Understanding Accounting Information Systems: Structure and Subsystems | Study notes Advanced Accounting

Accounting Information System- A STRUCTURE

THAT A BUSINESS USES TO COLLECT, STORE,

MANAGE, PROCESS, RETRIEVE, AND REPORT ITS

FINANCIAL DATA SO IT CAN BE USED BY

ACCOUNTANTS, CONSULTANTS, BUSINESS

ANALYSTS, MANAGERS, CHIEF FINANCIAL

OFFICERS (CFOS), AUDITORS, REGULATORS,

AND TAX AGENCIES.

AIS People- ACCOUNTANTS, CONSULTANTS,

BUSINESS ANALYSTS, MANAGERS, CHIEF

FINANCIAL OFFICERS (CFOS), AUDITORS,

REGULATORS, AND TAX AGENCIES

Components- • PEOPLE • PROCEDURES AND

INSTRUCTIONS • DATA • SOFTWARE • IT

INFRASTRUCTURE • INTERNAL CONTROL

AIS People- THE PEOPLE IN AN AIS ARE THE

SYSTEM USERS. PROFESSIONALS WHO MAY

NEED TO USE AN ORGANIZATION'S AIS

INCLUDE:  ACCOUNTANTS  CONSULTANTS 

BUSINESS ANALYSTS  MANAGERS  CHIEF

FINANCIAL OFFICERS  AUDITOR

Procedures and Instructions-  THE METHODS

IT USES FOR COLLECTING, STORING,

RETRIEVING, AND PROCESSING DATA.  THESE

METHODS ARE BOTH MANUAL AND

AUTOMATED.

AIS Data- AN AIS MUST HAVE A DATABASE

STRUCTURE TO STORE INFORMATION, SUCH AS

STRUCTURED QUERY LANGUAGE (SQL), WHICH

IS A COMPUTER LANGUAGE COMMONLY USED

FOR DATABASES.

THE TYPE OF DATA INCLUDED IN AN AIS

DEPENDS ON THE NATURE OF THE BUSINESS,

BUT IT MAY CONSIST OF THE FOLLOWING:

SALES ORDERS CUSTOMER BILLING

STATEMENTS SALES ANALYSIS REPORTS

PURCHASE REQUISITIONS VENDOR INVOICES

CHECK REGISTERS GENERAL LEDGER

INVENTORY DATA PAYROLL INFORMATION

TIMEKEEPING TAX INFORMATION

AIS Software- **THE SOFTWARE COMPONENT

OF AN AIS IS THE COMPUTER PROGRAMS USED

TO STORE, RETRIEVE, PROCESS, AND ANALYZE

THE COMPANY'S FINANCIAL DATA. BEFORE

THERE WERE COMPUTERS, AN AIS WAS A

MANUAL, PAPER-BASED SYSTEM, BUT TODAY,

MOST COMPANIES ARE USING COMPUTER

SOFTWARE AS THE BASIS OF THE AIS. **

QUALITY, RELIABILITY, AND SECURITY ARE KEY

COMPONENTS OF EFFECTIVE AIS SOFTWARE

IT Infrastructure- THE HARDWARE USED TO

OPERATE THE ACCOUNTING INFORMATION

SYSTEM. MOST OF THESE HARDWARE ITEMS A

BUSINESS WOULD NEED TO HAVE ANYWAY

AND CAN INCLUDE THE FOLLOWING: 

COMPUTERS  MOBILE DEVICES  SERVERS 

PRINTERS  SURGE PROTECTORS  ROUTERS 

STORAGE MEDIA  A BACK-UP POWER SUPPLY

Internal Controls- ARE THE SECURITY MEASURES

IT CONTAINS TO PROTECT SENSITIVE DATA

● CONTROL ACTIVITIES ARE ACTIONS

SUPPORTED BY POLICIES AND PROCEDURES TO

MANAGE RISK.

● TYPES: PREVENTATIVE AND DEFECTIVE

AN AIS CONTAINS CONFIDENTIAL

INFORMATION BELONGING NOT JUST TO THE

COMPANY BUT ALSO TO ITS EMPLOYEES AND

CUSTOMERS. THIS DATA MAY INCLUDE: 

SOCIAL SECURITY NUMBERS  SALARY AND

PERSONNEL INFORMATION  CREDIT CARD

NUMBERS  CUSTOMER INFORMATION 

COMPANY FINANCIAL DATA  FINANCIAL

INFORMATION OF SUPPLIERS AND VENDORS

** A WELL-DESIGNED AIS ALLOWS A BUSINESS

TO RUN SMOOTHLY ON A DAY-TO-DAY BASIS

** A POORLY DESIGNED AIS CAN HINDER ITS

OPERATION.

