Chapter one

Overview of Accounting Information Systems

Objectives: After completing this chapter you will understand;

 the meaning of system, data, and information

 an accounting information system (AIS)
 why is the AIS an important topic to study
 the role of the AIS in the value chain
 how does the AIS provide information for decision making
 the basic strategies and strategic positions an organization can pursue

1. INTRODUCTION

1.1. SYSTEMS, DATA AND INFORMATION

1.1.1. A system

System is a set of interrelated components that interact to achieve a goal. Most systems are
composed of smaller sub systems. Every organization has goals. The sub systems should be
designed to maximize achievement of the organization’s goals. Even to the detriment of the
subsystem itself

EXAMPLE: The production department (a subsystem) of a company might have to forego its
goal of staying within its budget in order to meet the organization’s goal of delivering product
on time.

Thus, based on the types of sub-system the goal conflict or goal congruence may occur

Goal conflict - occurs when the activity of a subsystem is not consistent with another sub
system or with the larger system.

Goal congruence – occurs when the subsystem’s goals are in line with the organization’s
goals. The larger and more complicated a system, the more difficult it is to achieve goal
congruence.

The systems concept encourages integration (i.e., minimizing the duplication of

recording, storing, reporting and processing).

1.1.2 Data

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Data are facts that are collected, recorded, stored, and processed by an information system.
Organizations collect data about: Events that occur, Resources that are affected by those events
and Agents who participate in the events. In other word data are just facts that are stored in a
system. For example, data could be a number, a date, a name of a business. Yet the facts are not
meaningful until you place the facts within a context. Then it becomes information.
For example:
2/22/18
ABC Company, 123,
99, 3, 20, 60
1.1.3. Information

Information is different from data. Information is data that have been organized and processed
to provide meaning to a user.

The above has no meaning and you could not determine if ABC company is a customer or a
vendor that you are doing business with, in addition 123 does not tell you if it’s a product
number, an amount, or a number on a form. However, if placed in the context of a sales
invoice, we now have meaning and the facts are information:
Invoice Date : 2/22/18 Invoice no: 123
Customer: ABC company
Item no. Qty Price
99 3 $20
Total Invoice Amount $60
Usually, more information and better information translates into better decisions. However,
when you get more information than you can effectively assimilate, you suffer from information
overload. Example: Final exams week! When you’ve reached the overload point, the quality of
decisions declines while the costs of producing the information increases.

Benefits of information:

Costs and benefits of information are often difficult to quantify, but you need to try when
you’re making decisions about whether to provide information. Information is valuable when
the benefits exceed the costs of gathering, maintaining, and storing the data. Benefit (i.e.,
improved decision making) > Cost (i.e., time and resources used to get the information)
Thus,

 Benefits: Costs :

 Reduce Uncertainty - Time

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  Improve Decisions - Resources

 Improve Planning - others

 Improve Scheduling

 Characteristics that make information useful:

Relevance - It reduces uncertainty by helping you predict what will happen or confirm what
already has happened. 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)
Reliability - It’s dependable, i.e., free from error or bias and faithfully portrays events and
activities.

Completeness - It doesn’t leave out anything that’s important. I.e. does not omit important
aspects of events or activities.

Timeliness - information needs to be provided in time to make the decision

Understandability - information must be presented in a meaningful manner

Verifiability - A consensus notion, the nature of the information is such that different people
would tend to produce the same result

Accessibility - You can get to it when you need it and in a format you can use.

For example to use and carry throughout the seven characteristics, let’s use an example of
customer credit decisions:
Relevant information is needed to make a customer credit decision, the relevant information
would include customer balances, payment history, credit history from other vendors, and so on.
The information is free from bias in making a credit decision for example, when the information
comes from the credit manager and not the sales manager who may have an incentive to extend
customer credit to get a sale and the sales commission. Not having customer payment history is
incomplete information to make a decision on extending credit to a customer. If we only know
how much the customer purchased in the past, but have no information on how timely the
customer makes payments, this is not providing a complete picture to make a credit decision.

If the credit manager makes a decision based upon customer account information activity (sales
and payments) from last quarter, it is not timely. For example, a customer may experience
recent cash flow problems which would show that their ability to pay on time is getting later
and later. If this is a recent trend, using an old report would not be useful in making a good
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credit decision. If the customer account information is organized in invoice date order only and
not within a customer subgroup, it is not in an understandable format to use that information to
make a credit decision on a specific customer because you would have to find each invoice
from the date order list.
Information is verifiable if two independent people can produce the same information on how
much a customer owes today. If the accounting system goes down before the credit manager can
access the customer information, it will prohibit the credit manager from making a decision.

