BIT211 Accounting Information Systems

Lecture 2:
2.0 Traditional Accounting Information Systems
2.1 Introduction
An accounting as an information system (AIS) is a system of collecting, storing and processing financial
and accounting data that are used by decision makers. An accounting information system is generally a
computer-based method for tracking accounting activity in conjunction with information technology
resources. The resulting financial reports can be used internally by management or externally by other
interested parties including investors, creditors and tax authorities. Accounting information systems are
designed to support all accounting functions and activities including auditing, financial accounting &
reporting, managerial/ management accounting and tax. The most widely adopted accounting
information systems are auditing and financial reporting modules.
An accounting information system consists of the people, records, and methods used to gather financial
information about business events, record it, process it into a useful form, and communicate the
information to end users and decision makers. In other words, an accounting system is everything and
everyone involved in collecting, recording, and organizing financial transactions for the company.
What Does Accounting Information Systems Mean?
In essence, the goal of an accounting system is to record financial data and turn it into useful financial
information.
There are many different parts and components to any accounting information system, but they can
typically be broken up into five main categories: source documents, input devices, information
processors, information storage, and output devices.
Example
Source documents are the original business documents that are used to track business transactions.
Documents like invoices, purchase orders, and receipts all track and keep a record of the original
transaction.

 Input devices are tools used to enter financial transaction information into the accounting system.
Devices like bar code scanners, keyboards, and modems all help employees enter source
documents into the system.
 Information processors, like computers and software programs, take the raw data from the input
devices and post it to ledgers, journals, and reports that can be used by decision makers.
 Information storage is the component of the system that stores the reports and ledgers that the
information processors create. Since most modern accounting systems are computer based, these
usually consist of servers and hard drives, but file cabinets are still considered storage devices.
 Output devices like monitors, printers, and projectors are any devices that take information from
the system storage and display it in a useful way, so that it can be used.
As you can see, the accounting information system is much more than a computer with Quickbooks
installed on it. It’s the entire system put in place to take financial data and turn it into usable financial
information.
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Note:
a) Accounting is an evolving process, which means that the system of recording the transactions in
the books should be changed and modified with time, so as to meet up the change in the
environment and maintain flexibility.
b) Keeping this in mind, the accounting concepts and conventions are modified from time to time
along with the change in the system of book keeping.
c) The accountants now have an option of either choosing the traditional accounting system for
maintaining the records or go with the modern system of accounting.
d) There will be no change in the transaction to be recorded in the books, irrespective of the
accounting system followed.
e) For different accounting systems, different set of debit and credit rules are framed. Under the
traditional approach, the accounts are classified as real, personal and nominal.
f) Under the modern system of accounting the accounts are divided into five categories of: asset,
liability, capital, expenses, and income. Modern system of accounting is based on the accounting
equation.
g) It can be concluded that with the evolution in the business environment, accounting as well faced
many evolutions for the ease of recording the transactions in the books of accounts.
h) And this evolution added to the new advanced methods of book keeping and accounting, which
acted as a helping hand for the management as well as the outsiders.
2.2 Accounting As an Information System
An accounting information system (AIS) combines the study and practice of accounting with the design,
implementation, and monitoring of an information system. Such a system involves applying modern
information technology resources to traditional accounting controls and methods to provide users the
financial information necessary to manage their organizations. This system is often a component of an
entity's management information system.
Technology
Contemporary technological capabilities permit a range of possible designs for an AIS. Yet, the basic
structure of a system continues to include essentially the same three components: input, processing, and
output.
Input
The input devices commonly associated with an AIS include standard personal computers (PCs) or
workstations running applications, scanning devices for standardized data entry, and electronic
communication devices for electronic data interchange (EDI) and electronic commerce (e-commerce). In
addition, many financial systems come "Web enabled" to allow devices that connect to the World Wide
Web AIS access.
Processing
Basic processing is achieved through computer systems ranging from individual PCs to large-scale
enterprise servers. Conceptually, however, the underlying processing model is still the double-entry
accounting system invented many centuries ago.
