Fundamentals of Accounting and Business Processes (Funnacco) De La Salle Lipa

Chapter 1
INTRODUCTION TO ACCOUNTING INFORMATION SYSTEMS

Data and Information

Data are raw facts and figures that are processed to produce information. Several kinds of data need to
be collected in businesses, such as facts about the activities that take place, the resources affected by
the activities, and the people who participate in the activity.

Information is data that have been processed and are meaningful and useful to users.

A system is a set of two or more interrelated components that interact to achieve a goal. 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.

When the systems concept is used in systems development, changes in subsystems cannot be made
without considering the effect on other subsystems and the system as a whole.

Goal conflict occurs when a decision or action of a subsystem is inconsistent with another subsystem or
the system as a whole. Goal congruence is achieved when a subsystem achieves its goals while
contributing to the organization’s overall goal.

The systems concept also encourages integration, which is eliminating duplicate recording, storage,
reporting and other processing activities in an organization.

Characteristics of Useful Information

 Relevant Information is relevant if it reduces uncertainty, improves decision makers’

ability to make predictions, or confirms or corrects their prior expectations.

 Reliable Information is reliable if it is free from error or bias and accurately

represents the events or activities of an organization.

 Complete Information is complete if it does not omit important aspects of the

underlying events or activities that it measures.

 Timely Information is timely if it is provided in time to enable decision makers to

use it to make decisions.

 Understandable Information is understandable if it is presented in a useful and intelligible

format.

 Verifiable Information is verifiable if two knowledgeable people acting independently

would each produce the same information.

 Accessible Information is accessible if it is available when needed in a format which

meets the specific needs of the user of the information system.

Functional Steps in Transforming Data into Information

1. Data collection Capturing, recording, validating, and editing data for completeness
and accuracy.

2. Data processing Classifying, sorting, and calculating data.

3. Data management Storing, maintaining, and retrieving data.

4. Information generation Interpreting, reporting, and communicating information.

5. Data control Safeguarding and securing data and ensuring the accuracy and
completeness of the same.
1
Fundamentals of Accounting and Business Processes (Funnacco) De La Salle Lipa

Figure 1-1. The General AIS model.

Users of Information

The information provided to external users is either mandatory information required by a governmental
entity or essential information required to conduct business with external parties (such as a report to the
BIR on taxable income and withholdings) or essential information required to conduct business with
external parties (such as purchased orders and customer billings).

Most internal information is discretionary information. The primary focus in producing this information
is ensuring that benefits exceed costs, i.e., the information has positive value. (The value of information
is the benefit produced by the information minus the cost of producing it.)

Information Systems

An information system is a set of interrelated subsystems that work together to collect, process, store,
transform, and distribute information for planning, decision making, and controls.

An example of an information system is a management information system that provides the

information necessary to manage an organization effectively.

Each organization must tailor its information system to the needs of its users. Therefore, specific
information system objectives may differ from firm to firm. Three fundamental objectives are, however,
common to all systems:

1. To support the stewardship function of management.

2. To support management decision making.

3. To support the firm’s day-to-day operations.

Accounting Information System

An accounting information system is a unified structure that employs physical resources and
components to transform economic data into accounting information for external and internal users.

Six Components of an Accounting Information System

1. The people who operate the system and perform various functions

2. The procedures and instructions, both manual and automated, involved in collecting, processing,
and storing data about the organization’s activities

2
Fundamentals of Accounting and Business Processes (Funnacco) De La Salle Lipa

3. The data about the organization and its business processes

4. The software used to process the organization’s data

5. The information technology infrastructure, including computers, peripheral devices and network
communications devices used to collect, store, process and transmit data and information

6. The internal controls and security measures that safeguard the data in the AIS.

Three Important Business Functions of an Accounting Information System

1. Collect and store data about organizational activities, resources, and personnel.

2. Transform data into information that is useful for making decisions so management can plan,
execute, control and evaluate activities, resources and personnel.

