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Chapter 1: The Study of Accounting Information Systems


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Title: Chapter 1: The Study of Accounting Information Systems

  • Chapter 1 The Study of Accounting Information

Slides Authored by Somnath Bhattacharya,
Ph.D. Florida Atlantic University
What Is Accounting?
  • It is the principal way of organizing and
    reporting financial information. It has been
    called the language of business.
  • Accounting and information systems comprise the
    functional area of business responsible for
    providing information to the other areas to
    enable them to do their jobs and for reporting
    the results to interested parties.
  • To that end, an accounting system is used to
    identify, analyze, measure, record, summarize,
    and communicate relevant economic information to
    interested parties.

What Is An AIS?
  • A system is a set of two or more interrelated
    components that interact to achieve a goal.
  • Systems are almost always composed of smaller
    subsystems, each performing a specific function
    supportive of the larger system.
  • An accounting information system (AIS) consists
  • People
  • Procedures
  • Data
  • Software
  • Information technology infrastructure

What Is An AIS?
  • What important functions does the AIS perform in
    an organization?
  • It collects and stores data about activities and
  • It processes data into information that is useful
    for making decisions.
  • It provides adequate controls to safeguard the
    organizations assets.

Why Study AIS?
  • To understand how the accounting system works.
  • How to collect data about an organizations
    activities and transactions
  • How to transform that data into information that
    management can use to run the organization
  • How to ensure the availability, reliability, and
    accuracy of that information

Why Study AIS?
  • Auditors need to understand the systems that are
    used to produce a companys financial statements.
  • Tax professionals need to understand enough about
    the clients AIS to be confident that the
    information used for tax planning and compliance
    work is complete and accurate.

What Is a System?
  • A System is an entity consisting of interacting
    parts that are coordinated to achieve one or more
    common objectives. Systems must possess
  • Organization
  • Transactions-Journals-Ledgers-Financial
  • Interrelationships
  • The relationship between Subsidiary ledgers and
    the General Ledger
  • Integration
  • Individual transactions to Financial Statements
  • Central Objectives
  • Financial Reports, Budgets, Management Reports

Data Versus Information
  • Data are raw facts and figures that are processed
    to produce information
  • Information is data that have been processed and
    are meaningful and useful to users. The terms
    meaningful and useful are value-laden terms
    and usually subsume other qualities such as
    timeliness, relevance, reliability, consistency,
    comparability, etc.

Functional Steps in Transforming Data into
  • Data collection - capturing, recording,
    validating and editing data for completeness and
  • Data Maintenance/Processing - classifying,
    sorting, calculating data
  • Data Management - storing, maintaining and
    retrieving data
  • Data Control - safeguarding and securing data and
    ensuring the accuracy and completeness of the
  • Information Generation - interpreting, reporting,
    and communicating information

What Is an Information System?
  • An Information system is a framework in which
    data is collected, processed, controlled and
    managed through stages in order to provide
    information to users
  • It evolves over time and becomes more formalized
    as a firm grows and becomes more complex. It can
    be a manual or computerized system
  • Firms depend on information systems in order to
    survive and stay competitive

The Universal Data Processing Model

Exchange Events Internal Events Environmental
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

Objectives and Users of AIS
  • Support day-to-day operations
  • Transaction processing
  • Support Internal Decision-Making
  • Trend Analyses
  • Quantitative Qualitative Data
  • Non-transactional sources
  • Help fulfill Stewardship Role

Resources Required for an AIS
  • Processor(s) Manual or Computerized
  • Data Base(s) Data Repositories
  • Procedures Manual or Computerized
  • Input/Output Devices
  • Miscellaneous Resources

AIS as an MIS Subsystem
Sales/ Marketing
Production Info
Relationship of AIS MIS
Reasons for Studying Accounting Information
  • Career accountants will be users, auditors, and
    developers of AIS
  • Modern-day AIS are complex because of new
  • Concepts studied in AIS are integrated into every
    other accounting course