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Output
The output devices used include computer displays, impact and nonimpact printers, and electronic
communication devices for EDI and e-commerce. The output content may encompass almost any type
of financial report, from budgets and tax reports to multinational financial statements and sustainability
reports.
Management Information Systems
Management information systems (MISs) are interactive human/machine systems that support decision
making for users both in and out of traditional organizational boundaries. These systems are used to
support an organization's daily operational activities, current and future tactical decisions, and overall
strategic direction. MISs are made up of several major applications, including the financial information
and human resources systems.
Financial Information Applications
Financial information applications make up the heart of AIS in practice. Modules commonly
implemented include: general ledger, payables, procurement/purchasing, receivables, billing, inventory,
assets, projects, and budgeting.
Human Resource Applications
Human resource applications make up another major part of modern information systems. Modules
commonly integrated with the AIS include: human resources, benefits administration, pension
administration, payroll, and time and labor reporting.
Information Systems in Context
AISs cover all business functions from backbone accounting transaction processing systems to
sophisticated financial management planning and processing systems.
Financial Reporting
Financial reporting starts at the operational levels of the organization where the transaction processing
systems capture important business events such as normal production, purchasing, and selling activities.
These events (transactions) are classified and summarized for internal decision making and for external
financial reporting.
Cost Accounting Systems
Cost accounting systems such as activity-based costing (ABC) systems are used primarily in manufacturing
environments, but increasingly are being applied to service companies, such as banks, real estate firms,
and insurance companies. These allow organizations to track the costs associated with production of
goods and performance of services.
Management Accounting Systems
Management accounting systems such as master budgets are used to facilitate organizational planning,
monitoring, and control for a variety of activities. Such systems allow all managerial levels to have access

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to prompt reporting and statistical analysis. The systems are used to gather information to consider
alternative scenarios, and to identify an optimal answer among the hypothetical scenarios.
Development of an AIS
The development of all AISs includes the basic phrases of planning, analysis, design, reporting,
implementation, and support. The time associated with each of these phrases can be as short as a few
weeks or as long as several years.
Planning
The first phase of systems development is the planning of the project. This entails determination of the
scope and objectives of the project, the definition of project responsibilities, control requirements,
project phases, project budgets, and project deliverables.
Analysis
The analysis phase requires a thorough evaluation and documentation of the accounting and business
processes in use by the organization. This phase may include reengineering to take advantage of modern
best practices and the operating characteristics of modern system solutions.
Data analysis involves a thorough review of the accounting information that is being collected by an
organization. Such data are often compared to budgeted data prepared for financial management and
for external financial reporting.
Decision analysis is a through review of the decisions a manager is responsible for making. The primary
decisions that managers are responsible for are identified on an individual basis. Then models are created
to support the manager in gathering financial and related information, developing and designing
alternatives, and making actionable choices. This method is used when decision support is the system's
primary objective.
Process analysis is a thorough review of the organization's business processes. Organizational processes
often are identified and segmented into a series of events that either add or change data. These processes
can then be modified or reengineered to improve the organization's operations in terms of lowering
cost, improving service, improving quality, and improving management information.
Design
The design phase takes the results of the analysis phase and turns them into detailed specific designs that
can be implemented in a subsequent phase. It involves the detailed design of all inputs, processing,
storage, and outputs of the proposed accounting system. Inputs may be defined using screen layout tools
and application generators. Processing can be shown through the use of flowcharts or business process
maps that define the system logic, operations, and work flow. Logical data storage designs are shown by
modeling the relationships between the organization's resources, events, and agents in diagrams. Also,
entity relationship diagram modeling is used to document large-scale database relationships. Output
designs are documented through the use of a variety of reporting tools such as report writers, data
extractions tools, query tools, and online analytical processing tools.
Data capture and storage
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Screen designs and system interfaces are the primary data capture devices of AISs and are developed
through a variety of tools. Storage is achieved through the use of normalized databases that increase
functionality and flexibility.
Processing
Business process maps and flowcharts are used to document the operations of the systems. Modern AISs
use specialized databases and processing designed specifically for accounting operations. This means that
much of the base processing capabilities come delivered with the accounting or enterprise software.
