ACCOUNTING INFORMATION SYSTEMS (AIS)

Introduction, Definition and importance of AIS

Introduction
When we have completed this session, we shall have been able to:
Define Accounting information systems (AIS), Discuss why AIS is an important area of study for future accountants Compare and contrast AIS with other Areas of study in accounting Explain the structure of Accounting information systems Explain qualities of information and sources of Accounting information systems. Explain the structure and content of the remainder of the course.

Definition
An Accounting information systems is (AIS):
A set of interrelated activities, documents and technologies designed to; collect data, process it, and report Information to diverse groups of internal, connected and external decision makers of an organisation. A well designed accounting information systems can significantly enhance decision making in an organisation by responding to many elements of the Financial Accounting Standards Board (FASB) Conceptual Framework.

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 Objective of Financial reporting: to provide information for decision making. Elements of financial statement (F/S):
Assets, Liabilities, Equity Revenue, Expense Gain, Losses Comprehensive income.

What is the FASB Conceptual Framework?

Qualities/Characteristics of F/S:
There are two basic categories: Primary Xtics:
Relevance and reliability

Secondary Xtics:
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Comparability and Consistency

Basic Elements of Financial Statements Balance Sheet Income Statement

Assets: Probable future economic benefits resulting from past transactions Liabilities: Probable future sacrifices of economic benefits resulting from past transactions Equity: Residual or ownership interest Investment by Owners: Increases in net assets Distributions to Owners: Decreases in net assets Comprehensive Income: All changes in equity from nonowner sources Revenues: Inflows from entitys ongoing operations Expenses: Outflows from entitys ongoing operations Gains: Increases in equity from incidental transactions Losses: Decreases in equity from incidental transactions

Conceptual Framework (contd)

Assumptions: Financial statements are prepared on the assumption based on: A going concern, Economic entity Periodicity Monetary Unit Principles: Historical Cost, realisation, matching and full disclosure. Constraints: Cost effectiveness Materiality Conservatism Industry practice Sampson Anomah
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Basic Assumptions
Economic Entity Assumption

The economic entity can be identified with a particular unit of accountability. The business is separate and distinct from its owners. Entitys assets and other financial elements are not commingled with those of the owners. The economic entity assumption is an accounting concept, and not a legal construct.

Basic Assumptions
Going Concern Assumption
The business is assumed to continue indefinitely unless terminated by owners. The basis of recording financial elements is historical accounting. Liquidation accounting (based on liquidation values) is not followed unless so indicated.

Basic Assumptions
Monetary Unit
Money is the common unit of measure of economic transactions. Use of a monetary unit is relevant, simple to understand and universally available. Price level changes are ignored in accounting, leading to the assumption that the dollar remains relatively stable.

Basic Assumptions
Periodicity (Time Period) Assumption
Economic activity of an entity may be artificially divided into time periods for reporting purposes. Shorter time periods are subject to revisions but may be more timely.

The Cost Principle

Historical Cost Principle
Transaction is recorded at its acquisition price. It is not changed to reflect market price. The principle applies to most assets and liabilities. Users of financial statements may find fair value information useful for certain types of assets and liabilities. The current system is a mixed attribute incorporating historical cost, fair value, and

certain other valuation bases.

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The Revenue Recognition Principle

Revenue Recognition Principle
Revenue is recognized when it is realized or realizable and earned and the amount can be objectively determined. Revenue is recognized at time of sale. There are exceptions:
1) 2) 3)

During production: In long-term construction revenue is recognized periodically based on % of job completed. End of production: Where active markets exist for the product and there are no significant future costs.. Receipt of cash: Used when there is uncertainty of collection. In installment sales contracts payment is required in periodic installments.

The Matching Principle

Expenses are matched to the revenues they help generate. There should be a logical, rational association of revenues and expenses. If a cost does not benefit future periods, it is recorded in the current period as an expense.

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The Full Disclosure Principle

Financial statements must report what a reasonable person would need to know to make an informed decision. Disclosure may be made:

within the body of the financial statements, as notes to those statements, or as supplementary information.

