)
❖ THREE MAJOR SUBSYSTEMS c. File (Top) – complete set of records
1. Transaction Processing System (TPS) – ✓ Three Fundamental Database
supports daily business operation with Management Task
numerous reports, documents, and a. Storage
messages for users b. Retrieval
2. General Ledger/Financial Reporting c. Deletion
System (GL/FRS) – produces the traditional 6. INFORMATION GENERATION – the process
financial statements (Summarize); Non- of compiling, arranging formatting, and
Discretionary Reporting processing information to users
3. Management Reporting System (MIS) – ✓ Characteristic of Useful Information
provides internal management with special- a. Timeliness
 b. Relevance a. Primary Manufacturing Activities -
c. Accuracy shape and assemble raw mats into
d. Completeness finished products
e. Summarization b. Production Support Activities - ensure
7. FEEDBACK – form of output that is sent back that primary manufacturing activities
to the system as a source data operate efficiently and effectively
✓ Production Planning involves
Organizational Structure and AIS (GROUP 2) scheduling the flow of materials,
labor, and machinery to efficiently
❖ FUNCTIONAL SEGMENTATION meet production needs.
➢ Segmentation by business function ✓ Quality Control monitors the
➢ Common method of organizing a business manufacturing process at various
entity points to ensure that the products
➢ Functional segments derive from the flow of meet the quality standards
resources through the firm ✓ Maintenance keeps the firm’s
machinery and other manufacturing
1. Materials Management - to plan and facilities in running order
control the materials inventory of the
company 3. Marketing - deals with the strategic
a. Purchasing - responsible for ordering problems of product promotion, advertising,
inventory from vendors and market research
b. Receiving - task of accepting the
inventory previously ordered by 4. Distribution - activity of getting the product
purchasing to the customer after the sale
c. Stores - takes physical custody of the
inventory received and release these 5. Personnel - to effectively manage the
resources into the production resource
Functions from Resources
✓ Materials - materials management, 6. Finance - manages the financial resources of
production, marketing, distribution the firm
✓ Labor – personnel
✓ Financial capital – finance THE ACCOUNTING FUNCTION
✓ Information - accounting, information ❖ Accounting captures and records the financial
technology effects of the economic events that constitute
the firm’s transaction
2. Production - conversion cycle in which raw ❖ Accounting distributes transaction information
mats, labor, and plant assets are used to to operations personnel to coordinate their key
create finished products tasks
Value of Information
❖ Determined by its reliability ➢ They build custom systems in-house
❖ Purpose of information is to lead the user to a from scratch
desired action ● Larger organizations with unique
❖ Unreliable information has no value information need often develop a
Accounting Independence custom software through a formal
❖ Information reliability rests heavily on the process called the systems
concept of accounting independence development life cycle.
❖ Accounting acts must be separate and ● Custom systems are more expensive
independent of the functional areas that manage than commercial packages because
and maintain custody of physical features organization must absorb all the
Information Technology development costs
❖ 4 IT FUNCTIONS ● Large-scale enterprise resource
1. Data Processing - Brings to bear IT personnel, planning - comprises thousands of
computer hardware, application programs small program modules
(software), and corporate data to support user b. System Maintenance - responsible for
information needs for transaction processing making changes to existing systems to
and information reporting. accommodate changes in user needs
➢ Centralized Data Processing - all data 3. Database Administration - A special
processing is performed by one or more independent group headed by the database
large computers housed in a common data administrator is responsible for the security and
center that serves users throughout the integrity of the database
organization 4. Network Administration
➢ Distributed Data Processing (DDP) - users ❖ Network - a collection of interconnected
process their transactions locally; computers and communications devices that
independently and tend not to share data allows users to communicate, access data
and information and applications, and share information and
2. Systems Development and Maintenance - resources
Information system needs of organizations are ❖ Network Administration - responsible for
met by 2 related functions: the effective functioning of the software and
a. Systems Development - process by which hardware that constitute the org’s network
orgs acquire information systems ❖ Also, it is responsible for monitoring network
❖ Organizations acquire information activity to ensure that the network is being
systems in 2 ways: used in accordance with companies’ policies
➢ They purchase commercial software: and that it is secure from attack by hackers
Commercial Software (Turnkey and unauthorized people.
