MODULE 1:

Accounting Information Systems (AIS) Overview

Accounting Information Systems

Elden T. Vergara
Lecturer
 Learning Objectives:
This lesson aims to help the student:
- Identify the information environment of the
business and the impact of organizational
structure on AIS.
- Be familiar with the different information system
models.
- Discuss the role of the accountants to AIS.
 LESSON 1:

An Accountant’s Perspective on the Information System

Accounting Information Systems

Elden T. Vergara
Lecturer
 The Information Environment
Illustration 1-1: INTERNAL AND EXTERNAL FLOWS OF INFORMATION

Top
Management Stakeholder

nd
Middle

Pe
on n a

rfo
Management
cti tio

rm
s
tru ma

an
Ins nfor

ce
I
Operations

nfo
I
et

rm
dg

Customers
Management Suppliers
Bu

ati
on
Operations Personnel

Day-to-day Operations Information

What is a system?
-is a group of two or more interrelated components
or subsystems that serve a common purpose.
Elements of a system?
1. Multiple Components
2. Relatedness
3. System versus subsystem
4. Purpose
An Example of an Artificial System
Illustration 1-2: PRIMARY SUBSYSTEM OF AN AUTOMOBILE

Automobile

Propulsion Electrical
Fuel System Brake System
System System

Brake
Fuel Tank Engine Lights
Pedal

Master
Fuel Pump Transmission Ignition Cylinder

Fuel Injector Brake

Rear Axle Radio
Lines

Wheels Battery Disk

 Illustration 1-3: A FRAMEWORK FOR INFORMATION SYSTEMS

Information
System (IS)

Accounting Management
Information Information
System (AIS) System (MIS)

General Transaction Management Financial

Ledger/Financial Marketing Distribution Human Resource
Reporting System
Processing Reporting Management
Systems Systems System
(GL/FRS) System (TPS) System (MRS) Systems

Expenditure Conversion Revenue

Cycle Cycle Cycle

Purchase Cost Accounting Sales Processing

System System System

Cash Production
Cash Receipts
Disbursement Planning and
System Control System System

Payroll
Processing
System

Fixed Asset
System
 Illustration 1-4: TRANSACTIONS PROCESSED BY THE INFORMATION SYSTEM
Financial
Transactions
Information
Information
User Decisions
System

Nonfinancial
Transactions

What is an information system?

Information system - set of formal procedures by which data are collected, processed into
information, and distributed to users.

Transaction – an event that affects or is of interest to the organization and is processed by

its information system as a unit of work.

Financial transaction – an economic event that affects the assets and equities of the
organization, is reflected in its accounts, and is measured in monetary terms.
Nonfinancial transaction – events that do not meet the narrow definition of a financial
transaction.
AIS subsystems process financial and nonfinancial transactions that directly affect
the processing of financial transactions.

Major subsystems of AIS:

1. Transaction processing system (TPS) – supports daily business operations with

numerous reports, documents, and messages for users throughout the
organization.
2. General ledger/financial reporting system (GL/FRS) – produces the traditional
financial statements and other reports required by law.
3. Management reporting system (MRS) – provides internal management with
special-purpose financial reports and information needed for decision making
such as budgets, variance reports, and responsibility reports.

MIS processes nonfinancial transactions that are not normally processed by

traditional AIS.
 Illustration 1-5: GENERAL MODEL FOR ACCOUNTING INFORMATION SYSTEM
The External Environment

The Information
System Database
Management

External Sources Data Information External End

Data Collection
of Data Processing Generation Users

Feedback
Internal Sources Internal End
of Data Users
The Business Organization

Feedback

End Users – internal and external

Data Versus Information: Data - facts which may or may not be processed.
Information – processed data
Data Sources - are financial transactions that enter the information system from
both internal and external sources.

Data Collection - the first operational stage in the information system.

Data Processing – collected data are processed to produce information.

Database Management – is the physical repository for financial and nonfinancial

data.

Data Attribute – is the most elemental piece of potentially useful data in

the database.

Record – is a complete set of attributes for a single occurrence within an

entity class.

File – is a complete set of records of an identical class.

 Database Management Tasks. Database management – involves three fundamental tasks: storage,
retrieval, and deletion.
Storage task assigns keys to new records and stores them in their proper location in the
database.
Retrieval is the task of locating and extracting an existing record from the database for
processing.
Deletion is the task of permanently removing obsolete or redundant records from the
database.