Constraints: The Cost Benefit Rule

Cost-Benefit Relationship
The cost of providing information should not outweigh the benefit derived. Costs and benefits are not always obvious or measurable. Sound judgment must be used in providing information.

Constraints: Materiality
Materiality refers to an items importance to a firms overall financial operations.
An item must make a difference to be material and be disclosed. It is a matter of the relative significance of the element. Both quantitative and qualitative factors are to be considered in determining relative significance.

Constraints: Industry Practices

Industry Practices
The nature of some industries sometimes require departures from basic accounting theory. If application of accounting theory results in statements that are not comparable or consistent, then industry practices must be examined for possible explanations.

Constraints: Conservatism
Conservatism suggests that the preparer, when in doubt, choose a conservative solution. This solution will be least likely to overstate assets and income. Conservatism does not suggest that net assets or net income be deliberately understated.

AIS relation to the Conceptual framework

AIS relates to the Conceptual framework by additionally, making sure that internal controls in the AIS promotes timeliness, feedback, verifiability, neutrality and faithful representation of accounting information (qualities of information as we shall see in more details later)
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The double entry system

No matter the level or form of your advancement in technology you use in your accounting system, most accounting information systems is based on the double entry (debit/credit) system. Note that:
An account is an arrangement of transactions affecting a given asset, liability or other element. Under this system, the two-sided effect of a transaction is recorded in the appropriate accounts. The recording is done by means of a debit-credit convention (set of rules) applying to all accounts.
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The Basic Accounting Equation

Accounting data is represented by the following relationship among the assets, liabilities and owners equity of a business: Assets = Liabilities + Owners Equity (Capital) The equation must be in balance after every recorded transaction in the system.

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The Debit-Credit Convention

Balance increases
Debit entries in an asset account Debit entries in an expense account Credit entries in a liability account Credit entries in Equity account Credit entries in a revenue account

Balance decreases
Credit entries in an asset account Credit entries in an expense account Debit entries in a liability account Debit entries in Equity account Debit entries in a revenue account

The Accounting Cycle: Steps

The Accounting Cycle entails the steps in gathering Accounting data and summarizing it for re-use in other reports ending within a specified time frame (e.g a year end) for decision making. Steps are as following: 1. Analyze the transaction 2. Journalize the transaction 3. Post the transaction to accounts in Ledger 4. Prepare the (unadjusted) Trial Balance 5. Prepare necessary Adjusting Journal entries 6. Prepare the (adjusted) Trial Balance 7. Prepare financial statements (Income statement/Balance sheets etc) 8. Prepare closing Journal entries for the year 9. Post closing trial balance

Why AIS is an important area of study for future accountants

AIS is pretty new and emerging area for accounting majors and it continues to grow. With the exception of forensic accounting and fraud examination, AIS may be the newest field of study for accounting students and many professionals and practitioners take different approaches in tackling this new area. Therefore, AIS is typically a field of research and future accountants are keen to keep abreast with valid information on the progress of their chosen career. New certifications like, Certified Fraud Examiner, (CFE), Certified Information systems Auditor (CISA), Certified Internal Auditor (CIA) build upon knowledge in AIS.
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USES OF AIS:
Planning: The plans of management are expressed formally as budgets and the term budgeting is often applied to management planning. Controlling: Reports that help focus a managers attention on problems or opportunities that might otherwise go un-notice. A performance report is a detailed feedback system that helps management to compare actual data for a specific period with the budgeted data. Organising and Directing: Managers have constant need for accounting information in the routine conduct of day-to-day operations. E.g. HR - Hiring, promotion and firing decision, PROCUREMENT - volumes of inventory, MARKETING - Pricing strategies etc, (REF. HANDOUT - Information requirement in different sectors) Decision Making: Accounting is generally responsible for gathering available cost and benefit data and for communicating it in a usable form to the appropriate manager.
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Stakeholders/Users of AIS
Stakeholders - Definition:
Any individual or group who can affect or are affected by the achievement or the non-achievement of a firms objectives. In AIS terms, Stakeholders are groups/individuals that have interests in the well-being of the company and/or are affected by the goals, operations, and activities of the organisation and therefore are keen in the financial performance of the organisation.