Reporting
Reporting is the driving force behind AIS development. If the system analysis and design are successful,
the reporting process provides the information that helps drive management decision making and
external financial reporting. Accounting systems make use of a variety of scheduled and on-demand
reports. The reports can be tabular, showing data in a table or tables; graphic, using images to convey
information in a picture format; or matrices, to show complex relationships in multiple dimensions.
There are numerous characteristics to consider when defining reporting requirements: The reports must
be accessible through the system's interface. They should convey information in a proactive manner.
They must be relevant. Accuracy and reliability must be considered. Lastly, reports must meet the
information processing (cognitive) style of the audience they were meant to inform and meet applicable
reporting standards.
Management reports come in three basic types:

 Filter reports —separate selected data from a database, such as a monthly check register
 Responsibility reports —such as a weekly sales report for a regional sales manager
Comparative reports —created to show period differences, percentage breakdowns and differences
(variances) between actual and budgeted expenditures, such as a report showing the expenses from the
current year and the prior year as a percentage of sales
Implementation
The implementation phase consists of two primary parts, construction and delivery. Construction
includes the selection of hardware, software, and vendors for the implementation; building and testing
the network communication systems; building and testing the databases; writing and testing the new
program modifications; and installing and testing the total system from a technical standpoint. Delivery
is the process of conducting final system and user acceptance testing, preparing the conversion plan,
installing the production database, training the users, and converting all operations to the new system.
Tool sets
Tool sets are a variety of application development aids that are vendor specific and used for
customization of delivered systems. They allow the addition of fields and tables to the database along
with ability to create screen and other interfaces for data capture. In addition, they help set accessibility
and security levels for adequate internal control within the accounting applications.
Security
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Security exists in several forms, including physical security. In typical AISs the equipment is located in a
locked room with access granted only to technicians. Software access controls are set at several levels,
depending on the size of AIS. The first level of security occurs at the network level, which protects the
organization's communication systems. Next is the operating system level security, which protects the
computing environment. Then database security is enabled to protect the organizational data from theft,
corruption, and other threats. Lastly, application security is used to keep unauthorized persons from
performing operations within the AIS.
Testing
Testing is performed at four levels. Stub or unit testing is used to ensure the proper operation of
individual modifications. Program testing involves the interaction between the individual modification
and the program it enhances. System testing is used to determine that the program modifications work
within the AIS as a whole. Acceptance testing ensures that the modifications meet user expectations and
that the entire AIS performs as designed.
Conversion
Conversion entails the method used to change from an old to a new AIS. Several methods are available
to achieve this goal. One is to run the new and old systems in parallel for a specified period. A second
method is to directly cut over to the new system at a specified time. A third method is to phase in the
system, either by location or system function. A fourth method is to pilot the new system at a specific
site before converting the rest of the organization.
Support
The support phase has two objectives. The first is to update and maintain the AIS. This includes fixing
problems and updating the system for business and environmental changes. For example, changes in
generally accepted accounting principles (GAAP) or new regulations such as the Sarbanes-Oxley Act of
2002 might necessitate changes to the AIS. The second objective of support is to continue development
by continuously improving the business through adjustments to business and environmental changes.
These changes might result in future problems, new opportunities, or management or governmental
directives requiring additional system modifications.
Assurance, Audit, and Attestation
Quality control of AISs involves many activities, including the services of both external auditors (public
accountants) and internal auditors. External auditors can provide a variety of services, including
providing assurance that the controls over external financial reporting are adequate and attestations that
the external financial statement are "fairly presented" in accordance with GAAP. Internal auditors focus
on providing assurance that AISs are effective and efficient in providing information to assist managerial
decision making.
Continuous improvement of AISs change the way internal controls are implemented and the types of
audit trails that exist within a modern organization. The lack of traditional forensic evidence, such as
paper, necessitates the involvement of accounting and auditing professionals in the design of such
systems. Periodic involvement of public auditing firms can be used to make sure the AIS is in compliance

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with current internal control requirements, such as the Section 404 requirements of the Sarbanes-Oxley
Act and revised financial reporting standards.
