This document provides an overview of accounting information systems (AIS). It defines AIS as a structure businesses use to collect, store, manage and report financial data for accountants, managers, auditors and regulators. The document discusses the responsibilities of AIS, including receiving and storing data, converting data into information for decision making, and establishing internal controls. It also examines the subsystems of AIS, such as the general ledger, production cycle and merchandising systems. Key objectives of AIS are supporting stewardship, management decision making and day-to-day operations. Resources required for a successful AIS include people, processors, procedures, databases, software and internal controls.

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The Study of
Accounting
Information
Systems:
Essential Concepts and
Applications

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Dated: 31st March, 2015
Tableof Contents PageNo.
1. Introduction 3
 Accounting
 Information System
2. Accounting Information System 5
 Responsibilities of Accounting Information System
3. AIS - The MIS Subsystem 6
 Decision-Making activities
 General Ledger & Reporting System
 Merchandising AIS Subsystem
 The Operational System of a Manufacturing Firm –
The Accounting Function
 Production Cycle
4. Objectives and Users of 13
5. Resources Required for an AIS 13
6. Roles of Accountants with Respect to AIS 14
7. Ethical Standards for Consulting 14

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8. Reasons for Studying AIS 15
Introduction
Before understanding the concept of Accounting Information System, we all
are aware of the general idea about the Accounting and Information System
distinctively that the former is the language of business and the latter is a
system composed of people and computers that processes or interprets
information.
In a broader sense, accounting can be explained as, “the principal way of
organizing and reporting financial information. Ithas been called the language
of business. The accounting system is used to identify, analyse, measure,
record, summarize, and communicate relevant economic information to
interested parties.”
Information System can be explained as, “it is a system composed of people
and computers that processes or interprets information. The term is also
sometimes used in more restricted senses to refer to only the software used to
run a computerized database or to refer to only a computer system.”
But for an Information System, one must require data to process it into proper
categorized information when needed. Therefore, data are raw facts and
figures that are processed to produce information.

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And “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.”
Whatare the components that really make an information system work? We'll
explore IPO (input, process and output) and how this system works.
Input is anything we wish to embed in a system for some type of use. A variety
of sources are used to input: keyboard, scanner, microphone, mouse, even
another computer. What we input has a purpose or an objective that can be
termed as a data - but until and unless it is processed and generated in some
form of output, it is technically of no use or purpose to be achieved.
Processing takes place in the internal parts of the computer system. It is the
act of taking inputted data and processing or converting it into something
useful. What we typically see on the screen in today's computer world (known
as what you see is what you get or in short as WYSIWYG) is the result of our
input being processed by some logical program so we can have the required
output: an English paper, an edited photograph, ‘this video you're watching’.
Output or the processed information in a usable format comes in various
forms: monitor or printer for visual work, a speaker for audio. Sometimes our
output is short-term, such as printing a photo, and sometimes what we work
on needs to be kept around for a while. That's where storage comes in.
Storage is the term used to indicate that we will be saving data for a period of
time. We store for many reasons: for future reference; to prevent full loss of
data; because we forget to purge. But, storage is vital. There are several
mediums on which we can keep output and processed data: a hard disk, a USB
drive, a CD.
Feedback is where the output from a system is fed back into the system in
order to influence the input. For example, when you try to withdraw too much
money from your account at an ATM a warning on the screen will advise you
that it isn’t possible and will suggest that you try to withdraw a smaller
amount. This is a type of feedback because it is trying to influence your input.

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Fig 1.1: Diagrammatic Representation: Information System
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.
Accounting Information System
By combining the two concepts Accounting and Information Systems together,
can be expressed as, “An Accounting Information System (AIS) is a structure
that a business uses to collect, store, manage, process, retrieve and report its
financial data so that it can be used by accountants, consultants, business
analysts, managers, chief financial officers (CFOs), auditors and regulatory and
tax agencies.
In particular, specially trained accountants work with AIS to ensure the highest
level of accuracy in a company's financial transactions and recordkeeping and
to make financial data easily available to those who legitimately need access to
it, all while keeping data intact and secure. This article will describe the
primary components of an AIS and some of its real-life applications.”
According to A Statement of Basic Accounting Theory (ASOBAT) and Generally
Accepted Accounting Principles (GAAP), accounting system should provide
information to assist management in planning and decision making along with
there are many responsibilities are to be maintained to make it successful.
Three main responsibilities of Accounting Information System are :

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 Receiving and keeping data, for later access:
To collect and store data about the organization’s business activities and
capture data about the transaction on source documents with effectivity and
efficiently. Later, recording of transactional data in journals to ledgers under
various accounts is required which can present a chronological order of
transactional events.
 Converting data into information for decision making:
Providing management with information which will be useful for decision
making like planning, implementation and monitoring all the accounting data
for the betterment or the future aspects of an organisation in terms of
financial stability. In the manual systems, this information is provided in the
form of reports that fall into two main categories:
o Financial Statements
o Managerial Reports
 Establishing the appropriate internal controls:
It is to ensure that the information produced by the accounting system is
reliable or not, if not then corrections required for the smooth accounting
system to prevent accounting errors like errors of commission: a transaction
that is calculated incorrectly or errors of omission: a transaction that is not
recorded, so that the business activities are performed efficiently and in
accordance with management’s objectives and safeguard and proper
utilization of all the organizational assets.
AIS – The MIS Subsystem
Accounting information systems are subsystems of the management
information system(MIS). MIS can be defined as a set of organized procedures
that provides information to support decision making and control in the
organization.
Decision-Making activities

