Accounting Information Systems (AIS)

Chapter 1 Objectives

• Understand the primary flows of information within a business environment.
• Differentiate between accounting and management information systems.
• Differentiate between financial and non-financial transactions.
• Know the general model for information systems.
• Understand the different functional areas of a business.
• Understand the stages of information system evolution.
• Understand the roles of accountants within an information system.

Topic 1: Internal & External Information Flows

• Internal information flows primarily at the operational level.
• Horizontal flows focus on transaction and operational data capture.
• Vertical flows originate from top management (instructions, quotas, and budgets) and flow downward.
• Vertical flows also include aggregating transaction and operations data flowing upward from operational personnel.
• External information flows involve stakeholders, providing performance information to top management.
• Budget information and instructions originate from top management and flow to middle/lower management to customers.

Internal Information Flows

• Horizontal flows are primarily used at the operational level to collect transaction and operational data.
• Vertical flows include downward instructions, quotas, and budgets from higher levels to lower levels of the business.
• Vertical flows also include aggregated transaction and operations data flowing upward to higher management from lower levels.

Information Requirements

• User groups have unique information requirements.
• Higher-level organizational units need more aggregated information and less detailed information.

Information in Business

• Information is a business resource that needs appropriate management.
• Information is crucial for the survival of contemporary businesses.

What is a System?

• A system is a group of interrelated components or subsystems that serve a common purpose.
• A subsystem is considered part of a larger system.
• A subsystem can become a system if it's the focus of attention.

System Decomposition vs. System Interdependency

• System decomposition involves dividing a system into smaller subsystems.
• System interdependency means that components of a system aren't self-contained, and they depend on each other. -All components must function, or the system fails.

What is an Information System?

• An information system is a set of formal procedures for collecting, processing data, and distributing information to users.

Transactions

• A transaction is a business event.
• Financial transactions are economic events impacting assets and equities.
• Non-financial transactions encompass all other events processed by the organization's information system, such as airline reservations (no commitment by the customer).

AIS vs MIS

• Accounting information systems (AIS) process financial transactions, alongside non-financial transactions critical to financial transaction processing, like vendor management.
• Management information systems (MIS) process non-financial transactions not typically processed by AIS, like customer complaints tracking.

AIS Subsystems

• Transaction processing system (TPS) - supports daily business operations.
• General Ledger/Financial Reporting System (GL/FRS) - produces financial statements and reports.
• Management Reporting System (MRS) - produces special-purpose reports for internal use.

General Model for AIS

• The external environment provides data to the information system.
• Data is collected, processed, and generated into information, and then distributed to external and internal end-users.
• Feedback loops exist in the business organization and the external environment.
• Centralized data processing involves large computers at a central site serving users across the organization.

Data Sources

• Data sources include internal and external financial transactions, encompassing factors like sales of goods, purchase of inventory, cash receipts, and disbursements.

Transforming the Data into Information

• Data collection, data processing, data management, and information generation make up the stages required to convert data to information.

Data Collection

• Capturing transaction data.
• Recording data onto forms.
• Validating and editing data.

Data Processing

• Classifying data.
• Transcribing data.
• Sorting data.
• Batching data.
• Merging data.
• Calculating data.
• Summarizing data.
• Comparing data.

Data Management

• Storing data.
• Retrieving data.
• Deleting data.

Information Generation

• Compiling information.
• Arranging information.
• Formatting information.
• Presenting information.

Characteristics of Useful Information

• Relevance - serves a purpose
• Timeliness - up-to-date information (not older than the relevant time period)
• Accuracy - free of material error
• Completeness - all information essential to the decision or task
• Summarization - aggregated in accordance with user needs

Topic 4: Information System Objectives in a Business Context

• Support the stewardship function of management.
• Support management decision-making.
• Support the firm's day-to-day operational activities.

Organizational Structure

• Organizational structure allocates responsibility and authority.
• Segmenting by business function is a common organizational method.

Functional Areas

• Inventory/materials management
• Production
• Marketing
• Distribution
• Personnel
• Finance
• Accounting
• Computer services

Accounting Independence

• Information reliability requires accounting independence.
• Accounting activities must be separate from other departments.
• Accounting provides information support but does not actively participate in other departments' operations.

The Computer Services Function

• Distributed data processing involves decentralizing computer services.
• Large computer systems at a central site perform all data processing work for centralized sites.

Organization of IT Function in a Centralized System

• The diagram illustrates how business departments interact with Computer Services functions, including Systems Development, Database Administration, Data Processing, Computer Operations, and Data Library.

Organizational Structure for a Distributed Processing System

• This structure depicts how different departments in various locations interact with Information Processing Units (IPUs).

Potential Advantages & Disadvantages of Distributed Data Processing (DDP)

• Advantages: cost reduction in hardware and data entry tasks, improved cost control responsibility, improved user satisfaction, and data backup improvements from multiple sites.
• Disadvantages: potential loss of control, mismanagement of resources, hardware/software incompatibility, redundant tasks and data, difficulty attracting qualified personnel, and the lack of standards.

Topic 5: Manual Process Model

• Transaction processing, information processing, and accounting operations are physically performed by people using paper documents.
• This method is useful for understanding business processes not clouded by technological processes and for understanding internal controls.

The Evolution of IS Models: The Flat-File Model

• This model illustrates the standalone application systems, where separate apps control areas such as billing, accounts receivable, product promotion, sales invoicing, cash receipts and customer data.

Data Redundancy Problems

• Data storage costs are higher due to excessive paper documents or magnetic media storage.
• Updating data across multiple systems leads to difficulties in updating data across all affected files.
• Maintaining data consistency and avoiding redundancy leads to greater efficiency.
• Information task dependency - user's inability to obtain additional information as needs evolve.
• Separate files make data integration across multiple users difficult.

The Evolution of IS Models: The Database Model

• Integration of data using a shared database, eliminating redundant data and improving data consistency, as used in current databases.

REA Model

• Resource-Event-Agent (REA) model is an accounting framework used to model transactions, resources, and agents within an organization.

REA Model (Resources, Events, and Agents) Data Model Example

• Diagram illustrating resources, events, and agents with associated relationships(e.g., Sales).

Accountants as Information System Users

• Accountants need to effectively communicate their systems requirements to systems professionals.
• Active participation in systems development projects is essential for accurate system design.

Accountants as System Designers

• Conceptual systems design is the responsibility of accountants.
• Technical systems design is the responsibility of computer specialists.
• Accountants determine the information requirements, sources, destination, and appropriate accounting rules.

Accountants as System Auditors

• External auditors attest to the fairness of financial statements.
• IT auditors evaluate information systems as part of financial audits.
• Internal auditors conduct in-house appraisals of information systems and technology.

Test your knowledge of Accounting Information Systems (AIS). Questions cover fundamental concepts, REA model, data redundancy and financial transactions.