After the implementation, the focus of attestation is the review and verification of system operation.
This requires adherence to such standards as ISO 9000 for software design and development, as well as
standards for control of information technology.
Periodic functional business reviews should be conducted to make sure the AIS remains in compliance
with the intended business functions. Quality standards dictate this review should be done according to
a periodic schedule.
Traditional AIS and Modern Enterprise Resource Planning Systems
Enterprise resource planning (ERP) systems are large-scale information systems that affect an
organization's AIS. These systems permeate all aspects of the organization and require such technologies
as client/server and relational databases. Other system types that affect AISs are supply chain
management and customer relationship management.
Traditional AISs recorded financial information and produced financial statements on a periodic basis
according to GAAP pronouncements. Modern ERP systems provide a broader view of organizational
information, enabling the use of advanced accounting techniques such as ABC and improved managerial
and financial reporting using a variety of analytical techniques.
Most people invest their savings in mutual funds, meaning mutual funds management companies handle
hundreds of billions of dollars from millions of clients. It is not possible to run this kind of business
without accurately recording information. When a client calls her investment company to find out her
balance, the company must be able to give her accurate information instantly. Companies rely on
advanced information systems to store data accurately.
Accounting Information Systems
To run a business, a company needs to store its financial information accurately. In accounting,
information systems plays that role. It involves financial reporting of normal business transactions to
expenditure and financial planning. Financial records have to be stored accurately for the benefit of the
firm as well as its shareholders. Transaction data is collected and processed into financial information,
which in turn is disseminated to shareholders, management and other interested parties. The system used
to process all that is called "accounting information system."
Data and Information
Information systems in accounting involve the collection of data and transformation of that data into
information that is then used to make accounting decisions. Data is basically raw facts that need
processing to turn the facts into usable information by those who need it to make financial decisions.
Accounting information systems play that role.
Transactions
Recording accounting information must include evidence a transaction occurred. Abstract information is
not admissible in accounting. Documents such as receipts and purchase orders must be provided as proof
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of the transaction. Other documents required in accounting information systems are trial balances,
financial statements and worksheets that result from the process. In years past, it was common to use
manual accounting information systems, which involved recording of information on a hard copy
balance sheet, for example. But increasingly, almost all financial records are electronic; however, there
are companies that maintain both electronic and manual information systems.
Technology
The standard personal computer is the most commonly used input device in accounting. Devices used
for information input include the keyboard, scanners and electronic communication instruments such as
electronic data interchange. Output devices include printers. Every day, ordinary people participate in
the input of data into various businesses' information systems. At a supermarket where you scan your
own items and make payment, you are inputting data into the business's information system, which will
be used for accounting purposes.
Building an Information System
Information systems vary from company to company. Each organization must build an information
system that is relevant to its goals. Information technology companies are able to build customized and
comprehensive software that fits specific needs of individual companies.
Developing an effective accounting information system requires great effort. The main objective for
designing an effective information system is that it is able to provide simple, relevant, timely and reliable
information to people who need to act on it more efficiently. These people might be management or
shareholders or other interested parties such as organizations that provide accounting oversight.
Follow-Up
Once the system is designed and developed, it needs monitoring to ensure it is functioning properly.
Changes must be made according to the organization's needs.
Implementation
Many large and SMEs are now adopting cost effective cloud-based accounting information system in
recent years.
Looking back years ago, most organizations, even larger ones, hire outside consultants, either from the
software publisher or consultants who understand the organization and who work to help select and
implement the ideal configuration, taking all components into consideration.
The steps to implement an accounting information system are as follows:
Detailed Requirements Analysis
where all individuals involved in the system are interviewed. The current system is thoroughly
understood, including problems, and complete documentation of the system—transactions, reports, and
questions that need to be answered—are gathered. User needs that are not in the current system are
outlined and documented. Users include everyone, from top management to data entry. The
requirements analysis not only provides the developer with the specific needs, it also helps users accept

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the change. Users who have the opportunity to ask questions and provide input are much more confident
and receptive of the change, than those who sit back and don't express their concerns.