Systems) - available for both general
accounting use and for industry-specific OUTSOURCING THE IT FUNCTION
applications; can be implemented by the ❖ Organization sells its IT resources to a third-party
user with little or no modification outsourcing vendor then the outsourcing org
 leases back IT services from the vendor for a from factors that might influence the
contract period (5 to 10 yrs.) report
❖ Cloud Computing - a variant of IT outsourcing;
is location-independent computing where 2. Internal (Operational) Audits
shared data centers deliver hosted IT services ❖ Independent appraisal functions
over the Internet. These fall into 3 categories: established within an org to examine and
1. Software as a service (SaaS) evaluate its activities.
2. Infrastructure as a service (IaaS) ❖ Internal audit is performed by internal
3. Platform as a service (PaaS) auditors
3. Fraud Audits
ROLE OF ACCOUNTANTS IN AIS ❖ To investigate anomalies and gather
Accountants as System Designers evidence of fraud that may lead to
❖ Conceptual System - involves specifying the criminal conviction
criteria for identifying delinquent customers and ❖ Done by its either hired by BOD or fraud
the information that needs to be reported auditors that have earned Certified Fraud
❖ Physical System - includes data storage Examiner certification
medium to be used and the method for The Role of the Audit Committee
capturing and presenting the information ❖ Sub-committee that has special responsibilities
❖ System Design is a collaborative effort. regarding audits
Accountants as System Auditors ❖ Usually composed of three people who should
❖ Auditor - who expresses opinions in a form of a be outsiders
formal audit report regarding the presentation of ❖ Serve as an independent “check and balance”
FS ❖ To look ways to identify risks
❖ Most common audits: ❖ Designer/Auditor Duality
1. External (Attestation) Audits
❖ an independent attestation performed by
an expert An Overview of Transaction Processing
❖ To assure the fair presentation of (GROUP 3)
corporate FS ❖ TPS applications process financial transactions.
❖ Also known as Attest Function ❖ Transaction Cycles - process the most of the
❖ Requires auditors to perform tests IS firm’s economic activity:
internal control and substantive tests that ➢ Expenditure Cycle - incurs expenditures in
reside in system databases exchange for resources
❖ External audits: Financial Audits ➔ Purchasing/Accounts Payable - this
❖ Auditor Independence is a critical system recognizes the need to acquire
element in the relationship between physical inventory and places and order
auditors and their constituents; with the vendor
independence means the auditor is free
 ➔ Cash Disbursements System - when ➔ Economic events result in the creation
the obligation created in the purchases of some document at the beginning of
system is due the transaction
➔ Payroll System - collects labor usage ➔ Used to capture and formalize
data transaction data
➔ Fixed Assets System - processes
transactions pertaining to acquisition,
maintenance and disposal of fixed 2. Product Documents
assets ➔ Result of the transaction processing
➢ Conversion Cycle - provides value added rather than the triggering mechanism
through its products for the process
➔ Production Planning and Control - 3. Turnaround Documents
involves planning, scheduling, and ➔ Product document of one system that
control of the physical product through become the source document for
the manufacturing process another system
➔ Cost Accounting - monitors the flow of ❖ JOURNALS
cost information including labor, ➢ Chronological record of financial
overhead, and raw mats related to transactions
production ➢ Primary sources are documents
➢ Revenue Cycle - receives revenue from ➢ 2 classes:
outside resources 1. Special Journals
➔ Sales Order Processing - majority of ➔ Used to record specific classes of
the business are made on credit transactions that occur in high
➔ Cash Receipts - included collecting volume
cash, depositing cash in the bank, and ➔ Provides specialized format
recording these events in AR and Cash. ➔ REGISTER - used to denote certain
types of special journals
ACCOUNTING RECORDS 2. General Journals
➔ Used to record non-recurring
MANUAL SYSTEMS infrequent, and dissimilar transaction
❖ DOCUMENTS ➔ JOURNAL VOUCHERS - written
➢ serve several purposes in TP authorizations prepared for every
➢ May initiate transaction processing or be transactions that meets the general
the output journal requirements
➢ Provide evidence of economic event ❖ LEDGERS
➢ Three types: ➢ Book of accounts that reflects the
1. Source Documents financial effects of the firm’s
transactions after they are posted from
various journals and journal vouchers
 ➢ Show activity by account DIGITAL ACCOUNTING RECORDS
➢ Indicates the increases, decreases, and ❖ Master File
current balance of each account ➔ Contains account data
➢ Provides info used to prepare FS, ➔ General ledger and subsidiary ledgers
support daily operations, and prepare ❖ Transaction File
internal reports ➔ temporary file of transaction records
used to update data in master file
➢ 2 Categories: ➔ Sales order, inventory receipts, cash
1. General Ledgers receipts
➔ contain the firm’s account ❖ Reference File
information in the form of a highly ➔ Stores data that are used as
summarized control accounts standards for processing transactions
➔ Summarize activity for each ➔ Price lists, lists of authorized suppliers
financial account ❖ Archive File
➔ GL function updates records from ➔ Contains records of past transactions
journal vouchers that are retained for future reference
➔ Provide single value for each ➔ Form an important part in audit trail
account
➔ Mechanism for verifying the overall
accuracy of accounting data
2. Subsidiary Ledgers
➔ contain the details that support a
particular control account
➔ Kept in various accounting
departments of the firm
NOTE: All general ledger has
corresponding subsidiary ledger

THE AUDIT TRAIL

❖ Provided for tracing account balances contained
in the FS back to source documents and the
economic event that created them
❖ Is of utmost importance in the conduct of a
financial audit
❖ Confirmation - contacting selected customers to
determine if the transactions recorded in the
accounts actually took place and they agree to
the balance