Information Generation – is the process of compiling, arranging, formatting, and presenting information to
users.
Relevance – the content of a report or document must serve a purpose.
Timeliness – the age of information is a critical factor in determining its usefulness.
Accuracy – information must be free from material errors.
Completeness – no piece of information essential to a decision or task should be missing.
Summarization – information should be aggregated in accordance with the user’s needs.

Feedback – is a form of output that is sent back to the system as a source of data.
Information System Objectives
1. To support the stewardship function of management.
2. To support management decision making.
3. To support the firm’s day-to-day operations.

Acquisition of Information Systems:

4. Customized system
5. Preprogrammed commercial systems
1. Turnkey systems – are completely finished and tested systems that
are ready for implementation.
2. Backbone systems – consist of a basic system structure on which to
build.
3. Vendor-supported systems – are customized systems that client
organizations purchase commercially rather than develop in-house.
 Organizational Structure
- reflects the distribution of responsibility, authority, and
accountability.
Illustration 1-6: THE FLOWS OF RESPONSIBILITY, AUTHORITY, AND ACCOUNTABILITY THROUGH THE ORGANIZATION

President

VP - VP - VP – Computer
VP - Finance Services
Marketing Production

Manager Manager Manager Responsibility

and Authority
Plant 1 Plant 2 Plant 3

Manager Manager Manager

Accountability
Unit 1 Unit 2 Unit 3
BUSINESS SEGMENTS:
1. Segmentation by Geographic Location
2. Segmentation by Product Line
3. Segmentation by Business Function
FUNCTIONAL SEGMENTATION
Illustration 1-8: FUNCTIONAL AREAS OF A FIRM

Resource Business Function

Materials Inventory Management
Production
Marketing
Distribution

Labor Personnel

Financial Capital Resource

Accounting
Information
Information Technology
Functional Segmentation
Illustration 1-8: FUNCTIONAL AREAS OF A FIRM

Business
Organization

Materials
Management Production Marketing Distribution Personnel Finance Accounting IT Services

Portfolio Inventory Data

Promotion Warehousing Recruiting
Purchasing Manufacturing Mgt. Control Processing

Cost
Systems
Advertising Shipping Training Treasury Accounting Development
Receiving Support
and
Maintenance
Payroll
Market
Benefits Credit
Stores Research
Database
Accounts
Admin
Payable
Cash
Sales Counseling Disbursement
Accounts
Receivable
Cash
Receipts
Billing

Fixed
Assets

General
Ledger
Materials Management
- planning and control of materials inventory of the company
Sub-functions:
1. Purchasing – responsible for ordering inventory from vendors when inventory
levels fall to their reorder points.
2. Receiving – is the task of accepting the inventory previously ordered by
purchasing.
3. Stores – takes physical custody of the inventory received and releases these
resources into the production process as needed.

Production
- occurs in the conversion cycle in which raw materials, labor, and plant assets are
used to create finished products.
Sub-functions:
1. primary manufacturing activities
2. production support activities
Marketing
- deals with the strategic problems of product promotion, advertising, and
market research.

Distribution
- is the activity of getting the product to the customer after the sale.

Personnel
- its objective is to effectively manage its valuable resource – employees

Finance
- manages the financial resources of the firm through banking and treasury
activities, portfolio management, credit evaluation, cash disbursements, and
cash receipts.
Accounting
- manages the financial information resource of the firms.
- captures and records the financial effects of the firm’s transactions.
- distributes transaction information to operations personnel to coordinate many
of their key tasks.
The value of information - is determined by its reliability and value to the users.
Accounting independence – accounting activities must be separate and
independent of the functional areas that maintain custody of physical resources.
Information Technology Service
Centralized Data Processing – all data processing is performed by one or more
large computers housed at a central site that serve users throughout the
organization.
IT areas of operation:
- Data Administration
- Data Processing
- Systems Development and Maintenance
Functional Segmentation
Illustration 1-9: ORGANIZATION OF IT FUNCTION IN A CENTRALIZED SYSTEM

Business
Organization

Computer
Marketing Production Finance
Services

Systems Database Data

Development Administration Processing

New Systems Systems Data Data Computer Data

Development Maintenance Control Conversion Operations Library
Functional Segmentation
Illustration 1-10: ORGANIZATION OF IT FUNCTION IN A DISTRIBUTED SYSTEM