In AIS terms, Stakeholders can be classified three categories: Internal, Connected and External
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Stakeholders/Users of AIS (contd)

1. Internal stakeholders (e.g. employees, managers): The two key internal roles that are directly related to accounting information systems, as stated earlier are the Management Accounting and Financial Accounting. (REF. TO
HANDOUT - Distinction between Management Accountants and Financial Accountants) 2. Connected Stakeholders: (shareholders, customers, suppliers,

financiers).
- What AIS would they claim or be interested in?

3.

External Stakeholders:(government, the community, pressure

groups).
- What AIS would they claim or be interested in?
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Trends in AIS
AISs combine the study and practice of accounting with the design, implementation, and monitoring of information systems. Such systems use modern information technology resources together with traditional accounting controls and methods to provide users the financial information necessary to manage their organizations.

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Trends in AIS (continued)

In Accounting as seen from above, AIS was previously a paper-based process, most businesses now use accounting software (Computerised Accounting).

In an electronic financial accounting system, the steps in the accounting cycle are dependent upon the system itself. E.g, some systems allow direct journal posting to the various ledgers and others do not.
These systems, commonly including accounting software, make it easier to compile financial data for use in:
taxes, payroll, other bookkeeping requirements and the preparation of General purpose financial reports:

trial balance,
statement of Comprehensive income, balance sheets, cash Sampson Anomah 2009 flow statements as well as other financial data analysis)

Compare and contrast other areas of study in Accounting

Like other areas AIS includes consideration of:
Financial report Internal report and performance analysis

Unlike other areas AIS includes:

Open-ended problems that dont have deterministic responses Accounting sub-divisions (financial accounting, managerial accounting etc) as well as other disciplines e.g. management and information systems/technology.

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The AIS Generic Structure

Input Process Output Storage Internal Controls (detail will be treated later in the course.

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Information: Definition
Information is a data that have been processed, interpreted and understood by the recipient of the message. This means that data is the raw stage of information. Data goes through some analysis, summarisation or processing in some other fashion to produce a message or report which is conventionally deemed to be management information. Data only becomes information understood by the recipient.
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if

it

is

Knowledge
Knowledge is an enabled ability and experience resulting from the continuous application of information. It is therefore an advanced level of information. Some people describe information as knowledge. However, knowledge has a bigger dimension than information. Knowledge can therefore be described a pattern of information that has been experienced over time. This definition is just rudimentary as many researchers have clearly stated that there is no one definition of Knowledge; yet Knowledge may be described as a collection of information. A combination of knowledge forms ones wisdom or truth.
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Qualities of Information
Effective information must have the following qualities:
Relevance: This is the overriding quality of information. Information must be relevant to the problem being considered. Irrelevant information makes the understanding too difficult and causes frustration to the user. Relevance is, in fact, affected by many of the factors below such as completeness, timeliness and detail.
To be relevant:

The information must be timely. The information should have predictive value: (be helpful in making predictions about ultimate outcomes of past, present and future events). The information should have feedback value (helps users to confirm prior expectations.) Sampson Anomah
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Qualities of information (contd)

Consistency: Accounting information is consistent, if the same accounting principles are applied in a similar manner from one period to the next. Accounting principles may be changed, if the change results in better reporting. If principles are changed, the justification for, and the nature and effect of the change, must be disclosed. Comparability: For information to be comparable, it must be: measured and reported in a similar manner for different enterprises. useful in the allocation of resources to the areas of greatest benefit. useful to users in identifying real differences between enterprises.
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Qualities of Information
Accuracy: Although there is no such thing as absolute accuracy, information must possess sufficient accuracy necessary to help the decision making required.
Reliability/Confidence in source : Information is reliable, when it can be relied on to represent the true, underlying situation. To be reliable, information must be:
Verifiable

representationally faithful, and Neutral

Source confidence is enhanced by: Past reliability record of the source Good interactive communication between the information producer and the manager.

