ACCOUNTING INFORMATION SYSTEM

CHAPTER 1: THE INFORMATION SYSTEM

THE INFORMATION ENVIRONMENT
➢ Information is a business resource.
➢ Information flow:
✓ Horizontal;
✓ Vertical – upward; downward
✓ Outward – trading partners; stakeholders

➢ User groups have unique user requirements.

➢ The level of details and nature of information depends.
✓ Bottom – detailed; routine
✓ Top – summarized; overall performance

WHAT IS A SYSTEM?
➢ A group of two or more interrelated components or subsystems that serve a
common purpose.
✓ Natural
✓ Artificial (man-made)
➢ MULTIPLE COMPONENTS
➢ RELATEDNESS AND PURPOSE
➢ System vs. Subsystem
✓ The distinction is a matter of perspective.
➢ System Decomposition
✓ Dividing the system into smaller subsystem to conveniently represent,
view, and understand the relationships among subsystems.
➢ System Interdependency
✓ A system’s ability to achieve its goal depends on the effective functioning
and harmonious interaction of its subsystem.
 ACCOUNTING INFORMATION SYSTEM

AN INFORMATION SYSTEM FRAMEWORK

➢ Information System
✓ A set of formal procedures by which data are collected, processed into
information, and distributed to users.
➢ Transaction
✓ An event that affects or is of interest to the organization and is processed
by its information system as a unit of work.

THE ACCOUNTING INFORMATION SYSTEM

➢ General Ledger
✓ Produces the traditional financial statements and other reports required by
the law.
➢ Transaction Processing System
✓ Supports business operations with numerous reports, documents, and
messages for users throughout the organization.
➢ Management Reporting System
✓ Provides internal management with special purpose financial reports and
information needed for decision making.

THE MANAGEMENT INFORMATION SYSTEM

 ACCOUNTING INFORMATION SYSTEM

➢ Management Information System

✓ Processes non-financial transactions that are not normally
processed by traditional accounting information system.
➢ Examples of MIS Applications in Functional Areas
✓ Finance – Portfolio Management Systems
- Capital Budgeting Systems
✓ Marketing – Market Analysis
- New Product Development
- Product Analysis
✓ Distribution – Warehouse Organization and Scheduling
- Delivery Scheduling
- Vehicle Loading and Allocation Models
✓ Personnel – Human Resource Management Systems
• Job skill tracking system
• Employee benefits system
Management responsibilities for internal controls are codified by Sections 203
and 404:
➢ Section 302 “ Certification”
✓ Corporate management is requires to certify their organization’s internal
controls internal controls on quarterly and annual basis.
➢ Section 404 “Assessment”
✓ Corporate management is required to assess the effectiveness of their
internal controls through the provision of an annual report.
➢ Health Insurance Portability and Accountability Act of 1996
➢ Communications Decency Act if 1996
➢ Sarbanes-Oxley Act of 2002
✓ Supports efforts to increase public confidence in capital markets by
seeking to improve corporate governance, internal controls and audit
quality;
✓ Requires management of public companies to implement adequate
system of internal controls over financial reporting (including control over
transactions processing system).
➢ Homeland Security Act of 2002

THE AIS SUBSYSTEMS

➢ Transaction Processing System
✓ Convert economic events into financial transactions;
✓ Record financial transactions in the accounting records; and
✓ Distribute essential financial information to operations personnel to
support their daily operations.
✓ Deals with business events that occur frequently in a given day.
✓ Transactions are grouped together into cycles:
• Revenue cycle
• Expenditure cycle
• Conversion cycle
➢ General Ledger/ Financial Reporting System
✓ Summaries of transaction cycle activity are processed by the GLS
✓ Less frequent events, such as stock transactions, mergers, and lawsuit
settlements also enter GLS through alternate sources.
✓ Measures and reports the status of financial resources and the changes in
those resources.
✓ Communicates this information primary to external users.
✓ Nondiscretionary – few or no choices
 ACCOUNTING INFORMATION SYSTEM

➢ Management Reporting System

✓ Typical reports produced by the MRS include budgets, variance reports,
cost-volume profit analysis, and reports using current data.
✓ Discretionary – organization can choose what information to report and
how to present it.

