CHAPTER 1

Accounting Information
Systems
An Overview

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 INTRODUCTION
• Questions to be addressed in this chapter
include:
– What is an accounting information system (AIS)?
– Why is the AIS an important topic to study?
– What is the role of the AIS in the value chain?
– How does the AIS provide information for decision
making?
– What are the basic strategies and strategic positions
an organization can pursue?
– What is the meaning of system, data, and
information?

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 What is
Accounting Information System?
• AIS is a system, which collects, records,
stores, and processes the data to produce
information for decision makers.
• It can be :
– Use advanced technology; or
– a simple paper-and-pencil system; or
– something in between.
• Technology is simply a tool to create,
maintain, or improve a system.
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 Overview
• An accounting information system (AIS) is
a collection of resources, such as people
and , to transform
financial and other data into information.
• Accounting information systems perform
this transformation whether they are
essentially manual systems or thoroughly
computerized.

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• A system is a set of two or more interrelated
components that interact each other to achieve a
goal.
• Systems are almost and always composed of
smaller subsystems, each performing a specific
function supportive of the larger system.
• An accounting information system (AIS) consists
of:
ØPeople
ØProcedures
ØData
ØSoftware
ØInformation technology infrastructure

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 AIS focuses on understanding
Ø How the accounting system works;
Ø How to collect data about an organization’s
activities and transactions;
Ø How to transform that data into information
that management can use to run the
organization;
Ø How to ensure the availability, reliability, and
accuracy of that information.
• Auditors need to understand the systems that
are used to produce a company’s financial
statements.
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 Functions of an AIS

• It collects and stores data about activities

and transactions such as Events,
Resources, and Agents.(REA)
• Processes or Transforms that data into
information, that, management can use to
make decisions about events, resources,
and agents.
• Provides adequate controls to safeguard
the organization’s resources including data,
which should be
• Available when needed
• Accurate and reliable
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 Information and Decisions
• Every organization accepts inputs and
transforms them into outputs that take the
form of products and services.
• Who are the two main users of accounting
information?
1 External users
2 Internal users
 Information and Decisions
• Who are the external users of accounting
information?
– stockholders
– investors
– creditors
– government agencies
– customers and vendors
 Information and Decisions
• Who are the internal users of accounting
information?
– managers
• There are different information needs and
demands at different managerial levels in
an organization.
 Information and Decisions

Top-Level
Management Strategic
Summarization
Middle and Filtration
Management Tactical

Lower-Level Operational
Management
Transaction Oriented
 Information Systems
• The term information system suggests
the use of computer technology in an
organization.
• What is a computer-based information
system?
• It is a collection of computer hardware and
software designed to transform data into
useful information.
 Information Systems

Electronic Data Processing System (EDP)

Data Processing System (DP)
Management Information System (MIS)
Decision Support System (DSS)
Expert System (ES)
Executive Information System (EIS)
Accounting Information System (AIS)
 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
• It’s fundamental to accounting.
• Accounting is an information-providing activity,
so accountants need to understand:
– How the system that provides the
information is designed, implemented and
used.
– How financial information is reported
– How information is used to make decisions

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 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
• It’s fundamental to accounting.
• Other accounting courses focus on collecting
the information and presenting to the user.
• Where as AIS places greater emphasis on:
– How the data is collected and transformed
– How the availability, reliability, and
accuracy of the data is ensured

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 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
• It’s fundamental to accounting.
• The skills are critical to career success.
• Auditors need to evaluate the accuracy and
reliability of information produced by the AIS.
• Tax accountants must understand the client’s
AIS adequately to be confident that it is
providing complete and accurate information
for tax planning and compliance work.

•AIS mainly focus on accountability and

control. 16
 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
Organizational Business
Culture Strategy

AIS
AIS design is
affected by
information
technology, the
Business strategy,
Information
and the
Technology
organization’s
culture.
Organizational culture = shared assumptions, values, and beliefs, which governs
how people behave in organizations.
Business strategy is a long term plan of action designed to achieve a particular goal .
Information technology (IT) is the use of computers, storage, networking and
other physical devices, infrastructure and processes to create, process, store, secure
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and exchange all forms of electronic data.
 WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?

Organizational Business
Culture Strategy

Information technology
affects the company’s AIS
choice of business strategy.
To perform cost-benefit
analyses on IT changes,
you need to understand
business strategy.
Eg. Wall mart. Information
Technology

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ROLE OF THE AIS IN THE VALUE CHAIN
• The objective of most organizations is to
provide value to their customers.
• What does it mean to deliver value?
Let’s see what is value chain.
Value Chain
• The process or activities by which a company
adds value to an article, including production,
marketing, and the provision of after-sales
service.
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vInterlinked value-adding activities that convert
inputs into outputs which, in turn, add to the
bottom line and help create competitive
advantage.
A value chain typically consists of
(1) Inbound logistics
(2) manufacturing operations,
(3) outbound logistics,
(4) marketing and selling, and
(5) after sales services.
These activities are supported by
(6) purchasing or procurement
(7) research and development
(8) human resource development,
(9) and corporate infrastructure. 20
 ROLE OF THE AIS IN THE VALUE CHAIN
• “adding value” is a commonly used buzzword, in its
genuine sense, it means making the value of the finished
component greater than the sum of its parts. That is the
impact realized from the synergetic effect of production.
• It may mean:
– Making it faster
– Making it more reliable
– Providing better service or advice
– Providing something in limited supply (like O-negative
blood or rare gems)
– Providing enhanced features
– Customizing it
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 ROLE OF THE AIS IN THE VALUE CHAIN

• Value is provided by performing a series of

activities referred to as the value chain.
These include:
– Primary activities
– Support activities
• These activities are sometimes referred to
as “line” and “staff” activities respectively.

