Accounting information system

1. Basic Conceptual Foundation of Accounting Information Systems
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2. Unit Introduction
We begin this chapter by illustrating the primary information flows within the business environment.
Next we discuss the Accounting information systems including definitions. Then we describe the
general model for information systems. Then we discuss the financial transactions versus the non-
financial transactions. Then we conclude by describing the functional areas of a business and roles
of accountants in an information systems environment.

3. Unit Learning Outcomes
Upon completion of this unit you should be able to:
illustrate primary information flows within the business environment
describe financial transactions and nonfinancial transactions
explain Accounting information systems
explain roles of accountants in an information systems environment

4. Key Words
Definition of key words
System: Is asset of two or more interrelated components that interact to achieve a goal
Data: Are facts that are collected, recorded, stored and processed by an information system
Information: Is data that have been organised and processed to provide meaning to a user.
Accounting Information system: Is a system that collects, records, stores and processes data to
capture information for decision makers.

5. Primary Information Flows within the Business Environment
Figure 1: Information Flows Diagram
Source: Accounting Information Systems, 6th
Edition by James A. Hall, Cengage Learning
An Information Flow Diagram (IFD) can be used to model the information flow throughout an
organisation. An IFD shows the relationship between internal information flows within an
organisation and external information flows between organisations. It also shows the relationship
between the internal departments and sub-systems.
An IFD also shows how information is transferred or flowing from a source to a receiver, in this
case information is flowing from day-to-day operations personnel (i.e. customers or suppliers) to
operational management then information flows to middle management and then flows to top
management through some medium of communication.
The information produced by the system has a great deal of value, information must possess
characteristics that makes information useful and meaningful for decision making.

6. Characteristics of Useful Information
Relevant – information is relevant if it minimises uncertainty and improves decision making ability
to make forecast 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 the organisation.
Complete- information is complete if it does not omit important aspects of the underlying events or
activities it measures.
Timely- Information is timely if it is provided in time for decision makers to make decisions.
Understandable – Information is understandable if it presented in a useful and intelligence format.
Verifiable- information is verifiable if two knowledgeable people activing independently would each
produce the same information.
Accessible – Information is accessible if it is available to users when they need it and in a format
they can use. Information can be provided to both internal and external users.

7. Information Flow
Internal information flow
Internal information flow includes information that is discretionary and choice must be made
regarding what information should be made available, to whom and how frequently. The primary
consideration in producing discretionary information is that its benefits exceeds its costs.
Internal information flows includes:
1. The horizontal flows of information used primarily at the operational level to capture
transaction and operations data.
2. The vertical flows of information which entails
2.1 Downward flows which includes instructions, quotas and budgets
2.2 Upward flows which includes aggregated transaction and operations data.
External information flow
This is information supplied to external users is either mandatory (compulsory or binding
information) required by government authorities (i.e. Receiver of Revenue).
The primary consideration in producing mandatory information and essential information is to
minimise cost while meeting standard of reliability and usefulness and meeting regulatory
requirements.
Information in business
Each user group has unique information requirements. The higher the level of the organisation, the
greater the need for more aggregated information and less need for detail.
Information is a business resource that needs to be appropriately managed and is vital to the
survival of contemporary businesses.

8. Accounting Information Systems
What is a System?
Is defined as 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.
Features of an Accounting 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.
Accounting Information Subsystems
There are three AIS subsystems that are of great importance, namely:
1. Transaction processing system (TPS) - Is a subsystem which provides daily supports on day
to day business operations.
2. General Ledger/ Financial Reporting System (GL/FRS) – is a subsystem which produces
financial statements and reports to the user of information. I.e. Management, Shareholders
K23. Management Reporting System (MRS) - is a subsystem which produces special-purpose
reports for internal use

9. Data Sources
Data sources are financial transactions that enter the information system from internal and
external sources.
The transformation of data into information involves Four (4) functions
1) Data collection- capturing transaction data, recording data onto forms and validating and
editing the data
2) Data processing – involves classifying, transcribing, sorting and batching.
3) Data Management – involves storing, retrieving and deleting
4) Information Generation – compiling, arranging, formatting and presenting.

10. Financial and Non-Financial Transactions
A transaction is a business event. A transaction involves financial transactions and non-financial
transactions.
Financial transactions
Economic events that affect the assets and equities of the organisation. .e.g. the purchase of
computer equipment
Nonfinancial transactions
All other events processed by the organisations information system .e.g. a reservation for
university admission- no commitment done yet by the prospect student.
Figure 2: Financial transaction vs Non-financial transactions
Source: Accounting information systems, 6th Edition, by James A. Hall; Cengage learning,

11. Accounting Information Systems (AIS)
Accounting is a set of formal procedures by which data are collected, processed into information
for decision makers and distributed to users. An AIS can be very simple paper-and-pencil based
manual system, a very complex system using the very latest in computers and information
technology or something between these two extremes.
The Accounting information system and the people who use it must still collect, process, store and
report data and information.
There are six components of an AIS
1. The people who operates the system and perform various functions
2. The procedures and instruction, both manual and automated
3. The data about the organisation and its business processes
4. The software used to process the organisation data
5. The information technology infrastructure
6. The internal controls and security measures in place

12. AIS vs MIS
What is the difference between Accounting Information Systems (AIS) and Management
Information Systems (MIS)?
Accounting information systems (AIS) processes financial transactions i.e. sale of goods and also
processes nonfinancial transactions that directly affect the processing of financial transactions e.g.
approval of new sales agents. On the other hand, Management Information Systems (MIS)
processes nonfinancial transactions that are not normally processes by traditional AIS. .e.g.
tracking customer complaints.
Why study accounting Information Systems?
The student needs to have knowledge of accounting and will be complimented by an
understanding of an AIS. AIS skills is important for an accounting student career success, students
intending to pursue career in public accounting required in depth understanding of an AIS. The
roles of accountant and Auditors is explained below.

13. Role of Accountants in an Information System Environment
Accountants as Information System Users
Accountants must be able to clearly convey their needs to the systems professionals who design
the system.
The accountant should actively participate in the system development projects to ensure
appropriate system design.
Accountants as Information System designers
The accounting function is responsible for the conceptual system, while the computer function is
responsible for the physical system.
The conceptual system determines the nature of the information required, its sources, its
destination and accounting rules that must be applied.
Accountants as Information System Auditors
External auditors: Attest to fairness of financial statements and providing audit assurance service.
IT Auditors: Evaluate IT, often as part of external audit, Auditors need to evaluate the accuracy
and reliability of information produced by an AIS and to do so they must understand how the
system is developed and how it operates and how it can be properly controlled.
Internal Auditors: responsible for in house IT and IS appraisal services.

14. Accountants and AIS
Thye are responsible for in house IT and IS appraisal services
External auditors
Score: 0
IT Auditors
Score: 0
Internal Auditors
Score: 1

15. Unit Summary
In this unit you learned the primary information flows within a business which highlighted the
characteristics of useful information and also learned the accounting information systems which
included the six components of an AIS. You also learned why it is important to study AIS and the
role of accountants and Auditors in AIS.
If you have any questions about this Unit please use the Discussion Forum to raise the questions.
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