** USE FOR AN AIS IS THAT, WHEN A BUSINESS

IS IN TROUBLE, THE DATA IN ITS AIS CAN BE

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Accounting Information System- A STRUCTURE THAT A BUSINESS USES TO COLLECT, STORE, MANAGE, PROCESS, RETRIEVE, AND REPORT ITS FINANCIAL DATA SO IT CAN BE USED BY ACCOUNTANTS, CONSULTANTS, BUSINESS ANALYSTS, MANAGERS, CHIEF FINANCIAL OFFICERS (CFOS), AUDITORS, REGULATORS, AND TAX AGENCIES. AIS People- ACCOUNTANTS, CONSULTANTS, BUSINESS ANALYSTS, MANAGERS, CHIEF FINANCIAL OFFICERS (CFOS), AUDITORS, REGULATORS, AND TAX AGENCIES Components- • PEOPLE • PROCEDURES AND INSTRUCTIONS • DATA • SOFTWARE • IT INFRASTRUCTURE • INTERNAL CONTROL AIS People- THE PEOPLE IN AN AIS ARE THE SYSTEM USERS. PROFESSIONALS WHO MAY NEED TO USE AN ORGANIZATION'S AIS INCLUDE:  ACCOUNTANTS  CONSULTANTS  BUSINESS ANALYSTS  MANAGERS  CHIEF FINANCIAL OFFICERS  AUDITOR Procedures and Instructions-  THE METHODS IT USES FOR COLLECTING, STORING, RETRIEVING, AND PROCESSING DATA.  THESE METHODS ARE BOTH MANUAL AND AUTOMATED. AIS Data- AN AIS MUST HAVE A DATABASE STRUCTURE TO STORE INFORMATION, SUCH AS STRUCTURED QUERY LANGUAGE (SQL), WHICH IS A COMPUTER LANGUAGE COMMONLY USED FOR DATABASES. THE TYPE OF DATA INCLUDED IN AN AIS DEPENDS ON THE NATURE OF THE BUSINESS, BUT IT MAY CONSIST OF THE FOLLOWING: SALES ORDERS CUSTOMER BILLING STATEMENTS SALES ANALYSIS REPORTS PURCHASE REQUISITIONS VENDOR INVOICES CHECK REGISTERS GENERAL LEDGER INVENTORY DATA PAYROLL INFORMATION TIMEKEEPING TAX INFORMATION AIS Software- **THE SOFTWARE COMPONENT OF AN AIS IS THE COMPUTER PROGRAMS USED TO STORE, RETRIEVE, PROCESS, AND ANALYZE THE COMPANY'S FINANCIAL DATA. BEFORE THERE WERE COMPUTERS, AN AIS WAS A MANUAL, PAPER-BASED SYSTEM, BUT TODAY, MOST COMPANIES ARE USING COMPUTER SOFTWARE AS THE BASIS OF THE AIS. ** QUALITY, RELIABILITY, AND SECURITY ARE KEY COMPONENTS OF EFFECTIVE AIS SOFTWARE IT Infrastructure- THE HARDWARE USED TO OPERATE THE ACCOUNTING INFORMATION SYSTEM. MOST OF THESE HARDWARE ITEMS A BUSINESS WOULD NEED TO HAVE ANYWAY AND CAN INCLUDE THE FOLLOWING:  COMPUTERS  MOBILE DEVICES  SERVERS  PRINTERS  SURGE PROTECTORS  ROUTERS  STORAGE MEDIA  A BACK-UP POWER SUPPLY Internal Controls- ARE THE SECURITY MEASURES IT CONTAINS TO PROTECT SENSITIVE DATA ● CONTROL ACTIVITIES ARE ACTIONS SUPPORTED BY POLICIES AND PROCEDURES TO MANAGE RISK. ● TYPES: PREVENTATIVE AND DEFECTIVE AN AIS CONTAINS CONFIDENTIAL INFORMATION BELONGING NOT JUST TO THE COMPANY BUT ALSO TO ITS EMPLOYEES AND CUSTOMERS. THIS DATA MAY INCLUDE:  SOCIAL SECURITY NUMBERS  SALARY AND PERSONNEL INFORMATION  CREDIT CARD NUMBERS  CUSTOMER INFORMATION  COMPANY FINANCIAL DATA  FINANCIAL INFORMATION OF SUPPLIERS AND VENDORS ** A WELL-DESIGNED AIS ALLOWS A BUSINESS TO RUN SMOOTHLY ON A DAY-TO-DAY BASIS ** A POORLY DESIGNED AIS CAN HINDER ITS OPERATION. ** USE FOR AN AIS IS THAT, WHEN A BUSINESS IS IN TROUBLE, THE DATA IN ITS AIS CAN BE

USED TO UNCOVER THE STORY OF WHAT WENT

WRONG.

