TOPIC 1

Introduction
Accounting Information System overview
 Learning Objectives
• Understand the meaning of Accounting and Accounting information system
• 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 and the information needed to make
them.
• Identify the information that passes between internal and external parties and
an AIS.
• Describe the major business processes present in most companies.
• Explain what an accounting information system (AIS) is and describe its basic
functions.
• Discuss how an AIS can add value to an organization.
• Explain how an AIS and corporate strategy affect each other.
• Explain the role an AIS plays in a company’s value chain.

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 Introduction

• Accounting is a routine activity in business entities

• Accounting was one of the earliest applications to be
computerized
• The human involvement is limited to:
- Creation of company
- Creation of ledgers
- Voucher entries
• Accounting package generate statements and reports
= Remember GIGO =
 What Is a System?

• System
– A set of two or more interrelated
components interacting to
achieve a goal
• Goal Conflict Process1
– Occurs when components act in
their own interest without regard
for overall goal
• Goal Congruence
– Occurs when components acting
in their own interest contribute
Goal
toward overall goal
Process2

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 Data vs. Information

• Data are facts that are recorded

and stored.
– Insufficient for decision data
making. data
• Information is processed data
used in decision making.
data
– Too much information
however, will make it more,
not less, difficult to make
decisions. This is known as
Information Overload. Information

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 Value of Information

Benefits Costs

• Reduce Uncertainty • Time & Resources

• Improve Decisions
• Improve Planning – Produce Information
– Distribute Information
• Improve Scheduling
Benefit $’s > Cost $’s

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 What Makes Information Useful?
• Necessary characteristics:
– Relevant
• “The capacity of information to make a difference in a decision
by helping users to form predictions about the outcomes of
past, present, and future events or to confirm or correct prior
expectations.”
– Reliable
• “The quality of information that assures that information is
reasonably free from error and bias and faithfully represents
what it purports to represent.”
– Complete
• “The inclusion in reported information of everything material
that is necessary for faithful representation of the relevant
phenomena.”

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 What Makes Information Useful?
– Timely
• “Having information available to a decision maker before it
loses its capacity to influence decisions.”
– Understandable
• “The quality of information that enables users to perceive its
significance.”
– Verifiable
• “The ability through consensus among measurers to ensure
that information represents what it purports to represent or
that the chosen method of measurement has been used
without error or bias.”
– Accessible
• Available when needed (see Timely) and in a useful format
(see Understandable).

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 Business Process

• Systems working
Financing Revenue
toward
organizational goals

Human
Expenditure
Resources

Production

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 Business Process Cycles
• Revenue
• Expenditure
• Production
• Human Resources
• Financing

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 Business Transactions
• Give–Get exchanges
• Between two entities
• Measured in economic terms

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Business Cycle Give–Get

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 Accounting Information Systems
• Collect, process, store, and report data and
information
• If Accounting = language of business
• AIS = information providing vehicle
• Accounting = AIS

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 Components of an AIS
• People using the system
• Procedures and Instructions
– For collecting, processing, and storing data
• Data
• Software
• Information Technology (IT) Infrastructure
– Computers, peripherals, networks, and so on
• Internal Control and Security
– Safeguard the system and its data
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 AIS and Business Functions
• Collect and store data about organizational:
– Activities, resources, and personnel
• Transform data into information enabling
– Management to:
• Plan, execute, control, and evaluate
– Activities, resources, and personnel

• Provide adequate control to safeguard

– Assets and data

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 AIS Value Add
• Improve Quality and Reduce Costs
• Improve Efficiency
• Improve Sharing Knowledge
• Improve Supply Chain.
• Improve Internal Control
• Improve Decision Making

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 Improve Decision Making
• Identify situations that require action.
• Provide alternative choices.
• Reduce uncertainty.
• Provide feedback on previous decisions.
• Provide accurate and timely information.

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 Value Chain
• The set of activities a product or service moves
along before as output it is sold to a customer
– At each activity the product or service gains value

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 Value Chain—Primary Activities

Inbound Outbound
Operations Marketing/Sales Service
Logistics Logistics

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 Value Chain—Support Activities

Firm
Infrastructure Technology

Human Purchasing
Resources

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Value Chain

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AIS and Corporate Strategy
Organizations have limited resources,
thus investments to AIS should have
greatest impact on ROI.
Organizations need to understand:
IT
✓IT developments Developments

✓Business strategy
✓Organizational culture
Will effect and be effected by new AIS

AIS
Organizational Business
Culture Strategy

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 Source documents

The source documents are the standard evidence of

business transactions. They include:
• Sales invoices
• Credit notes
• Cheques
• Receipts
• Debit notes
• Sales order
• Etc…
 Accounting Package

Computerized Accounting require transaction data to be entered into the

accounting package. Accounting package or software typically has accounting
procedures embedded in it. The rules of debit and credit, capital, revenue and
expenditure classification etc. are captured and coded in the package.

Types of Accounting software are:

• Custom-built
• Off-the shelf.

Examples of Accounting software are:

• Quick Books
• Tally
• Sage
• MS Navision Dynamics
 Features of off-the shelf accounting software

• Less expensive
• Takes less time to implement
• Availability of detailed system documentation
• Package already tested by the developers. There
exist possible referees to contact
• Generally more efficient in terms of speed,
accuracy and memory requirements
 Disadvantages of off-the shelf accounting software

• Quite restricted. Very limited customization

• Frequent updates that motivate acquisition of
new versions may lead to high software cost in
the long-run
• Not available for unique processing needs of
individual user or user-organizations
• Could be susceptible to security risks
• Possibility of bugs lying undetected in software
package sourced from outside.
 Advantages of Computerized accounting

• High efficiency
• Reduces human capital cost
• Easy correction of errors
• No delay in generation of accounts and reports
• Quick generation of customized reports
• Facility to analyse performance of cost centre
• Enable querying for real time information
• Facilitate company wide availability of accounting information
• Uniformity of accounting policies can be ensured
• No annual ritual of books closures
• Better data security
 Disadvantages of Computerized accounting

• Expensive – most commercial ones are quite costly

• Challenges with selecting right fit package
• Constant pressure to upgrade hardware and
software systems
• Security risks
• Special employee skills
• Dependence on computer specialists
• Difficult to meet individual requirements fully