Business
Organization

Marketing Finance Administration Production

Manager Manager
Treasurer Controller
Plant X Plant Y

IPU IPU IPU IPU IPU IPU

Information Technology Service

Distributed Data Processing – involves reorganizing of IT function into small
information processing units (IPUs) that are distributed to end users and placed under
their control.
Disadvantages of DDP:
1. Mismanagement of organization-wide resources.
2. Hardware and software incompatibility.
3. Redundant tasks.
4. Consolidating incompatible activities.
5. Hiring qualified professionals.
6. Lack of standards

Advantages of DDP:
7. Cost reductions.
8. Improved cost control responsibility.
9. Improved user satisfaction.
10. Backup
The Evolution of Information System Models
The Manual Process Model
- is the oldest and most traditional form of
accounting systems.
- constitutes the physical events, resources, and
personnel that characterize many business
processes such as order-taking, warehousing
materials, manufacturing goods for sale, shipping
goods to customers, and placing orders with
vendors.
The Evolution of Information System Models
The Flat-File Model
- describes an environment in which individual data
files are not related to other files.
- end users in this environment own their data files
rather than share them with others.
- stand-alone applications rather than integrated
systems perform data processing.
Illustration 1-10: FLAT-FILE MODEL

User Stand-Alone Application User-Owned Data Sets

Customer Data
(Current AR)

Billing/Accounts
Accounting Receivable System Sales Invoices

Cash Receipts

Customer Data
(Historic/Demographic
Product Promotion Orientation)
Marketing System
Sales Invoice

Customer Data
(Historic/Product
Service Scheduling Orientation)
Product Services System
Product/Services
Schedule
The Evolution of Information System Models
The Database Model
- organization’s data are in a central location, all
users have access to the data they need to
achieve their respective objectives.
- access to the data resource is controlled by
Database Management System (DBMS).
- DBMS is a special software system that is
programmed to know which data elements each
user is authorized to access.
Illustration 1-11: DATABASE MODEL

User User View Intergration Software Shared Database

Customer Sales
Accounting (Current AR)

Customer Sales Product

Marketing (Historic/Demogra Promotion
phic Orientation) System Customer Data
(Current AR)

Customer Sales
Product Services (Historic/Product
Orientation)
 The REA Model
REA
- is an accounting framework for modeling an
organization’s critical resources, events, and
agents (REA) and the relationship among them.
Resources – are the assets of the organization
Events – phenomena that affect changes in
resources
Agents – are individuals and departments that
participate in an economic event.
Illustration 1-12: CLASSIC ACCOUNTING RECORDS IN A NON-REA SYSTEM

Accounts Receivable File

Customer Customer
Number Name Debit Credit Balance

23456 Smith 350 200 150

Cost of Goods Sold File

Account
Number Debit Credit

5734 270

Sales File
Account
Number Credit

4975 350
Illustration 1-13: EVENT DATABASE IN A REA SYSTEM

CUSTOMER Table
Customer Number
(PK) Name Address Tel Num Credit Limit Billing Date Anniver

23456 Smith 125 Elm St., City 610-555-1234 5,000.00 12 12/9/89

INVOICE Table
Invoice Invoice Cust Num
Num (PK) Date Ship Date Terms Carrier
(FK)
98765 9/1/09 9/3/09 Net 30 UPS 23456

LINE ITEM Table

Product Num Invoice Num
(PK) Qty Sold
(FK)
X21 98765 5

Y33 98765 10

PRODUCT Table
Product
Num (PK) Description Sales Price Unit Cost QOH Reorder Point

X21 Something or other 30.00 22 200 50

Y33 Something else 20 16 159 60

CASH REC Table

Trans Num Customer Check Amount Check Date Dated
(PK) Num (FK) Num Posted
77654 23456 451 200 200 9/3/09
ENTERPRISE RESOURCES PLANNING SYSTEMS (ERP)
- is an information system model that enables and organization to
automate and integrate its key business processes.
THE ROLE OF THE ACCOUNTANTS

Accountants as users
- Accountants must provide a clear picture of their needs to the
professionals who design their systems.
Accountants as system designers
Conceptual system – determines the nature of the information
required, its sources, its destination, and the accounting rules that
need to be applied.
Physical system – is the medium and method for capturing and
presenting the information.
Accountants as system auditors
- Perform the attest functions
End of LESSON 1