WORLDCOM IN 2002, WORLDCOM'S INTERNAL

AUDITORS EUGENE MORSE AND CYNTHIA

COOPER USED THE COMPANY'S AIS TO

UNCOVER NEARLY $4 BILLION IN FRAUDULENT

EXPENSE ALLOCATIONS AND OTHER

ACCOUNTING ENTRIES.

Elements of a System Regardless of their origin, all systems possess some common elements. To specify: A system is a group of two or more interrelated components or subsystems that serve a common purpose. Let’s analyze the general definition to gain an understanding of how it applies to businesses and information systems.

MULTIPLE COMPONENTS A system must contain more than one part. For example, a yo-yo carved from a single piece of wood and attached to a string is a system. Without the string, it is not a system.
RELATEDNESS A common purpose relates the multiple parts of the system. Although each part functions independently of the others, all parts serve a common objective. If a particular component does not contribute to the common goal, then it is not part of the system. For instance, a pair of ice skates and a volleyball net are both components; however, they lack a common purpose, and thus do not form a system.
SYSTEM VERSUS SUBSYSTEM The distinction between the terms system and subsystem is a matter of perspective. For our purposes, these terms are interchangeable. A system is called a subsystem when it is viewed in relation to the larger system of which it is a part. A subsystem is called a system when it is the focus of attention. Animals, plants, and other life forms are systems. They are also subsystems of the ecosystem in which they exist. From a different perspective, animals are systems composed of many smaller subsystems, such as the circulatory subsystem and the respiratory subsystem.
1. PURPOSE A system must serve at least one purpose, but it may serve several. Whether a system provides a measure of time, electrical power, or information, serving a purpose is its fundamental justification. When a system ceases to serve a purpose, it should be replaced.
2. SYSTEM DECOMPOSITION Decomposition is the process of dividing the system into smaller subsystem parts. This is a convenient way of representing, viewing, and understanding the relationships among subsystems. By decomposing a system, we can present the overall system as a hierarchy and view the relationships between subordinate and higher-level subsystems. Each subordinate subsystem performs one or more specific functions to help achieve the overall objective of the higher-level system.
3. SUBSYSTEM INTERDEPENDENCY A system’s ability to achieve its goal depends on the effective functioning and harmonious interaction of its subsystems. AN INFORMATION SYSTEMS FRAMEWORK The information system is the set of formal procedures by which data are collected, processed into information, and distributed to users.

The Management Information System Management often requires information that goes beyond the capability of AIS. As organizations grow in size and complexity, specialized functional areas emerge, requiring additional information for production planning and control, sales forecasting, inventory warehouse planning, market research, and so on. The management information system (MIS) processes nonfinancial transactions that are not normally processed by traditional AIS. A GENERAL MODEL FOR AIS This is a general model because it describes all information systems, regardless of their technological architecture. The elements of the general model are end users, data sources, data collection, data processing, database management, information generation, and feedback.

End Users End users fall into two general groups: external and internal. External users include creditors, stockholders, potential investors, regulatory agencies, tax authorities, suppliers, and customers. Institutional users such as banks, the SEC, and the Internal Revenue Service (IRS) receive information in the form of financial statements, tax returns, and other reports that the firm has a legal obligation to produce. Internal users include management at every level of the organization, as well as operations personnel. In contrast to external reporting, the organization has a great deal of latitude in the way it meets the needs of internal users. DATA VERSUS INFORMATION Data are facts, which may or may not be processed (edited, summarized, or refined) and have no direct effect on the user. By contrast, information causes the user to take an action that he or she otherwise could not, or would not, have taken. Information is often defined simply as processed data. This is an inadequate definition. Information is determined by the effect it has on the user, not by its physical form. Data Sources Data sources are financial transactions that enter the information system from both internal and external sources. External financial transactions are the most common source of data for most organizations. These are economic exchanges with other business entities and individuals outside the firm. Examples include the sale of goods and services, the purchase of inventory, the receipt of cash, and the disbursement of cash (including payroll). Internal financial transactions involve the exchange or movement of resources within the organization. Examples include the movement of raw materials into work-in- process (WIP), application of labor and overhead to WIP, the transfer of WIP into finished goods inventory, and the depreciation of plant and equipment. Data Collection Data collection is the first operational stage in the information system. The objective is to ensure that event data entering the system are valid, complete, and free from material errors. In many respects, this is the most important stage in the system. Data Processing Once collected, data usually require processing to produce information. Tasks in the data processing stage range from simple to complex. Examples include mathematical algorithms (such as linear programming models) used for production scheduling applications, statistical