Information-Oriented Professionals
  • An array of professionally trained persons from
    different fields of study have focused on
    providing information to users
  • These professionals include system and managerial
    accountants and auditors, system analysts and
    industrial engineers
  • Professional certifications are increasing.
    These include Certified Computing Professional,
    Certified Information Systems Auditor, Certified
    Managerial Accountant, Certified Fraud Examiner,

  • The Business Environment and the AIS

The Business Firm as a System
Organizations functions
AIS Transaction Cycles
Business Events from Operations
Figure 2-1
System Characteristics of Business Firms
  • Objectives
  • Environment
  • Constraints
  • Input-Process-Output
  • Feedback
  • Controls
  • Subsystems

Examples of AIS Subsystems(Merchandising)
No Planning/Control, Investment, or Production
Cycles reflected here
Examples of AIS Subsystems Service Firm Revenue
No Purchasing, Production, Planning/Control,
Investment Cycles reflected here
Examples of AIS Subsystems Production Cycle
No Revenue, and Investment Cycles reflected here
Organizational Structure in Business Firms
  • Hierarchical
  • Matrix Blend functional and project-oriented
  • Decentralized
  • Network

A Networked Organizational Structure
Consultant Training
Marketing Consulting Services
Consultant Recruitment
Operation Management
Customer Project Team
Customer Services Management
Figure 2-5
The Operational System of a Manufacturing Firm
Figure 2-7
Useful Data Elements Concerning a Business Event
  • The nature of the element and when it occurred
  • Which agents were involved
  • What kinds of resources were involved and in what
  • Where the event took place

Data ManagementSome Specifics
Some More Specifics
  • The manual activity of journalizing transactions
    is equivalent to the computerized recording of
    transactions in a transaction file
  • In general, manual accounting journals are
    equivalent to computerized transaction files
  • Similarly, manual general ledger and subsidiary
    ledgers are equivalent to computerized Master
    files. e.g., There is typically 1 record in the
    general ledger for each account in an entitys
    chart of accounts
  • Examples of Master files include
  • Accounts Receivable Master File
  • Accounts Payable Master File
  • Inventory Master File

  • AIS Enhancements Through Information Technology
    and Networks

Importance of IT and Computer Networks to
  • To use, evaluate, and develop a modern AIS,
    accountants must be familiar with IT
  • Computers enable accountants to perform their
    duties more quickly, accurately, and consistently
    than by manual methods
  • Software such as electronic spreadsheets aid
    accountants in analyzing financial statements and
    in developing budgets

IT Components of Interest to Accountants
  • Devices for data entry
  • Data Processing
  • Data Communication
  • Information Generation
  • Data Bases
  • Data Modeling concepts
  • Evaluation of internal controls in AIS
  • Variety of software packages
  • Computer Networks

Networks Accountants
  • Because they transmit data and information,
    networks are an integral part of AIS
  • Networks are vulnerable to high level risk thus
    requiring special controls and security measures.
  • Need to prevent loss of accounting records
  • Need to ensure accuracy of data
  • Networks may be used to consolidate data into
    financial information

Gains from IT for Accountants
  • Faster processing of transactions and other data
  • Greater accuracy in computations of and
    comparisons with data
  • Lower cost of processing each transaction
  • More timely preparation of reports and other
  • More concise storage of data, with greater
    accessibility when needed
  • Wider range of choices for entering data and
    providing outputs
  • Higher productivity for employees and managers,
    who learn to use computers effectively in their
    routine and decision-making responsibilities

Task Matching to Computers
  • Manual
  • Exceptional/infrequent transactions
  • Setting objectives and policy-making judgments
  • New problems
  • Supervising employees
  • Social communications
  • Making complex strategic decisions
  • Computerized
  • Collecting and processing large volumes of
    routine transactions
  • Storing large quantities of data and information
  • Monitoring and controlling continuous processes
  • Answering specific inquiries based on stored data
  • Preparing complex analyses and extensive reports
  • Helping gather data and understanding the
    relationships between all types of decisions