Note: As we know, Information is provided to both: External users and Internal Users

External users - primarily use information that is either: Mandatory information—required

by a governmental entity or essential information required to conduct business with external
parties, such as purchase orders. In providing mandatory or essential information, the focus
should be on: Minimizing costs, Meeting regulatory requirements. Meeting minimum
standards of reliability and usefulness and voluntary

Internal users - primarily use discretionary information. The primary focus in producing this
information is ensuring that benefits exceed costs, i.e., the information has positive value.

1.2.3. 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.

For example: a local restaurant near campus (e.g., a pizza restaurant).

Assume you are restaurant owner, what decisions would the owner need to make to run the
business successfully?

You may have many answers which could include decisions about what products (pizzas to
sell), what resources are needed to make the pizza (labor, equipment, and ingredients), who to
buy the ingredients from? How many people are needed to work at the restaurant, and what
skills are required from employees (pizza maker, waiter, delivery person), and so on.

In essence, all of these decisions can be mapped to a series of business processes and from these
decisions identify information that is needed to measure performance. For example, if the key
decision is what types of pizzas should I sell; the processes that may impact this decision would
be sales and market information. In addition, vendor information on ingredient costs may play a
role here as well (especially if it’s an exotic ingredient, expensive ingredient, or hard to source).
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 Transactional Information between Internal and External Parties in 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.
Interactions between AIS and Internal and External Parties

The above Figure 1-1 provides a great amount of detail and insights as to the flow of
information going from the internal and external stakeholders for business processes

Basic Business Processes

Transactions between the business organization and external parties fundamentally involve a
“give–get” exchange. These basic business processes are:

o Revenue: give goods / give service—get cash

o Expenditure: get goods / get service—give cash
o Production: give labor and give raw materials—get finished goods
o Payroll: give cash—get labor
o Financing: give cash—get cash
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 1.2 Accounting Information System

WHA TIS AN AIS? AIS are a system that collects, records, stores, and processes data to
produce information for decision makers.

If Accounting = language of business

AIS = information providing vehicle

Thus, Accounting = AIS

It can Use advanced technology; or be a simple paper-and-pencil system; or be something in

between. Where technology is simply a tool to create, maintain, or improve a system

1.2.1 The functions of AIS are to:

◦ Collect and store data about events, resources, and agents.

◦ Transform that data into information that management can use to make decisions about events,
resources, and agents.

◦ Provide adequate controls to ensure that the entity’s resources (including data) are: Available
when needed, Accurate and reliable

Why study accounting information systems?

Accounting is an information-providing activity, so accountants need to understand:

– How the system that provides that information is designed, implemented and used.

– How financial information is reported

– How information is used to make decisions

 It’ s fundamental to accounting. Other accounting courses focus on how the information
is provided and used.

An AIS course places greater emphasis on:

– How the data is collected and transformed

– How the availability, reliability, and accuracy of the data is ensured

 AIS courses are not number-crunching courses. The skills are critical to career success
- Auditors need to evaluate the accuracy and reliability of information produced by the
AIS.
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 - Tax accountants must understand the client’s AIS adequately to be confident that it is
providing complete and accurate information for tax planning and compliance work.
- In private industry and not-for-profits, systems work is considered the most important
activity performed by accountants.
- In management consulting, the design, selection, and implementation of accounting
systems is a rapid growth area.
 The AIS course complements other systems courses.
- Other systems courses focus on design and implementation of information systems, data
bases, expert systems, and telecommunications.
- AIS courses focus on accountability and control.
- AIS topics impact corporate strategy and culture.

AIS design is affected by information technology, the organization’s strategy, and the
organization’s culture. Information technology affects the company’s choice of business
strategy to perform cost-benefit analyses on IT. Changes, you need to understand business
strategy. While culture affects the design of the AIS, it’s also true that the AIS affect culture by
altering the dispersion and availability of information.

1.2.2 Components of AIS

- People using the system

- Procedures and Instructions: For collecting, processing, and storing data
- Data
- Software
- Information Technology (IT) and Infrastructure (Computers, peripherals, networks, and so on)
- Internal Control and Security (Safeguard the system and its data) ----

1.2.4 How AIS Can Add Value To An Organization?

By providing accurate and timely information so that five primary value chain activities can be
performed more effectively and efficiently

AIS Value Add

• Improve Quality and Reduce Costs

• Improve Efficiency

• Improve Sharing Knowledge

• Improve Supply Chain

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 • Improve Internal Control

• Improve Decision Making by:

– Identify situations that require action.

– Provide alternative choices.

– Reduce uncertainty.

– Provide feedback on previous decisions.

– Provide accurate and timely information.

Well-designed AIS can also help an organization profit by improving the efficiency and
effectiveness of its supply chain

A good example here is thinking back to the Pizza restaurant example in the above. The owner
uses AIS to determine which pizzas are the most popular. The sales information in the AIS is
used to help answer this question and provides the owner with information to know how much
of certain ingredients should be on hand to make those popular pizza pies. If ingredients were to
run out, then the quality of this decision would be considered poor as there would be many
dissatisfied customers. In addition, this information helps the owner not to buy too much of an
ingredient to have on hand to where there may be waste if the ingredients go stale.