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There are three basic levels of managerial activities:
 Strategic planning – these activities are primary concern of a top
management (e.g. identification of major markets and product lines).
 Management control – these activities are primarily concern of middle
management. Their aim is to operate their segments efficiently while
achieving the objectives identified by top management.
 Operational control – these activities are implemented by department
heads and supervisors, the lowest-level managers in an organization.
Their aim is to achieve those specific tasks assigned to them by middle
management.
Main accounting information systems as components of MIS
 Transaction processing system – The most structured component of the
MIS. It provides information used by clerical and managerial personnel
at the operational level.
 Budgeting system – It allows top management to communicate
corporate objectives to all managers in the organization. This system
provides top-down information flows, utilizes both internal and external
data, is predictive in nature and involves estimates that are frequently
imprecise. It is used in semi-structured decision processes involving
management control activities.
 Responsibility Reporting System – It summarizes historical data on a
periodic basis and provides bottom-up information flows. It is a example
of highly structured information system that is useful for management
control.
In order to explain how accounting information system could achieve the
mentioned responsibilities, it is needed to classify organizations’ activities into
five main cycles which are the subsystems of AIS:
 Expenditure cycle – It consists of activities that involve the buying and

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paying for goods and services used by the organization for cost
allocation and appropriation.
 Production cycle – It includes activities which convert raw materials and
labours to the finished products.
 Human resources cycle – which consists of activities that are involved in
employing and paying staff salaries.
 Revenue cycle – It includes sales of goods or services or receiving the
cash.
 Financing cycle – It includes activity that provides the funds needed for
operations.
Some examples of AIS subsystems based on the five main cycles are:
General Ledger & Reporting System
The General ledger is a subsystem of the AIS. It accumulates financial
transaction data, classifies the data by general ledger accounts, records the
data in those accounts and serves as a basis for financial reporting and
managerial reporting subsystems. The general ledger serves as the hub from
which general purpose and external financial reports are prepared. The
external financial reports must conform to GAAP and maybe prepared using
the general ledger.

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Fig 1.2: Diagrammatic Representation: AIS subsystems
Merchandising AIS Subsystem
The revenue cycle in a merchandising firm processes millions of bits of data
every year related to sales order processing [(i.e. preparing invoices, granting
credit, shipping products or rendering services), billing customers, and
recording transactions in the accounts (i.e. accounts receivables, inventory,
expense and sales)]. This cycle also processes millions of transactions related
to cash receipts processing (i.e. collecting cash, depositing cash in the bank,
and recording these transactions in the appropriate accounts, such as accounts
receivable and cash). The Expenditure cycle on the other hand processes
millions of transactions every year related to purchase/accounts payable
systems, cash disbursements systems and payrollsystems whilethe Production
cycle processes transactions related to the production system and cost
accounting system. No Planning, Control, Investment, or Production Cycles are
reflected here.

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Fig 1.3: Diagrammatic Representation: Merchandising AIS Subsystem
The Operational System of a Manufacturing Firm
THE ACCOUNTING FUNCTION
Accounting manages the financial information in the system with resources
available in the firm or how it is utilized and also for the end-users. In this
regard, it plays two important roles in transaction processing. First, accounting
captures and records the financial effects of the economic events that
constitute the firm’s transactions. These include events such as the movement
of raw materials from the warehouse into production, shipments of the
finished products to customers, cash flows into the firm and deposits in the
bank, the acquisition of inventory, and the discharge of financial obligations.
Second, accounting distributes transaction information to operations
personnel to coordinate many of their key tasks. The following accounting
functions contribute directly to business operations: inventory control, cost
accounting, payroll, accounts payable, accounts receivable, billing, fixed asset
accounting, and the general ledger.

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The value of information to a user is determined by its reliability. We saw
earlier that the purpose of information is to lead the user to a desired action.
For this to happen, information must possess certain attributes—relevance,
accuracy, completeness, summarization, and timeliness. When these attributes
are consistently present, information has reliability and provides value to the
user. Unreliable information has no value. At best, it is a waste of resources; at
worst, it can lead to dysfunctional decisions. Consider the following example:
A marketing manager signed a contract with a customer to supply a large
quantity of product by a certain deadline. He made this decision based on
information about finished goods inventory levels. However, because of faulty
record keeping, the information was incorrect. The actual inventory levels of
the product were insufficient to meet the order, and the necessary quantities
could not be manufactured by the deadline. Failure to comply with the terms of
the contract resulted in litigation.
This poor sales decision was a result of flawed information. Effective decisions
require information that has a high degree of reliability.
Information reliability rests heavily on the concept of accounting
independence. Simply stated, accounting activities must be separate and
independent of the functional areas that manage and maintain custody of
physical resources. For example, accounting monitors and records the
movement of raw materials into production and the sale of finished goods to
customers. Accounting authorizes purchases of raw materials and the
disbursement of cash payments to vendors and employees. Accounting
supports these functions with information but does not actively participate in
the physical activities.