Figure 3-1
Limitations of Infoages Legacy AIS
  • Large portion of personnel time and effort spent
    on systems maintenance
  • Little time effort for value-added services
  • Little flexibility to changing business
  • Financial and Operational data not integrated
  • Difficult to generate data with both financial
    and non-financial components
  • The transaction processing systems focus on chart
    of accounts classification
  • Ignore the multidimensional aspects of
  • Files related to applications are not integrated
  • Inefficiencies of the manual system remodeled in
    automated form
  • Business processes and accounting procedures not
    analyzed and improved upon prior to conversion to
    automated form
  • System not geared to generate timely
    decision-support information
  • Computer programmers required to write new
    programs for ad hoc queries

Types of Network Architectures
  • Wide-Area Networks
  • Formed among computers and inter-connected
    devices that are geographically distant from one
  • Local-Area Networks
  • A type of distributed network created when two or
    more linked computers are grouped within a
    limited geographical area

Centralized WANs - I
  • Concentrates all application processing at one
    geographical location
  • Consists essentially of one (or a cluster of)
    central mainframe computer(s) and one or more
    physically remote terminals
  • Typically all hardware, software, and data
    processing personnel are located at corporate
  • Advantages include
  • the concentrated computing power of a large
  • low operating costs per transaction leading to
    economies of scale
  • can facilitate the use of a database approach
  • facilitate better security provisions
  • allow for greater standardization and
    professional planning and control of
    information-related activities

Centralized WANs - II
  • Best suited for
  • Firms with centralized organizational structures
  • Firms with homogeneous operations
  • Firms with low processing activity at remote
  • Examples include
  • Savings and loan institutions
  • Banks with many ATMs and branches
  • Merchandizing chains
  • Motels
  • Airlines
  • Drawbacks include
  • Inflexibility
  • Expensive and complicated software needed
  • Vulnerable to disasters as a result of complete
    dependence on central computer
  • Not user-friendly

Distributed WANs - I
  • This links fully functional computers in
    different geographical locations.
  • Each remote site processes its own applications.
    However, users may not have easy access to
    centralized data or be able to transmit data and
    information rapidly.
  • Computers may be interconnected by data
    communications hardware and software to other
    remote sites and to a central computer facility
    to form an enterprise-wide network.

Distributed WANs - II
  • Distributed databases are useful when
  • Large volumes of data need to be processed at
    remote locations
  • Managers and employees need very fast access to
    data on a frequent basis
  • Databases may be distributed by replication or
  • Replication Copies of files from the main data
    base are stored at remote locations
  • Partition Segments of files are allocated to
    various locations within the network
  • This avoids data redundancy, but increases the
    complexity of transmitting data throughout the
  • Likely to become the dominant approach as
    technology improves
  • At present most data bases are a hybrid of the
    two approaches

Benefits of Distributed WANs
  • Can be responsive to diverse needs of users
  • Enable network facilities to be used efficiently
    since processing jobs can be routed to unused
    computer systems in the network
  • Are robust against individual computer failures
  • Flexible and adaptable to change
  • Best suited for firms with
  • Decentralized organizational structures
  • Diverse operations or user groups
  • Clustered functions at various locations
  • Multiple products
  • Manufacturing operations
  • A variety of services

Drawbacks of Distributed WANs
  • Difficulty in maintaining adequate control and
  • Each distributed processing location needs its
    own set of controls and security measures
  • Given the smallness of each location,
    organizational independence is not easily
  • Managers may sacrifice control and security for
    greater productivity
  • Difficulty and cost of coordinating the
    relatively independent and sometimes incompatible
    computer systems
  • Added costs for multiple computers, other system
    components, and communication services

  • A LAN may be connected to other LANs and/or WANs
    via hardware devices known as gateways or bridges
  • At the heart of a LAN is the workstation
  • Microcomputer-based workstation
  • Traditional workstation
  • Super workstation

