Fundamentals of Accounting Part 1

1
Accounting Information System

Module 003 Accounting Information System

Topics under this module include: definition of the accounting information

system (AIS); features and functions of AIS; components of AIS; Types of AIS
and their comparison.

After studying this module, the students should be able to

1. Define accounting information system.
2. Describe the features of an effective accounting system.
3. Enumerate the components of a computerized system.
4. Compare computerized and manual accounting systems.

Introduction to Accounting Information System

Accounting Information System (AIS) is a method of collecting and processing business
transactions or financial and accounting data that will be beneficial to the firm’s
stakeholders (owners, managers, creditors, government, prospective investors, and
employees).
AIS is generally a computer-based approach for monitoring accounting activities. This is an
accounting information system combining or applying modern information technology to
accounting practices (e.g. Generally Accepted Accounting Principles or GAAP).

Features and Functions of an Accounting Information System

From the definition above, we can extract the very important functions of AIS. These are:
1. AIS provides an efficient and effective means of collecting, storing, and processing
accounting and financial data.
2. It supplies financial information that is very valuable not only in creating reports and
financial statement for management but also in decision-making.
3. AIS warrants the proper or accurate recording and processing of data are done
according to accounting principles.
An effective accounting system, computerized or manual should have the following
features:
1. Control. An internal operations control involves methods and techniques that will
allow transactions and protect assets of the firm.
2. Flexibility. An AIS that is properly designed can hold changes without disturbing the
whole system.

Course Module
 Fundamentals of Accounting Part 1
2
Accounting Information System

3. Compatibility. An AIS is said to be compatible if it works easily with the operations of

the business, its people and structure.
4. And a positive cost-benefit analysis. This pertains to the characteristic of AIS where the
benefits it will yield should outscore the cost of creating it.
The American Institute of Certified Public Accountants (AICPA) has identified five basic,
yet, important principles that will vouch the AIS reliability for any organization. These are:
1. Security. Only authorized person should have access to the system and the data.
2. Confidentiality. Restricted or confidential information should be protected from
unauthorized exposure.
3. Privacy. Customers or client’s personal information should be collected, used, and
disclosed in an appropriate manner.
4. Processing integrity. The timely processing of data should be done by authorized
person only with accuracy and completeness.
5. Availability. An AIS adopted by a firm should be available to meet operational and
contractual obligations.

Components of an Effective Accounting Information System

AIS has six basic components:
1. People
2. Procedures and Instructions
3. Data
4. Software
5. Hardware or the Information Technology Infrastructure
6. Internal control

People refer to the system users, including professionals such as accountants, business
analysts, managers, consultants, chief financial officers, and auditors. An AIS should be
designed to cater to the needs of the people authorized to use it. It helps all the departments
in the firm to work collaboratively.

Procedures and Instructions pertains to the different approaches or techniques, manual

and automated, the firm uses in gathering, keeping, retrieving, and processing data. These
instructions are coded into the AIS software and shared to the “people” through trainings
and documentation.
A database structure like the structured query language (SQL) must be present in the AIS to
house information. Different types of users need different input screens, varying types of
data entry and output styles and differing types of information.

Data in AIS are all the relevant financial information of the business activities and practices.
The data inclusive in AIS depends on the kind and nature of the business. Among them are
sales orders, customer billing statements, sales reports, purchase requisitions, sellers’
invoices, check registers, inventory, payroll information, general ledger, timekeeping, tax
information, etc.
 Fundamentals of Accounting Part 1
3
Accounting Information System

Data should be complete, accurate, and significant to be very useful to the users.

Software refers to the computer programs that will be used to store, retrieve, and process
and analyze the financial data of the firm. Software programs can be custom-made to meet
the distinctive needs or requirements of different types of businesses and users.

Information Technology Infrastructure or simply, the hardware components are the

electronic equipment such as computers, disk drives, monitors, printers, routers, storage
media, and back-up power supply and surge protectors. The hardware should be compatible
with the software that the business will use and should possess the needed speed and
storage capability.
Aside from the hardware acquisitions, proposals on its maintenance, servicing, replacement
and upgrading and even disposing broken or outdated hardware should be included in the
AIS.

Internal controls of AIS refer to the security measures that will protect sensitive data.
Examples are passwords or biometric identification, protections from hackers, computer
viruses, and other threats to network security. These also include controls to protect data
from natural disasters and power interruptions.