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 ROLE OF THE AIS IN THE VALUE CHAIN

• Value is provided by performing a series of

activities referred to as the value chain.
These include:
– Primary activities
– Support activities
• These activities are sometimes referred to
as “line” and “staff” activities respectively.

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 ROLE OF THE AIS IN THE VALUE CHAIN

• Primary activities include:

– Inbound logistics
Receiving, storing, and distributing the
materials that are inputs to the organization’s
product or service.

For a pharmaceutical company, this activity

might involve handling incoming chemicals and
elements that will be used to make their drugs.

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 ROLE OF THE AIS IN THE VALUE CHAIN

• Primary activities include:

– Inbound logistics
– Operations
Transforming those inputs into products or services.

For the pharmaceutical company, this step involves

converting the raw chemicals with the help of people
and equipment to produce the finished drug product
that will be sold to customers.

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 ROLE OF THE AIS IN THE VALUE CHAIN

• Primary activities include:

– Inbound logistics
– Operations
– Outbound logistics
Distributing products or services to customers.

For the pharmaceutical company, this step involves

packaging and shipping the goods to drug stores,
doctors, and hospitals.

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 ROLE OF THE AIS IN THE VALUE CHAIN

• Primary activities include:

– Inbound logistics Helping customers to
buy the organization’s
– Operations
products or services.
– Outbound logistics
– Marketing and sales A pharmacy
Representative may visit
with drug stores, doctors,
etc. to inform them about
their products and take
orders.

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 ROLE OF THE AIS IN THE VALUE CHAIN

• Primary activities include:

– Inbound logistics Post-sale support provided to
customers such as repair and
– Operations maintenance function.
– Outbound logistics
A pharmaceutical firm will
– Marketing and sales
typically not be repairing it’s
– Service product (though the product
may be periodically
reformulated). The
pharmaceutical company is
more likely to be providing
advisory services to 28

pharmacists, etc.
 ROLE OF THE AIS IN THE VALUE CHAIN

• Value is provided by performing a series of

activities referred to as the value chain.
These include:
– Primary activities
– Support activities
• These activities are sometimes referred to
as “line” and “staff” activities respectively.

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 ROLE OF THE AIS IN THE VALUE CHAIN

• Support activities include:

– Firm infrastructure
Accountants, lawyers, and administration.
Includes the company’s accounting information
system.

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 ROLE OF THE AIS IN THE VALUE CHAIN

• Support activities include:

– Firm infrastructure
– Human resources
Involves recruiting and hiring new employees,
training employees, paying employees, and
handling employee benefits.

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 ROLE OF THE AIS IN THE VALUE CHAIN

• Support activities include:

– Firm infrastructure
– Human resources
– Technology
Activities to improve the products or services (e.g.,
R&D, website development).

For the pharmaceutical company, these activities

would include research and development to create
new drugs and modify existing ones.
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ROLE OF THE AIS IN THE VALUE CHAIN
• Support activities include:
– Firm infrastructure
– Human resourcesBuying the resources (e.g.,
– Technology materials, inventory, fixed assets)
needed to carry out the entity’s
– Purchasing primary activities.

In the pharmaceutical company, the

purchasing people are trying to get
the best combination of cost and
quality in buying chemicals, supplies,
and other assets the company
needs to run its operations. 33
ROLE OF THE AIS IN THE VALUE CHAIN

• Information technology can significantly

impact the efficiency and effectiveness
with which the preceding activities are
carried out.
• An organization’s value chain can be
connected with the value chains of its
customers, suppliers, and distributors.

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ROLE OF THE AIS IN THE VALUE CHAIN

Smith Supply Co. For example, the inbound logistics of

Inbound Logistics Pharmaceuticals, Inc., links to the outbound
Operations logistics of its suppliers.
Outbound Logistics
Marketing & Sales Pharmaceuticals, Inc.
Service Inbound Logistics
Operations
Outbound Logistics Customer Pharmacy
Marketing & Sales Inbound Logistics
Operations
Service
Outbound Logistics
Marketing & Sales
Service

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ROLE OF THE AIS IN THE VALUE CHAIN

Smith Supply Co. And the outbound logistics of Pharmaceuticals, Inc.,

Inbound Logistics links to the inbound logistics of its customers.
Operations
Outbound Logistics
Marketing & Sales Pharmaceuticals, Inc.
Service Inbound Logistics
Operations
Outbound Logistics Customer Pharmacy
Marketing & Sales Inbound Logistics
Operations
Service
Outbound Logistics
Marketing & Sales
Service