techniques for sales forecasting, and posting and summarizing procedures used for accounting applications. Database Management The organization’s database is its physical repository for financial and nonfinancial data. We use the term database in the generic sense. It can be a filing cabinet or a computer disk. Regardless of the database’s physical form, we can represent its contents in a logical hierarchy. DATA ATTRIBUTE The data attribute is the most elemental piece of potentially useful data in the database. An attribute is a logical and relevant characteristic of an entity about which the firm captures data. The attributes are logical because they all relate sensibly to a common entity— accounts receivable (AR). Each attribute is also relevant because it contributes to the information content of the entire set. RECORD A record is a complete set of attributes for a single occurrence within an entity class. For example, a particular customer’s name, address, and account balance is one occurrence (or record) within the AR class. To find a particular record within the database, we must be able to identify it uniquely. Therefore, every record in the database must be unique in at least one attribute. This unique identifier attribute is the primary key. Because no natural attribute (such as customer name) can guarantee uniqueness, we typically assign artificial keys to records. FILES A file is a complete set of records of an identical class. For example, all the AR records of the organization constitute the AR file. Similarly, files are constructed for other classes of records such as inventory, accounts payable, and payroll. The organization’s database is the entire collection of such files. DATABASE MANAGEMENT TASKS Database management involves three fundamental tasks: storage, retrieval, and deletion. The storage task assigns keys to new records and stores them in their proper location in the database. Retrieval is the task of locating and extracting an existing record from the database for processing. Deletion is the task of permanently removing obsolete or redundant records from the database. Information Generation Information generation is the process of compiling, arranging, formatting, and presenting information to users. Information can be an operational document such as a sales order, a structured report, or a message on a computer screen. Regardless of physical form, useful information has the following characteristics: relevance, timeliness, accuracy, completeness, and summarization. RELEVANCE The contents of a report or document must serve a purpose. This could be to support a manager’s decision or a clerk’s task. We have established that only data relevant to a user’s action have information content. Therefore, the information system should present only relevant data in its reports. Reports containing irrelevancies waste resources and may be counterproductive to the user. TIMELINESS The age of information is a critical factor in determining its usefulness. Information must be no older than the time of the action it supports. For example, if a manager makes decisions daily to purchase inventory from a supplier based on

rather than develop in-house. Under this approach, the software vendor designs, implements, and maintains the system for its client. This is a popular option with health care and legal services organizations that have complex systems requirements but are not of sufficient magnitude to justify retaining an in- house systems development staff. Organizational Structure The structure of an organization reflects the distribution of responsibility, authority, and accountability throughout the organization. Firms achieve their overall objectives by establishing measurable financial goals for their operational units. BUSINESS SEGMENTS Business organizations consist of functional units or segments. Firms organize into segments to promote internal efficiencies through the specialization of labor and costeffective resource allocations. Managers within a segment can focus their attention on narrow areas of responsibility to achieve higher levels of operating efficiency. BUSINESS SEGMENTATION

Geographic Location. Many organizations have operations dispersed across the country and around the world. They do this to gain access to resources, markets, or lines of distribution.
Product Line. Companies that produce highly diversified products often organize around product lines, creating separate divisions for each.
Business Function. Functional segmentation divides the organization into areas of specialized responsibility based on tasks. FUNCTIONAL SEGMENTATION Segmentation by business function is the most common method of organizing. To illustrate it, we will assume a manufacturing firm that uses these resources: materials, labor, financial capital, and information. Materials Management The objective of materials management is to plan and control the materials inventory of the company. A materials management has three subfunctions: 1. Purchasing is responsible for ordering inventory from vendors when inventory levels fall to their reorder points. 2. Receiving is the task of accepting the inventory previously ordered by purchasing. Receiving activities include counting and checking the physical condition of these items. 3. Stores takes physical custody of the inventory received and releases these resources into the production process as needed. Production Production activities occur in the conversion cycle in which raw materials, labor, and plant assets are used to create finished products. The specific activities are determined by the nature of the products being manufactured. In general, they fall into two broad classes: (1) primary manufacturing activities and (2) production support activities. Primary manufacturing activities shape and assemble raw materials into finished products. Production Production planning involves scheduling the flow of materials, labor, and machinery to efficiently meet production needs.

