School of Postgraduate Studies

MSc in Accounting and Finance

Accounting Information Systems

Chapter One
1. Accounting Information Systems: An
Overview

By TNT
Overview of Accounting Information Systems
Learning Objectives
• Distinguish between data and information:
– Discuss the characteristics of useful information.
– Explain how to determine the value of information.

• Explain the decisions an organization makes:

– The information needed to make them.
– The major business processes present in most companies.

• Explain how an AIS adds value to an organization.

– How it affects and is affected by corporate strategy.
– The role of AIS in a value chain.
By TNT
Slide 1 - 2
 Distinguishing Between Data and
Information
• Data are facts collected, recorded, and stored in the
system
– A fact could be a number, date, name, and so on.
For example:
2/22/14
ABC Company, 123,
99, 3, 20, 60

By TNT
Slide 1 - 3
 Data vs. Information
The previous slide just showed data, if we organize the data
within a context of a sales invoice, for example, it is
meaningful and considered information.

Invoice Date : 2/22/14 Invoice #: 123

Customer: ABC company

Item # Qty Price

99 3 $20

Total Invoice Amount $60

By TNT
Slide 1 - 4
 Decision Quality
• Information helps us make better decisions.
• Too much information causing information overload can
reduce decision quality.
• Information Technology (IT) is used to help decision
makers more effectively filter and condense information.

By TNT
Slide 1 - 5
 Value of Information
• Information is valuable when the benefits exceed the costs
of gathering, maintaining, and storing the data.
Benefit (i.e., improved decision making) - Cost (i.e., time
and resources used to get the information) = value of
information

By TNT
Slide 1 - 6
 What Makes Information Useful? (1 of 2)
There are seven general characteristics that make
information useful:
1. Relevant: information needed to make a decision (e.g., the
decision to extend customer credit would need relevant information
on customer balance from an A/R aging report)
2. Reliable: information free from bias
3. Complete: does not omit important aspects of events or activities
4. Timely: information needs to be provided in time to make the
decision

By TNT
Slide 1 - 7
 What Makes Information Useful? (2 of 2)
5. Understandable: information must be presented in a meaningful
manner
6. Verifiable: two independent people can produce the same
conclusion
7. Accessible: available when needed

By TNT
Slide 1 - 8
 Information Needs and Business Processes
• Business organizations use business processes to get
things done. A business process is a set of related,
coordinated, and structured activities and tasks performed
by people, machines, or both to achieve a specific
organizational goal.
• Key decisions and information needed often come from
these business processes.

By TNT
Slide 1 - 9
 Transactional Information Between Internal
and External Parties in an AIS
• Business organizations conduct business transactions
which is an agreement between two entities to exchange
goods, services, or any other event that can be measured
in economic terms by an organization.
• Transaction data is used to create financial statements and
is called transaction processing.
• The flow of information between these users for the
various business activities involves a give-get exchange
grouped into business processes or transaction cycles.

By TNT
Slide 1 - 10
 Interactions Between AIS and Internal and
External Parties

By TNT
Slide 1 - 11
 Basic Business Processes
• Transactions between the business organization and
external parties fundamentally involve a ―give–get‖
exchange. These basic business processes are:
– Revenue cycle: give goods / give service—get cash
– Expenditure cycle: get goods / get service—give cash
– Production cycle: give labor and give raw materials—get finished
goods
– Payroll cycle: give cash—get labor
– Financing cycle: give cash—get cash

By TNT
Slide 1 - 12
 What Is an Accounting Information System
(AIS)?
• AIS is a system that collects, records, stores, and
processes data to produce information for decision
makers.
• Consists of
– People who use the system
– Processes (procedures and instructions)
– Technology (data, software, and information technology)
– Controls to safeguard information
• Thus, an AIS collects and stores data, transforms that data
into information, and provides adequate controls.

By TNT
Slide 1 - 13
 How Does an AIS Add Value to an
Organization?
• A well thought out AIS can add value by:
– Improving the quality and reducing the costs of products or
services
– Improving efficiency
– Sharing knowledge
– Improving efficiency and effectiveness of its supply chain
– Improving the internal control structure
– Improving decision making

By TNT
Slide 1 - 14
 AIS and Corporate Strategy
• An AIS is influenced by an organization’s strategy.
• A strategy is the overall goal the organization hopes to
achieve (e.g., increase profitability).
• Once an overall goal is determined, an organization can
determine actions needed to reach their goal and identify
the informational requirements (both financial and
nonfinancial) necessary to measure how well they are
doing in obtaining that goal.

