Accounting Information Systems, 6th edition

James A. Hall

COPYRIGHT © 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western
are trademarks used herein under license
Internal & External
Information Flows
Internal & External
Information Flows
Operations
Internal & External
Information Flows
Internal & External
Information Flows
Internal & External
Information Flows
Internal & External
Information Flows
Internal Information Flows
 Horizontal flows of information used primarily at the
operations level to capture transaction and operations
data
 Vertical flows of information
 downward flows — instructions, quotas, and budgets
 upward flows — aggregated transaction and operations
data
Information Requirements
 Each user group has unique information requirements.
 The higher the level of the organization, the greater
the need for more aggregated information and less
need for detail.
Information in Business
 Information is a business resource
that:
 needs to be appropriately managed
 is vital to the survival of
contemporary businesses
Reasons for Studying Accounting Information
Systems

 Career accountants will be users, auditors, and

developers of AIS
 Modern-day AIS are complex because of new
technologies
 Concepts studied in AIS are integrated into every
other accounting course
What is a system?
 Elements

A system is a group of two or more interrelated

components or subsystems that serve a common
purpose.
1. Multiple Components
2. Relatedness
3. System versus subsystem
4. Purpose
Multiple Components
Relatedness
What is a System?
 A group of interrelated multiple components or
subsystems that serve a common purpose
 System or subsystem?
 A system is called a subsystem when it is viewed as a
component of a larger system.
 A subsystem is considered a system when it is the focus
of attention.
System or subsystem?
Purpose
 System Decomposition versus
System Interdependency
 System Decomposition
 the process of dividing the system into smaller
subsystem parts
 System Interdependency
 distinct parts are not self-contained
 they are reliant upon the functioning of the other parts
of the system
 all distinct parts must be functioning or the system will
fail
 System Decomposition versus
System Interdependency
 System Decomposition
 the process of dividing the system into smaller
subsystem parts
 System Interdependency
 distinct parts are not self-contained
 they are reliant upon the functioning of the other parts
of the system
 all distinct parts must be functioning or the system will
fail
System Decomposition versus
System Interdependency
What is an Information System?
An information system is the set of
formal procedures by which data are
collected, processed into information,
and distributed to users.
Transactions
 A transaction is a business event.
 Financial transactions
 economic events that affect the assets and equities of
the organization
 e.g., purchase of an airline ticket
 Nonfinancial transactions
 all other events processed by the organization’s
information system
 e.g., an airline reservation — no commitment by the
customer
Transactions
Financial

Transactions User
Information
Decision
Nonfinancial System
Information Making

Transactions
What is Accounting Information
Systems?
 Accounting is an information system.
 It identifies, collects, processes, and
communicates economic information about
a firm using a wide variety of technologies.
 It captures and records the financial effects
of the firm’s transactions.
 It distributes transaction information to
operations personnel to coordinate many key
tasks.
AIS versus MIS
 Accounting Information Systems (AIS) process
 financial transactions; e.g., sale of goods
 and nonfinancial transactions that directly affect the
processing of financial transactions; e.g., addition of
newly approved vendors
 Management Information Systems (MIS)
process
 nonfinancial transactions that are not normally
processed by traditional AIS; e.g., tracking customer
complaints
 AIS versus MIS?

IS

AIS MIS

GLS/FRS TPS MRS Finance Marketing Production HRS Distribution

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
The Management Information
System (MIS)
The General AIS Model
Transaction Processing System
1. Converts economic events into financial transactions
2. Records financial transactions in the accounting
records (journals & ledgers)
3. Distributes essential financial information to
Transaction Processing System
General Ledger/Financial
Reporting Systems
Management Reporting System
Data vs. Information
• Data are facts 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

1-41
Data vs. Information
The previous slide just showed facts, if we put those facts
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

1-42
What Makes Information
Useful?
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
What Makes Information
Useful?
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

1-44
Organizational Decisions and
Information Needed
 Business organizations use business processes to get
things done. These processes are a set of structured
activities that are performed by people, machines, or
both to achieve a specific goal.
 Key decisions and information needed often come
from these business processes.

1-45
Transactional Information Between
Internal and External Parties in an
AIS
• Business organizations conduct business transactions
between internal and external stakeholders.
• Internal stakeholders are employees in the
organization (e.g., employees and managers).
• External stakeholders are trading partners such as
customers and vendors as well as other external
organizations such as Banks and Government.
• The AIS captures the flow of information between
these users for the various business transactions.

1-46
Interactions Between AIS and
Internal and External Parties

1-47
Basic Business Processes
 Transactions between the business organization and
external parties fundamentally involve a “give–get”
exchange. These basic business processes are:
 Revenue: give goods / give service—get cash
 Expenditure: get goods / get service—give cash
 Production: give labor and give raw materials—get
finished goods
 Payroll: give cash—get labor
 Financing: give cash—get cash

1-48
 What Is an Accounting Information
System?
• It can be manual or computerized
• Consists of
▫ People who use the system
▫ Processes
▫ Technology (data, software, and information
technology)
▫ Controls to safeguard information
• Thus, transactional data is collected and stored into
meaningful information from which business
decisions are made and provides adequate controls to
protect and secure the organizational data assets.

1-49
How Does an AIS Add Value?
 A well thought out AIS can add value through effective
and efficient decisions.
 Having effective decisions means quality decisions
 Having efficient decisions means reducing costs of
decision making

1-50
AIS and 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 necessary to
measure how well they are doing in obtaining that
goal.

1-51
AIS in the Value Chain
 The value chain shows how the different activities
within an organization provide value to the customer.
 These activities are primary and support activities.
 Primary activities provide direct value to the customer.
 Support activities enable primary activities to be
efficient and effective.

1-52
1-53