Types of Accounting Information Systems and Their Comparison

The category of accounting information system that a business will use depends on its
nature, size, and needs.

Manual Accounting Information System

This system is manual in its entirety. This requires source-transaction documents,

general journal, and general ledger. Special journals can also be used. Computers
and software are not employed in the system. This is usually used by small business
with limited transactions.

Computerized Accounting Information System

This system, as the name implies, uses electronic equipment and software to record,
store, process accounting data. This system works best on large businesses with
multiple transactions or activities.

Both the manual and computerized accounting systems perform the same
accounting and financial processes and apply the same accounting principles and
concepts. The difference lies on some factors such as processing speed, costs to be
incurred, and records back-up.

Course Module
 Fundamentals of Accounting Part 1
4
Accounting Information System

Computerized accounting system processes data and produce reports much faster
than manual system. This is so, because of the software program being used, which
performs automatic calculations. This also reduces commitment of errors and
increases efficiency.

Manual accounting system is cheaper as compared to computerized system. Papers,

pencil or ball pen cost less than computers and software, training and software-
hardware maintenance and to include the cost of paper, ink and other supplies.

Another distinction between the two systems is the backup process. In a

computerized system, all the business transactions and reports can be saved and
backed up for a more safe condition in case of calamities as fire, flood, or theft.

How Computerized and Manual Accounting Systems Work

Let us include in our discussion how computerized and manual accounting systems work.
In both systems, the data processing involves three phases:

Inputs Process Outputs

(Data) (Accounting) (Reports)

Inputs refer to data from different source documents (examples: sales invoice/receipts, fax
orders, banks’ deposit slips, etc.) In both accounting systems, the inputs are just the same.
Data will be processed using the chart of accounts. In manual accounting system, the
account titles are of prime importance while in a computerized system, the account
numbers are mainly used to translate accounts and their balances to financial reports and
statements.
Processing manually includes journalizing business transactions, posting to the ledger or
accounts, and preparing financial statements. A computerized accounting system process
without these intermediary steps.
In manual accounting system, recording business transactions (merchandising) needs
classification so that they can efficiently be handled. Examples would be the use of special
journals (which we will discuss later). Credit sales are recorded on Sales Journal; Cash
receipts are entered in Cash Receipts Journal; Cash disbursements are recorded in Cash
Payment Journal; Purchases on account were recorded at Purchases Journal; other
transactions not classified under the four categories above were recorded in the General
Journal.
Under the computerized accounting system, one can access the functions through an
arranged menu. A menu is a list of selections in choosing computer functions. You have the
main menu followed by the submenus. Transactions are continuously recorded and
automatically posted. A click on the submenu/menu can give you a trial balance or
financial statement that you want to generate.
 Fundamentals of Accounting Part 1
5
Accounting Information System

Outputs are the accounting reports which are considered the final stage of data processing.
Under the computerized accounting system, the financial reports and statements are
automatically performed and a click on the menu will display them.

Glossary
Accounting Information System(AIS): a system of processing business transactions,
generally referred to as computerized system.
Components of AIS: the elements relative to the operation of an AIS.
Inputs: raw data for processing.
Outputs: the results of processing data.

References and Supplementary Materials

Books and Journals
Horngren, C. T., Harrison, W. T. Jr., Bamber, L. S., (2002). Accounting (International
Edition). New Jersey, USA: Prentice Hall
Online Supplementary Reading Materials
Accounting Information Systems - Functions and Parts of the System
www.accountingedu.org/accounting-information-systems.html
Accessed: March 16, 2017

Accounting Information System: Types, Uses & Examples | Study.com

study.com/academy/lesson/accounting-information-system-types-uses-examples.html
Accessed: March 16, 2017

Different Types of Accounting Information Systems ...

www.myaccountinginfo.net/2015/11/different-types-of-accounting.html
Accessed: March 16, 2017
Online Instructional Videos
THE ACCOUNTING INFORMATION SYSTEM. ... Support System-Session-1 -
Introduction To Accounting Information Systems - Video | Investopedia
www.investopedia.com/video/.../introduction-accounting-informati...
Accessed: March 16, 2017

Accounting Information Systems and Firm Value | Video Vault | Fox ...
https://www.fox.temple.edu/.../video/accounting-information-systems-and-firm-value/
Accessed: March 16, 2017

Course Module