3. Provide adequate controls to safeguard the organization’s assets, including its data, to ensure that
the assets and data are available when needed and the data are accurate and reliable.

Three Major Subsystems of an Accounting Information System

1. The transaction processing system supports daily business operations with numerous documents
and messages for users throughout the organization.

2. The general ledger/financial reporting system produces the traditional financial statements, such
as income statements, balance sheets, statements of cash flows, tax returns, and other reports
required by law.

3. The management reporting system provides internal management with special purpose financial
reports and information needed for decision making, such as budgets, variance reports, and
responsibility reports.

Three Factors that Influence the Design of an AIS

1. Developments in information technology (IT)

2. Business strategy

3. Organizational culture

The Organization and Its Value Chain

The value chain is the sequence of business activities by which, in the perspective of the end user,
value is added to products and services produced by an organization.

The objective of most organizations is to provide value to their customers. 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, or customizing it.

Five Primary Activities in the Value Chain

1. Inbound logistics consists of receiving, storing and distributing the materials an organization uses to
create the services and products it sells.

2. Operations activities transform inputs into final products or services

3. Outbound logistics activities distribute finished products or services to customers.

3
Fundamentals of Accounting and Business Processes (Funnacco) De La Salle Lipa

4. Marketing and sales activities help customers buy the organization’s products or services.

5. Service activities provide post-sale support to customers.

Four Categories of Support Activities in the Value Chain

1. Firm infrastructure is the accounting, finance, legal and general administration activities that allow
an organization to function.

2. Human resources activities include recruiting, hiring, training and providing employee benefits and
compensation

3. Technology activities improve a product or service

4. Purchasing activities procure raw materials, supplies, machinery and the buildings used to carry
out the primary activities

Figure 1-2. The value chain.

Three Categories of Decision Structures

1. Structured decisions are repetitive, routine, and understood well enough that they can be delegated
to lower-level employees in the organization.

2. Semistructured decisions are characterized by incomplete rules for making the decision and the
need for subjective assessments and judgments to supplement formal data analysis.

3. Unstructured decisions are nonrecurring and nonroutine.

Decision Scope

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

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

3. Strategic planning is concerned with establishing organizational objectives and policies for
accomplishing those objectives.

4
Fundamentals of Accounting and Business Processes (Funnacco) De La Salle Lipa

Information System Models

1. Manual Process Model. This is the old manual approach to recording accounting transactions.
Transaction processing, information processing, and accounting are physically performed by people,
usually using paper documents.

2. The Flat-File Model. When accounting applications were first computerized, different applications
were developed separately with files created for individual applications—even if other parts of the
organization had use for the same information. The department that developed the application owned
the data and typically did not share it with other units.

Figure 1-3. Example of a flat-file model.

3. The Database Model. This model centralized an organization’s data so that it can be shared by
other users. Because all data should not be accessible by all users, the database management
system (DBMS) serves as a gatekeeper, limiting access to particular data sets to users who are
authorized.

Figure 1-4. Example of a database model.

4. The REA Model. The REA model is based on the premise that data can be represented with a
framework that identifies the organization’s resources, events, and agents. With this approach to
organizing accounting and nonaccounting data, user views can be developed as needed to support
all decision-making.
5
Fundamentals of Accounting and Business Processes (Funnacco) De La Salle Lipa

Figure 1-5. Example of a REA model.

5. ERP Systems. Enterprise resource planning is an information system model that enables an
organization to automate and integrate its key business processes. ERP breaks down traditional
functional barriers by facilitating data sharing, information flows, and the introduction of common
business practices among all organizational users.

The Role of the Accountant

1. Accountants as users must decide what information must be collected, how it must be processed,
and how it must be reported.

2. Accountants as systems designers must work with IT professionals in designing the conceptual
system while the IT professionals handle the physical system.

3. Accountants as auditors must form opinions of the fairness of a company’s financial statements.