1.3. ROLE OF THE AIS INTHE V ALUE CHAIN

The objective of most organizations is to provide value to their customers. What does it mean to
deliver value?

While “adding value” is a commonly used buzzword, in its genuine sense, it means making the
value of the finished component greater than the sum of its parts. It may mean: Making it
faster, Making it more reliable, providing better service or advice, providing something in
limited supply, Providing enhanced features and Customizing it. The value chain concept can
be extended by recognizing that organizations must interact with suppliers, distributors, and
customers. An organization’s value chain and the value chains of its suppliers, distributors, and
customers collectively form a value system

Value is provided by performing a series of activities referred to as the value chain. These

Include: Primary activities and Support activities. These activities are sometimes referred to as

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“Line” and “staff” activities respectively.

 Primary activities – Primary activities include:

Inbound logistics - Receiving, storing, and distributing the materials that are inputs to the
organization’s product or service.

Operations - Transforming those inputs into products or services.

Outbound logistics - Distributing products or services to customers.

Marketing and sales - Helping customers to buy the organization’s products or services.

Service - Post-sale support provided to customers such as repair and maintenance functions.

 Support activities - The four support activities in the value chain make it possible for the
primary activities to be performed efficiently and effectively. Support activities include:

Firm infrastructure - Accountants, lawyers, and administration. Includes the company’s

accounting information system

Human resources - Involves recruiting and hiring new employees, training employees, paying
employees, and handling employee benefits.

Technology - Activities to improve the products or services (e.g. R&D, website development)

Purchasing – Buying the resources (e.g. materials, inventory , fixed assets) needed to carry out
the entity’ s primary activities.

Information technology can significantly impact the efficiency and effectiveness with which the
preceding activities are carried out. An organization’s value chain can be connected with the
value chains of its customers, suppliers, and distributors. Information technology can facilitate
synergistic linkages that improve the performance of each company’s value chain.

1.4. Information and Decision Making

What is decision making? Decision making involves the following steps:

1. Identify the problem.

2. Select a method for solving the problem.

3. Collect data needed to execute the decision model.

4. Interpret the outputs of the model.

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 5. Evaluate the merits of each alternative.

6. Choose and execute the preferred solution

 Decisions can be categorized as follows:

– in terms of the degree of structure that exists

– by the scope of the decision

There is variation in the degree of structure used to make decisions:

◦ Structured decisions: Repetitive and routine and Can be delegated to lower-level employees

EXAMPLE: Deciding whether to write an auto insurance policy for a customer with a clean
driving history.

Semi structured decisions: Incomplete rules and require subjective assessments

EXAMPLE: Deciding whether to sell auto insurance to a customer with a tainted driving
history.

Unstructured decisions: Non-recurring and non-routine and Require a great deal of

subjective assessment

• EXAMPLE: Deciding whether to begin selling a new type of insurance policy

There is also variation in the scope of a decision’s effect: Decision Scope

Decisions vary in terms of the scope of their effect.

 Operational control is concerned with the effective and efficient performance of specific
tasks.

 Management control is concerned with the effective and efficient use of resources for
accomplishing organizational objectives.

 Strategic planning is concerned with establishing organizational objectives and policies

for accomplishing those objectives.

In general, the higher a manager is in the organization, the more likely he/she is to be engaging
in: Less structured decisions, broader scope (i.e., strategic planning) decisions

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1.5. Factors Influencing Design of AIS

Factors Influencing Design of AIS can be shown as follow:

Organizational Strategy
Culture

AIS

Information

Technology

The above figure shows that new development in IT affects the design of AIS. Indeed, in the
past decade, IT has profoundly changed the way that accounting and many other business
activities are performed. Moreover, that impact is likely to continue in the future.

How to evaluate the costs and benefits of new IT developments requires developing a basic
understanding of corporate strategies and how IT developments can be used to implement
existing organizational strategies or create an opportunity to modify those strategies. Moreover,
because an AIS functions within the organization, it should be designed to reflect the values of
that organizational culture. The arrow between organizational culture and the AIS is
bidirectional. This reflects the fact that the AIS influence the organizational culture. One way, it
does so is, through choices on how, and to whom, it disseminates information. For example,
AIS that makes information easily accessible and widely available is likely to increase pressures
for more decentralization and autonomy.

There are many opportunities to invest in IT so that the AIS can be improved to add value to an
organization. Most organizations, however, do not have unlimited resources. Therefore, an
important decision involves identifying which potential AIS improvements are likely to yield
the greatest return. Making this decision wisely requires that accountants and information
systems professionals understand their organization’s strategy.

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