Systems Design (synthesis)
The analysis is thoroughly reviewed and a new system is created. The system that surrounds the system
is often the most important. What data needs to go into the system and how is this going to be handled?
What information needs to come out of the system how is it going to be formatted? If we know what
needs to come out, we know what we need to put into the system. The program we select will need to
appropriately handle the process. The system is built with control files, sample master records, and the
ability to perform processes on a test basis. The system is designed to include appropriate internal controls
and to provide management with the information needed to make decisions. It is a goal of an accounting
information system to provide information that is relevant, meaningful, reliable, useful, and current. To
achieve this, the system is designed so that transactions are entered as they occur (either manually or
electronically) and information is immediately available online for management.
Once the system is designed, an RFP is created detailing the requirements and fundamental design.
Vendors are asked to respond to the proposal, to provide demonstrations of the product, and to
specifically respond to the needs of the organization. Ideally, the vendor will input control files, sample
master records, and be able to show how transactions are processed that result in the information that
management needs to make decisions. An RFP for the information technology infrastructure follows the
selection of the software product because the software product generally has specific requirements for
infrastructure. Sometimes, the software and the infrastructure is selected from the same vendor. If not,
the organization must ensure that vendors will work together without "pointing fingers" when there is
an issue with either the software or the infrastructure.
Documentation
As the system is being designed, it is documented. The documentation includes vendor documentation
of the system and, more importantly, the procedures or detailed instructions that help users handle each
process specific to the organization. Most documentation and procedures are online and it is helpful if
organizations can add to the help instructions provided by the software vendor. Documentation and
procedures tend to be an afterthought but is the insurance policy and the tool used during testing and
training—before launch. The documentation is tested during the training so that when the system is
launched, there is no question that it works and that the users are confident with the change.
Testing
Before launch, all processes are tested from input through output, using the documentation as a tool
to ensure that all processes are thoroughly documented and that users can easily follow the procedures:
They know it works and that the procedures will be followed consistently. The reports are reviewed and
verified, so that there’s no garbage in-garbage out. This is done in a test system not yet fully populated
with live data. Unfortunately, most organizations launch systems before thorough testing, adding to end-
user frustration when processes don't work. The documentation and procedures may be modified during
this process. All identified transactions must be tested during this step. All reports and online information
must be verified and traced through the audit trail so that management is ensured that transactions will
be handled consistently and that the information can be relied upon to make decisions.
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Training
Before launch, all users need to be trained, with procedures. This means a trainer using the procedures
to show each end user how to handle a procedures. The procedures often need to be updated during
training as users describe their unique circumstances and the "design" is modified with this additional
information. The end user then performs the procedure with the trainer and the documentation. The
end user then performs the procedure with the documentation alone. The end user is then on his or her
own with the support, either in person or by phone, of the trainer or other support person. This is before
data conversion.
Data Conversion
Tools are developed to convert the data from the current system (which was documented in the
requirements analysis) to the new system. The data is mapped from one system to the other and data
files are created that will work with the tools that are developed. The conversion is thoroughly tested
and verified before final conversion. There’s a backup so it can be restarted, if necessary.
Launch
The system is implemented only after all of the above is completed. The entire organization is aware
of the launch date. Ideally, the current system is retained and often run in "parallel" until the new system
is in full operation and working properly. With the current mass-market software used by thousands of
companies and fundamentally proven to work, the "parallel" run that is mandatory with software tailor-
made to a company is generally not done. This is only true, however, when the above process is
followed, the system is thoroughly documented and tested, and users are trained before launch.
Tools
Online resources are available to assist with strategic planning of accounting information systems.
Information systems and financial forms aid in determining the specific needs of each organization, as
well as assigning responsibility to principles involved.
Support
The end users and managers have ongoing support available at all times. System upgrades follow a
similar process and all users are thoroughly apprised of changes, upgraded in an efficient manner, and
trained.
Many organizations chose to limit the time and money spent on the analysis, design, documentation,
and training, and move right into software selection and implementation. If a detailed requirements
analysis is performed with adequate time being spent on the analysis, the implementation and ongoing
support will be minimal. Organizations that skip the steps to ensure the system meets their needs are
often left with frustrated end users, costly support, and information that is not current or correct. Worse
yet, these organizations build the system three times instead of once.
