A model for

Processing
Accounting
Information
Chapter # 1

i Muhammad Irshad
LECTURER COMMERCE GCMS TIMERGARA
Accounting Information Systems
Definition
An accounting information system (AIS) is a subsystem of Management Information System1 that
records, processes and reports information related to the financial aspects of business events.
Accounting information systems recorded the financial aspects of business events by using the
organization system of human & computer resources, summarized by using accounting methods
and objectives, and reported as information to interested parties both within and outside the
organization.
Human and Computer Resources
A system of human and computer resources records, processes and reports events from the
organization’s environment. When the system contains only human resource, it is called manual
system. If it uses only computer resources, it is called computer system. When it uses both human
and computer resources, it is called computer-based system. Most organization today use
computer-based accounting information system.
Organizations
Accounting information systems exists in many forms of organizations, whether proprietorships,
partnerships, corporations, or nonprofit organizations. While the complexity of each accounting
information differs, however each accounting information system is similar in three important
ways: 1) each contain similar structure (of human & computer resources), 2) similar processes (the
use of accounting methods), 3) similar purposes (to provide information).
The structure, processes, and purposes of the accounting information systems are more complex
in the manufacturing corporations than in the others.
Events Affecting an Organizations
Any incident that change the status of a person, a community, or an organization is called event.
An event may be economic event or non-economic event. Economic event is an action taken by
an organization affecting its assets, liabilities and owner equity. While non-economic event has no
such impact involved.
When an incident occur in monetary term, that is, when money is involved, is called transaction.
In other words, an economic event is known as transaction. Thus all transactions are events but all
events are not transactions.
The events that affect an organization are a result of its interaction with its environment.
Accounting information systems record, summarize, and report those events to interested parties
both within and outside the organization.

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Accounting Methods and Objectives
All accounting information systems records, processes and reports events using accounting
methods to achieve accounting objectives which determine the system’s scope.
Scope of an accounting information system
The scope of an accounting information system encompasses both the financial accounting
information system and managerial accounting information system,
Financial accounting information system: an accounting system whose objective is to record,
process and report past transactions in accordance with generally accepted accounting principles
(GAAP) or international financial reporting standards (IFRS).
For the publicly held corporations the accounting information system scope must comply with
generally accepted accounting principle (GAAP)
Managerial accounting information system: an accounting system that records, processes
and reports financial information for internal use in accordance with the preferences of
management. The scope of this system is usually broader than that required by GAAP or
IFRS.
Both the financial and the managerial systems are interconnected. The following illustration
depicts an accounting information system (AIS) as two overlapping circles. The area where the
circles overlap shows how these systems share certain components. For example, GAAP requires
that AIS must maintain data on accounts receivable. While management uses these data to decide
which customers are creditworthy. Thus, these data are used for both external and internal
reporting.

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The Accounting Process
The accounting process starts when an economic event is recognized by AIS, which records
this event as an accounting transaction. For financial accounting information systems, the
activities that process a transaction constitute the accounting cycle with following six steps:
1. Journalize. Journalizing is the recording the transaction. Someone analyzes the event,
determines the account it affects, identifies whether each account is debited or credited and enters
the transactions chronologically in a journal.
2. Post. AIS transfers journal entries to ledgers. A ledger is a summary, by account, of all
transactions affecting that account.
3. Prepare a Trial Balance. The trial balance is a summary of all the accounts in a general ledger
and the balances in those accounts. More specifically, a trial balance is two column schedule
listing the names and the debit and credit balances of all accounts in the ledger. The total of the
two column should agree. A trial balance prove the equality of debit and credit balance.
4. Prepare Adjusting Entries. The adjusting entries are accounting entries made at the end of
financial reporting period to recorded accruals and deferrals and to correct previous errors.
Accruals include, expenses such as salary or interest which have accumulated day by day
but or unrecorded or unpaid at the end of the period also called unrecorded expenses, and revenue
which has been earned but not recorded to the closing date.
Deferrals include unearned revenue also called differed revenue which is an obligation to
render service or deliver goods in future because of receipt of advance payment.
5. Prepare Accounting Reports. The income statement and the balance sheet are the main
accounting reports produced by a financial accounting information system. These reports are
prepared from the adjusted trial balance, which reflected the adjusting entries.
6. Close the Books. After preparing the accounting reports, accountants prepare the accounting
records for the next reporting period. This includes the posting of closing and reversing journal
entries.
Closing entries transfer balance from revenue and expense account into the income
summary account. The balance in this, which equals net income, is then transferred to retain
earning accounting, leaving zero balances in these accounts, and thus the accounts is prepared for
next accounting period.
Accountant also post reversing entries, so called because they are the reverse of accrual &
deferral adjusting entries made earlier. These reversing entries reset the balances of accrual &
deferrals accounts at zero and ensure that expense and revenue of the prior period are not included
in the upcoming period.

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 The following table explain the main steps of the accounting cycle in brief.
Step Description
Journalize Identify the economic event and record it chronologically
as an accounting transaction
Post Transfer transaction total from journal to specific ledger
account
Trial balance Prepare periodically a list of accounts and the balance in
them
Adjusting entries The adjusting entries are accounting entries made at the
end of financial reporting period to recorded
accruals and deferrals and to correct previous errors.
Reports Prepare accounting reports from the adjusted trial balance.

Technology and Accounting Information System

Technology independent view
We know that in the old days there were no use of computer and information technology in the
accounting process. Accountant manually prepare journal, ledger, trial balance and financial
statements. This process was known as technology independent view of accounting
Technology dependent view
However, due to the emergence of new and modern computer technology the journal and ledgers
are replaced by computer, file and the computer program were begin to use in the accounting
process. The accounting software have been developed which automatically keeps the record of
accounts. The accountant has to only learn about these soft wares and that how to enter the data
relating business Transactions in these soft wares. This leads to the concept of technology
dependent view of accounting.
The following table summarizes the technology dependent and independent view of accounting
Technology independent view Technology dependent view
JOURNALS TRANSACTION FILES
General Journal Journal voucher file
Special Cash receipt file
LEDGERS MASTER FILES

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 General Ledger Customer master file
Subsidiary Ledger Inventory master file
JOURNALIZING DATA ENTRY
POSTING FILE UPDATE

Why Study Accounting Information System

The study of accounting information system is as important as accounting itself. This is because
now a days more powerful computer hard wares and soft wares have been developed which has
brought enhancement in the accounting process. The importance of studying the accounting
information system can be explained by the following points.
 The results provide by the computer based accounting information system are more
reliable and accurate than that of the manual system

 The accounting process done by the help of accounting information system is more fast
then the manual system.

 Accounting information system can produce the reports any time when the users need it.

 The accounting information system is easy to understand and use and provide users
friendly interface