Peer-to-Peer LANs
  • In smaller LANs, every workstation functions as
    both a client and a server
  • This allows all users to share data and files on
    all workstations
  • Called peer-to-peer network since no workstations
    are dedicated to perform only server functions
  • Compared to a server network, peer-to-peer
    networks are less costly, easier to install, and
    compare well against server networks of similar
  • Number expected to significantly increase in the
    near future

Server Networks
  • May interconnect hundreds of workstations
  • More difficult to manage and interpret than
    peer-to-peer networks
  • Provide greater security than peer-to-peer
  • At least one workstation is dedicated to
    performing specific server tasks
  • Examples include
  • Servers
  • Database servers
  • Print servers
  • Communications servers
  • Transaction processing servers
  • Large server networks often contain multiple

The Network Operating System
  • In peer-to-peer networks, the Network Operating
    Software (NOS) is installed in each user
  • In a server network, most of the NOS is installed
    in the file server and a portion also resides in
    each workstation
  • To run centralized LAN applications, the NOS
    installed in the file server interacts with the
    NOS and the local operating system installed in
    the workstation. The client workstation NOS
    initiates a request to the file server NOS to
    load files and programs into the client
    workstations RAM
  • In a peer-to-peer network, a client NOS initiates
    a request to another client NOS, which also
    functions as a server, to load the requested
    files and/or programs into RAM

More Networks
  • Examples of pre-developed network configurations
    resident in Network Interface Cards include
    Ethernet, Token Ring, and ARC-net
  • The International Standards Organization has
    issued the Open Systems Interconnection (OSI)
  • Open Systems Architecture
  • Seamless exchange of data, files, and software
    between LANs and WANs built with multiple
    vendors hardware, software, and networking

Client/Server Networks
  • This model splits data processing between a user
    workstation (client) and one or more servers
  • Majority of servers are dedicated database
    servers, thereby enabling client to share data
    and files, conduct database searches, and update
    the database
  • One of the fastest growing segments of IT

Cooperative Client/Server Computing
  • Most commonly implemented mode of client/server
  • Facilitates the optimal sharing of computer
    resources since the client(s) and server(s)
    jointly process the data
  • Clients typically employ Graphical User
    Interfaces (GUIs)
  • Data-processing locale is transparent to the user

Network Topologies
  • The STAR and RING topologies apply to both
    distributed WANs and LANs
  • The BUS topology applies only to LANs
  • All three found in client/server networks
  • All three may be combined to form hybrid

The STAR Configuration
Figure 3-3a
The RING Configuration
Figure 3-3b
The BUS Configuration
Figure 3-3c
Enterprise-wide Processing and Data Systems
  • Enterprise-wide on-line transaction processing
    systems collect and process mission-critical
    accounting and operational applications
  • Enterprise Resource Planning Systems (ERP) such
    as SAP R/3 overcome the limitations of legacy
  • Firms typically develop two types of On-line
    Analytical Processing (OLAP) systems that
    supplement ERP or legacy systems
  • A firm can model the relevant aspects of business
    events contained within the business processes
    allowing for the use of relational
    database-related query language commands
  • Firms can create a data mart or data warehouse to
    generate predefined reports for executives and
    other managers

Data Marts and Data Warehouses
  • Both Data Marts and Data Warehouses organize and
    store copies of informational or decision
    support data
  • A Data Mart stores copies of decision support
    data in a data base for a portion of a company
  • A Data Warehouse stores copies of decision
    support data in an integrated data base for an
    entire enterprise
  • As opposed to applications-oriented data in
    legacy systems, data in a data mart or warehouse
    are stored by subject areas (e.g., customers)
  • Data may be stored in both summarized or raw
  • Both have drill down and data mining features

Specialized Inter-organizational Systems/Networks
  • Internet Commerce and Electronic Commerce
  • Point-of-Sale Systems/Networks
  • Electronic Funds Transfer (EFT) Systems
  • Electronic Data Interchange (EDI) Systems
  • Value Added Networks (VANs)
  • The Internet (TCP/IP)
  • The World Wide Web (WWW)
  • Hypertext information retrieval system
  • Intranets
  • Extranets