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Fig 1.4: Diagrammatic Representation: The Operational System of a
Manufacturing Firm
Production Cycle
The Production Cycle is a recurring set of business activities and related data
processing operations associated with the manufacture of products.
Information flows to the production cycle from other cycles, e.g.:
 Revenue cycle provides information on customer orders and sales
forecasts for use in planning production and inventory levels.
 Expenditure/Purchasing cycle provides information about raw materials
acquisitions and overhead costs.
 Human resources/payroll cycle provides information about labour costs
and availability

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Information also flows from the expenditure cycle:
 Revenue cycle receives information from the production cycle about
finished goods available for sale.
 Expenditure cycle receives information about raw materials needs.
 Human resources/payroll cycle receives information about labour needs.
 General ledger and reporting system receives information about cost of
goods manufactured.
Fig 1.5: Diagrammatic Representation: Flow of Production Cycle
Fig 1.6: Diagrammatic Representation:Detailed Flowof Production Cycle

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Objectives and Users of AIS
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:
 To support the stewardship function of management.
Stewardship refers to management’s responsibility to properly manage the
resources of the firm. The information system provides information about
resource utilization to external users via traditional financial statements and
other mandated reports. Internally, management receives stewardship
information from various responsibility reports.
 To support management decision making.
The information system supplies managers with the information they need to
carry out their decision-making responsibilities with the help and support of
Trend Analysis, availability and acquiring of quantitative and qualitative data,
and find out non-transactional sources for management decision making.
 To support the firm’s day-to-day operations.
The information systemprovides information to operations personnel to assist
them in the efficient and effective discharge of their daily tasks through
transaction processing in the AIS.
Resources Required for an AIS
An accounting information system that combines traditional accounting
practices such as the Generally Accepted Accounting Principles (GAAP) with
the available modern information technology resources. Seven elements
compose the typical accounting information system:
 People - the system users.
 Processor(s): Manual or Computerized
 Procedure and Instructions - Methods for retrieving and processing
data.

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 Database - Information pertinent to the organization's business
practices.
 Software - computer programs used to process data.
 Information Technology Infrastructure - Hardware used to operate the
system i.e. input-output devices.
 Internal Controls - Security measures to protect sensitive data.
Rolesof Accountants with Respect to
AIS
• Financial accountants prepare financial information for external
decision-making in accordance with GAAP
• Managerial accountants prepare financial information for internal
decision-making
• Auditors - evaluate controls and attest to the fairness of the financial
statements.
• Accounting managers - control all accounting activities of a firm.
• Tax specialists - develop information that reflects tax obligations of the
firm.
• Consultants - devise specifications for the AIS.
Ethical Standards for Consulting
 Professional competence
 Exercise due professional care
 Plan and supervise all work
 Obtain relevant data to support reasonable recommendations
 Maintain integrity and objectivity
 Understand and respect the responsibilitiesof all parties
 Disclose any conflicts of interest

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Reasons for Studying Accounting
Information Systems
Accountants provide the information necessary to determine and evaluate the
long term and short term financial stability of companies, organization or
individuals. Accountants track expenses, provide detailed insight about the
expenses and future paths, as well as prepare, analyse and verify financial
documents. They look for ways to be more financially efficient, keep public
records and make sure taxes are paid properly.
Accounting information systems provides businesses with the ability to record
all types of financial information for future use. In addition, these systems are
huge time-savers and make the accounting processes and procedures easily
repeatable. Because of that, these systems save companies money because
the number of people needed to complete accounting processes is reduced.
Also, the risk of human error is drastically reduced because the computer
systems manage the accounting processes, and documents are automatically
created by the systems. It is imperative that businesses keep accurate books,
and accounting information systems make this requirement much easier to
meet.
Reasons
Accounting information systems provides businesses with the ability to record
all types of financial information for future use. In addition, these systems are
huge time-savers and make the accounting processes and procedures easily
repeatable. Because of that, these systems save companies money because
the number of people needed to complete accounting processes is reduced.
Also, the risk of human error is drastically reduced because the computer
systems manage the accounting processes, and documents are automatically
created by the systems. It is imperative that businesses keep accurate books,
and accounting information systems make this requirement much easier to
meet.
The accounting information systems profession is growing rapidly with the
advent of businesses computerizing their accounting processes. As a result,

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businesses are seeking professionals with not only an information systems
background, but also people who understand accounting concepts like system
and managerial accountants and auditors, system analysts and industrial
engineers. Although students pursuing an accounting information systems
degree are faced with pretty rigorous coursework, pursuing this line of study
will reap many rewards because the career outlook for this profession is
excellent in terms of job growth and financial rewards.
Professional certifications are also increasing like Certified Computing
Professional, Certified Information Systems Auditor, Certified Managerial
Accountant, Certified Fraud Examiner, etc.