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ROLE OF THE AIS IN THE VALUE CHAIN

Smith Supply Co. The linking of these separate value chains creates a
Inbound Logistics larger system known as a supply chain.
Operations
Outbound Logistics
Marketing & Sales Pharmaceuticals, Inc.
Service Inbound Logistics
Operations
Customer Pharmacy
Outbound Logistics
Inbound Logistics
Marketing & Sales
Operations
Service Outbound Logistics
Marketing & Sales
Service

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 ROLE OF THE AIS IN THE VALUE CHAIN

Smith Supply Co. The linking of these separate value chains

Inbound Logistics creates a larger system known as a supply
Operations chain.
Outbound Logistics
Marketing & Sales Pharmaceuticals, Inc.
Service Inbound Logistics
Operations
Outbound Logistics Customer Pharmacy
Information technology
can facilitate synergistic Marketing & Sales Inbound Logistics
linkages that improve Operations
Service
the performance of each Outbound Logistics
company’s value chain. Marketing & Sales
Service

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 AIS AND DECESION MAKING
• There is variation in the degree of structure
used to make decisions:
• Structured decisions
• Repetitive and routine - Can be delegated to lower-level
employees
• EXAMPLE: Deciding whether to write an auto insurance policy
for a customer with a clean driving history.
• Semi structured decisions
• Incomplete rules - Require subjective assessments
• EXAMPLE: Deciding whether to sell auto insurance to a
customer with a tainted driving history.
• Unstructured decisions
• Non-recurring and non-routine - Require a great deal of
subjective assessment
• EXAMPLE: Deciding whether to begin selling a new type of
insurance policy 39
• There is also variation in the scope of a decision’s effect:
– Occupational control decisions

• Relate to performance of specific tasks - Often of a day-to-day nature

• EXAMPLE: Deciding whether to order inventory

• Management control decisions

• Relate to utilizing resources to accomplish organizational objectives
• EXAMPLE: Budgeting

• Strategic planning decisions

• “what do we want to be, when we grow up”
– Deciding on Organizational objectives
– Preparing Policies to achieve those objectives
• EXAMPLE: Deciding whether to diversify the company into
other product lines

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• In general, the manager of higher position in
the organization, is most likely to be engaged
in:
– Less structured decisions
– Involve in Broader scope decision (strategic
planning)
• Corporations have:
– Unlimited opportunities to invest in technology
– Limited resources to invest in technology
• Consequently, they must identify the
improvements likely to yield the highest
return.
• This decision requires an understanding of
the organizations overall business strategy. 41
 THE AIS AND CORPORATE STRATEGY
• Michael Porter suggests that there are two
basic business strategies companies can
follow:
– Product-differentiation strategy
A product differentiation strategy involves setting
your product apart from those of our competitors,
i.e., building a “better” product by offering to the
customer with different sizes of pickings, or with
enhanced features, etc.
– Low-cost strategy
A low-cost strategy involves offering a cheaper
product than our competitors. The low cost is
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made possible by operating more efficiently.
 THE AIS AND CORPORATE STRATEGY
The company can choose other
strategies like:
• Variety-based strategic position
• Offering a subset of the industry’s products or services.
• Needs-based strategic position
• Serve most or all of the needs of a particular group of
customers in a target market.
• Access-based strategic position
• Serve a subset of customers who differ from others in
terms of factors such as geographic location or size..

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 THE AIS AND CORPORATE STRATEGY

• The AIS should help a company adopt and

maintain its strategic position.
– Requires that data be collected about each
activity.
– Requires the collection and integration of both
financial and nonfinancial data.

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 SYSTEMS
DATA
&
INFORMATION

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 A SYSTEM is :
– A set of interrelated components
– That interact
– To achieve a goal..
• Most systems are composed of smaller
subsystems . . .. . . And vice versa!

• Every organization has goals.

– The sub systems should be designed to maximize
in achievement of the organization’s goals
– EXAMPLE: The production department (a
subsystem) of a company might have to forego its
goal of staying within its budget in order to meet
the organization’s goal of delivering product on
time.
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 System............
• 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.

• The systems concept encourages

integration (i.e., minimizing the duplication of47
recording, storing, reporting and processing).
 Data are facts that are collected, recorded, stored, and
processed by an information system.

Organizations collect data about:

– Events that occur
– Resources that are affected by those events
– Agents who participate in the events

Information is different from data.

Information is data that have been organized and
processed to provide meaning to a user.

It helps in :
• Reduction of uncertainty
• Improved decisions
• Improved ability to plan and schedule activities
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• Information is provided to both External users and
Internal users.

• Characteristics of information :
– Relevance .. reduces uncertainty
– Reliability .. free from error
– Completeness .. doesn’t leave out anything
– Timeliness … get it in time
– Understandability … comprehend and use
– Verifiability . . give same result for different people
– Accessibility .. can get it when needed.

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Any Questions ????

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