A GENERAL MODEL FOR AIS

The elements of general model are:
➢ End users,
➢ Data sources
➢ Data collection
➢ Data processing
➢ Database management
➢ Information generation
➢ Feedback
END USERS
➢ External Users – those with current or financial interest in the organization but
are not involved in the operations.
➢ Internal Users – those that can be connected to the organization because of
their current involvement in the organization.
DATABASE, DATA, AND INFORMATION
➢ Database – is a collection of data organized in a manner that allows access,
retrieval, and use of that data.
✓ The levels in the hierarchy are:
• Attribute – logical and relevant characteristic of an entity
• Record – complete set of attributes
• File - complete set of records
✓ Database Management Task:
• Storage
• Retrieval
• Deletion
➢ Data – is a collection of unprocessed items.
➢ Information – is processed data.
➢ Data Sources - financial transactions that enter the information on the system.
➢ Data Collection – first operational stage in the information system; ensure that
the data entering the system are valid, complete, and free from material errors;
relevance and efficiency
➢ Data Processing – task in the data processing stage range from simple to
complex.
➢ Information Generation – process of compiling, arranging, formatting, and
presenting information to users.
✓ Has the following characteristics:
• Relevance
• Timeliness
• Accuracy
• Completeness
• Summarization
➢ Feedback – form of output that is sent back to the system
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INFORMATION SYSTEM OBJECTIVES

➢ To support the stewardship function of a management
➢ To support the management decision making
➢ To support the firm’s day to day operations
➢ To assist in the efficient and effective discharge of daily tasks

ACQUISITION OF INFORMATION SYSTEMS

➢ Develop customized systems from scratch through in house systems
development activities.
✓ System Development:
• Planning
• Analysis
• Design
• Implementation
• Operation, Support, and Security
✓ Software Development Phase:
• Planning
• Development
• Implementation
• Maintenance
➢ Purchase of pre-programmed commercial systems from software vendors.
✓ 3 basic types of commercial software:
• Turnkey systems – completely finished and tested systems that
are ready for implementation.
• Backbone systems – consists of a basic system structure on
which to build.
• Vendor-supported systems – customized systems that client
organizations purchase commercially rather than develop in house.

ORGANIZATIONAL STRUCTURE & FUNCTIONAL SEGMENTATION

Organizational Structure
➢ Reflects the distribution of responsibilities, authority, and accountability
throughout the organization.
➢ Business Segments (functional units)
✓ Geographical Location
✓ Product Line
✓ Business functions (most common)
Functional Segmentation
➢ Materials Management
➢ Production
➢ Marketing
➢ Distribution
➢ Personnel
➢ Finance
➢ Accounting
➢ IT Services
Who participates in system development?
➢ Involve representatives from each department
➢ Both nontechnical users and IT professionals
➢ System professionals – system analysts, database designers, and programmers
 ACCOUNTING INFORMATION SYSTEM

➢ End users – those for whom the system is built

➢ Stakeholders – individuals inside or outside the firm who have an interest in the
system but are not end users.

INFORMATION SYSTEM MODELS

Evolution of Information System Models
➢ The Manual Process Model – oldest and most traditional form of accounting
systems; constitute the physical events, resources, and personnel, that
characterize many business processes.
➢ The Flat File Model – describes an environment in which individual data files are
not related to other files.
✓ Three significant problems:
• Data Storage
• Data Updating
• Currency Information
• Task-Data Dependency
➢ The Database Model – access to the data resource
➢ The REA Model – an accounting framework for modeling an organization’s
critical resources, events, and agents (REA) and the relationships between them.
✓ Resources – assets of the organization. Also defines as objects that are
both scarce and under the control of the enterprise.
✓ Events – phenomena that affect changes in resources.
✓ Agents – individuals and departments that participate in economic event.
➢ Enterprise Resource Planning Systems – an information system model that
enables an organization to automate and integrate its key business processes.