By TNT
Slide 1 - 15
 AIS in the Value Chain
• The value chain links together the different activities
within an organization that provide value to the customer.
– Value chain activities are primary and support activities.
 Primary activities provide direct value to the customer.
 Support activities enable primary activities to be efficient and effective.

• A supply chain is an extended system that includes the

organizations value chain as well as its suppliers,
distributors, and customers.

By TNT
Slide 1 - 16
By TNT
Slide 1 - 17
 Transaction Processing and Enterprise
Resource Planning Systems
Learning Objectives
• Describe the data processing cycle used to
process transactions, including how data is input,
stored, and processed and how information is
outputted.

• Discuss how organizations use enterprise

resource planning (ERP) systems to process
By TNT
transactions and provide information. Slide 1 - 18
 Data Processing Cycle

By TNT
Slide 1 - 19
 Data Input
Steps in Processing Input are:
• Capture transaction data triggered by a business activity (event).
• Make sure captured data are accurate and complete.
• Ensure company policies are followed (e.g., approval of transaction).

By TNT
Slide 1 - 20
 Data Capture
• Information collected for an activity includes:
– Activity of interest (e.g., sale)
– Resources affected (e.g., inventory and cash)
– People who participated in the activity (e.g., customer and
employee)
• Information comes from source documents.

By TNT
Slide 1 - 21
 Source Documents
• Captures data at the source when the transaction takes
place
– Paper source documents
– Turnaround documents
– Source data automation (captured data from machines, e.g., Point
of Sale scanners at grocery store)

By TNT
Slide 1 - 22
 Data Storage
• Important to understand how data is organized
– Chart of accounts
 Coding schemas that are well thought out to anticipate management needs
are most efficient and effective
– Transaction journals (e.g., Sales)
– Subsidiary ledgers (e.g., Accounts receivable)
– General ledger
Note: With the above, one can trace the path of the transaction
(audit trail)

By TNT
Slide 1 - 23
 Coding Techniques
• Sequence codes—items numbered consecutively to
account for all items (i.e., prenumbered forms)
• Block code—blocks of numbers reserved for specific
categories of data (i.e., product numbers that start with a 2
are refrigerators)
• Group codes—two or more subgroups of digits used to
code items (i.e., car vin #’s)
• Mnemonic codes—letters and numbers interspersed to
identify an item (i.e. Dry300W05 is low end (300), white
(W) dryer (DRY) made by Sears (05))

By TNT
Slide 1 - 24
 Audit trail for
Invoice #156 for
$1,876.50 sold to
KDR Builders

By TNT

Slide 1 - 25
 Computer-Based Storage
• Data is stored in master files or transaction files.

By TNT
Slide 1 - 26
 Data Processing
Four types of processing (CRUD):
• Creating new records (e.g., adding a customer)
• Reading existing data
• Updating previous record or data
• Deleting data

Data processing can be batch processed (e.g., post records

at the end of the business day) or in real-time (process as it
occurs).

By TNT
Slide 1 - 27
 Information Output
The data stored in the database files can be viewed
• Online (soft copy)
• Printed out (hard copy)
– Document (e.g., sales invoice)
– Report (e.g., monthly sales report)
– Query (question for specific information in a database, e.g., Which
division had the most sales for the month?)

By TNT
Slide 1 - 28
 Enterprise Resource Planning (ERP)
Systems
• Integrates activities from the entire organization
– Revenue Cycle
– Expenditure Cycle
– Production Cycle
– H/R Payroll Cycle
– General Ledger and Reporting System

By TNT
Slide 1 - 29
 Advantages of ERP System
• Integrated enterprise-wide single view of the organization’s
data which streamlines the flow of information
• Data captured once (i.e., no longer need sales to enter
data about a customer and then accounting to enter same
customer data for invoicing)
• Greater visibility and monitoring capabilities for
management
• Improve access of control of the data through security
settings
• Standardization of procedures and reports
• Improves customer service
• Increases productivity through automation
By TNT
Slide 1 - 30
 Disadvantages of ERP System
• Costly
• Significant amount of time to implement
• Customizing or standardizing a business process
• Complexity
• User resistance (learning new things is sometimes hard
for employees)

By TNT
Slide 1 - 31
 Thank You
End of Chapter 1

By TNT
Slide 1 - 32