2.3 Difference between Traditional & Computerized Accounting
Before the advent of fast and cheap computers, accounting traditionally was processed manually with
all transactions recorded in columnar papers and kept in voluminous binders. Once computers became
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popular and software affordable, accounting tasks moved into this medium, where concepts stayed the
same but mechanics changed from papers to programs.
Speed
The most glaring difference between traditional and computerized accounting is the speed of operations.
With an accounting program, data is entered once and it is saved. The program provides management
with reports in a speed never dreamed possible in the traditional days. No more waiting days or weeks
to know whether your business is making a profit. Using computerized accounting, information can be
accessed in a matter of minutes. Once data is available in the system, it can be used in reports, queries
and analysis.
Accuracy
Computerized systems have drastically increased accuracy of calculations when compared to the
traditional, manual system, in which columns had to be added up, numbers moved from one page to
the next, and trial balance and financial statements manually compiled. If errors occurred, many hours
had to be spent trying to find and correct them. With accounting software, this problem is eliminated.
In the case of accounting spreadsheets, adding simple formulas still may be needed, but it is an easier
and more accurate process. Efficiency goes through the roof when a computerized system is used.
Costs
The traditional manual accounting system with paper and pencil is cheaper than the computerized
version, in which a firm needs a computer, software, printer and other expenses associated with a system.
The manual system may work for small businesses up to a certain point, but with the affordable costs of
computers and software, many firms are opting for the computerized system. They are easy to use, and
finding experienced employees to run the system is not a hurdle.
Backups
When using a manual system, the risk of losing data is real. If important papers are damaged or
destroyed, that work may have to be re-created. Copies of the original work can be made, but that
could be expensive and time-consuming. Accounting on a computerized system offers the choice of
saving work on a CD, portable or external hard drive, flash drive, or even online. Many firms back up
data every night as a precaution. If something happens the next day, the data can be restored from the
backup.
Considerations
Using a computerized accounting system keeps all of the information organized and in one place—the
computer hard drive. Finding and accessing information on an accounting software program is much
easier than the traditional method. Specific data can be found using system functions, which usually
include a "find" or “search” key. For example, finding information about a vendor on a manual system
could take many steps and significant time. The same process in a computerized system most likely would
yield the information in a snap, with less confusion and aggravation.
Traditional Accounting vs Integrated Accounting

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Integrated Accounting Versus Traditional Accounting Traditional accounting systems are isolated from
operations, and that causes some problems:
a) Traditional accounting information is dated. With manual accounting, accounting information is
never up-to-date except for the instant that someone manually closes a period. But integrated
cloud accounting is automatically and continuously updated by operations for a complete,
accurate, real-time picture of where business stands. It requires a lot of time and labor to manually
take all of the information from operations and re-key it into an accounting system.
b) Traditional accounting takes too long. It requires alot of time and labor to manually take all of
the information from operations and re-key it into an accounting system. With integrated
accounting, the information flows automatically from operations to accounting to eliminate rote
tasks.
c) Traditional accounting invites errors. Manual data entry is always an error opportunity. So re-
keying information from order management to accounting for every order is bound to lead to
mistakes. Integrated accounting removes error opportunities by removing manual re-keying.
d) Traditional accounting requires manual sorting. Not only do professionals have to re-key
accounting data in traditional systems, they first have to identify what it is and sort it into
cumbersome batches. Integrated accounting systems know what A/R is, what A/P is, and what
belongs where so information is automatically posted to the right place.
e) Traditional accounting means missed opportunities. You can’t take traditional accounting with
you. Integrated cloud accounting opens a world of opportunities. Accounting is tied back to
orders, so it’s easy to invoice and receive payment right on the spot – even if that spot is miles
from the office.
Lecture 2 Assignment: Traditional Accounting Information Systems
Discuss how integrated accounting information systems has improved the following concepts in our
modern organizations.
a) Confidentiality
b) Integrity
c) Availability
To be presented in the next lesson 10 Marks

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