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Qualities of information (continued)

Completeness: The information must be sufficiently available for the decision. Communicated to the Right person: Each manager has his defined sphere of activity in carrying out his duties. Note the difference between a Management Accounting information and Financial Accounting information. Timely: Too rapidly communicated or too slowly communicated information looses its validity and relevance. Detail: Information should contain the least amount of details consistent with effective decision making. Information Overload should be avoided.

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Benefits of Efficient AIS

To quantify the benefits of AIS, several factors need to be considered: 1. Increased turnover: Improved data collection, storage and analysis tools through efficient database management (e.g. centralised or distributed) with its associated data-mining software and tools (e.g. SQL as well as neural networks, fuzzy logic and other intelligent techniques) also known as Datawarehousing. 2. Cost reduction (to achieve competitive advantage)
Cost advantage Differentiation advantage (per Michael Porter)

3. Sampson Enhanced Services: Anomah

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Benefits of Efficient AIS (contd)

1. Improved decision making - Enhanced
Forecasting Developing Scenarios
(e.g. Making provision for uncertain timing, changing interest rates etc)

Market Analysis: Demand, supply elasticity and pricing decisions Project evaluation: Investment appraisals and the application of time value of money for decision making.

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Management Information Systems (MIS) compared with Accounting Information Systems (AIS)

The information role of the AIS has been given above.

It should be noted that the AIS is part of the MIS.
MIS is interactive human/machine systems that support decision making for users both in and out of traditional organizational boundaries

The MIS also includes information systems or applications for:

- marketing - internal auditing - data processing, etc.
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- production - personnel (HR)

Structure and content of the remainder of the course

Since the course is designed for Accounting students, concentration on accounting and preparation of financial reports and performance analysis will not be prominent but the concentration will be on the management of Business Information processing, technology and management Systems to produce quality report that support users decision.

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The following areas will be the focus:

AIS Technology: Hardware
Computer Architecture
CPU, Memory, Storage types, Operating systems

Input devices Processing Output devices

Storage:
Units of Computer memory Binary/Decimal/Hexadecimal
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Remainder of the course (contd)

Recording and Sharing of Information Networking
Server software Client software Peer to peer

Software Bespoke software or an off-the-shelf accounting package Customised versions of standard packages Outsourcing strategies Development AIS Systems and systems thinking The 7-stage description Rich picture Defining a System: CATWOE Sampson Anomah
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Remainder of the course (contd)

The information age and Ethics in business Applications of information systems Asset Accounting Information Security threats identification Attacks and intrusion on Accounting information systems and controls Risk management Information Security models and classification Access control Business Process Re-Engineering (BPR) and Managing Change System Changeover/ Conversion strategies Resistance to change
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Remainder of the course (contd)

Knowledge and Business Intelligence Management Organisational learning, knowledge creation and dissemination Electronic Commerce and Management Systems Classification of E-Commerce by the Nature and Interactions

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Reading list and materials

Course handout, and if you come across: Hurt R. L (2008) Accounting information systems, basic concepts and current issues, McGraw Hills. www.wikipedia.org for references, definitions furtherance of clarification Turban E. et al (2006) Electronic Commerce, A managerial perspective. Lucey T. (1996) Management Information Systems. Atkinson A. A et al (2006) Management Accounting, international edition, Kaplan consulting. Harris S. (2002) All in One book for CISSP Certification, McGraw Hills.
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Reading list and materials (contd)

Boczko, T. (2007). Corporate Accounting Information Systems, (1st edition), Prentice Hall.) Romney, M. B. & Steinbart, P. J., Accounting Information Systems. (11th edition.), Prentice Hall. Chaffey, D. and Wood, S. (2005) , Business Information Management: Improving Performance Using Information Systems, (1st edition), Prentice Hall. Bocij, P., Chaffey, D., Greasley, A. and Hickie, S., Business Information Systems: Technology, Development and Management for the e-business, (3rd edition), Prentice Hall. Laudon, C. and Laudon, J. Management Information Systems: Managing the digital firm, (9th edition), Prentice Hall.
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Assignment 1
Submission date 21/01/2010 You will be having a presentation exercise in the week of submission of exercise. Click here to view the assignment A maximum of 2000 words.

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