Quality control monitors the manufacturing process at various points to ensure that the finished products meet the firm’s quality standards. Maintenance keeps the firm’s machinery and other manufacturing facilities in running order. The manufacturing process relies on its plant and equipment and cannot tolerate breakdowns during peak production periods. Marketing The marketplace needs to know about, and have access to, a firm’s products. The marketing function deals with the strategic problems of product promotion, advertising, and market research. On an operational level, marketing performs such daily activities as sales order entry. Distribution Distribution is the activity of getting the product to the customer after the sale. This is a critical step. Much can go wrong before the customer takes possession of the product. Excessive lags between the taking and filling of orders, incorrect shipments, or damaged merchandise can result in customer dissatisfaction and lost sales. Personnel Competent and reliable employees are a valuable resource to a business. The objective of the personnel function is to effectively manage this resource. A well-developed personnel function includes recruiting, training, continuing education, counseling, evaluating, labor relations, and compensation administration. Finance The finance function manages the financial resources of the firm through banking and treasury activities, portfolio management, credit evaluation, cash disbursements, and cash receipts. Because of the cyclical nature of business, many firms swing between positions of excess funds and cash deficits. In response to these cash flow patterns, financial planners seek lucrative investments in stocks and other assets and low-cost lines of credit from banks. THE ACCOUNTING FUNCTION The accounting function manages the financial information resource of the firm. In this regard, it plays two important roles in transaction processing. First, accounting captures and records the financial effects of 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, the accounting function distributes transaction information to operations personnel to coordinate many of their key tasks. Accounting activities that contribute directly to business operations include inventory control, cost accounting, payroll, accounts payable, accounts receivable, billing, fixed asset accounting, and the general ledger. The Value of Information 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. Accounting Independence Information reliability rests heavily on the concept of accounting independence. Simply stated, accounting activities must be separate and independent of the functional areas that

We should bear in mind that the disadvantages of DDP might also be described as the advantages of a centralized approach.

Mismanagement of organization-wide resources
Hardware and software incompatibility.
Redundant tasks
Consolidating incompatible activities
Hiring qualified professionals
Lack of standards ADVANTAGES OF DDP The most commonly cited advantages of DDP are related to cost savings, increased user satisfaction, and improved operational efficiency.
Cost reductions
Improved cost control responsibility
Improved user satisfaction
Backup THE MANUAL PROCESS MODEL The manual process model is the oldest and most traditional form of accounting systems. Manual systems constitute the physical events, resources, and personnel that characterize many business processes. This includes such tasks as order-taking, warehousing materials, manufacturing goods for sale, shipping goods to customers, and placing orders with vendors. Traditionally, this model also includes the physical task of record keeping. Often, manual record keeping is used to teach the principles of accounting to business students. However, this approach is simply a training aid. Manual records are never used in practice today. THE FLAT-FILE MODEL The flat-file approach is most often associated with so-called legacy systems. These are large mainframe systems that were implemented in the late 1960s through the 1980s. Organizations today still use these systems extensively. Eventually, modern database management systems will replace them, but in the meantime, accountants must continue to deal with legacy system technologies. The data redundancy demonstrated in this example contributes to three significant problems in the flat-file environment: data storage, data updating, and currency of information. These and other problems associated with flat files are discussed in the following sections. Data Storage An efficient information system captures and stores data only once and makes this single source available to all users who need it. In the flat-file environment, this is not possible. To meet the private data needs of users, organizations must incur the costs of both multiple collection and multiple storage procedures. Some commonly used data may be duplicated dozens, hundreds, or even thousands of times. Data Updating Organizations have a great deal of data stored in files that require periodic updating to reflect changes. For example, a change to a customer’s name or address must be reflected in the appropriate master files. When users keep separate files, all changes must be made separately for each user. This adds significantly to the task and the cost of data management. Currency of Information In contrast to the problem of performing multiple updates is the problem of failing to update all the user files affected by a change in

status. If update information is not properly disseminated, the change will not be reflected in some users’ data, resulting in decisions based on outdated information. Currency of Information In contrast to the problem of performing multiple updates is the problem of failing to update all the user files affected by a change in status. If update information is not properly disseminated, the change will not be reflected in some users’ data, resulting in decisions based on outdated information. Flat Files Limit Data Integration The flat-file approach is a single-view model. Files are structured, formatted, and arranged to suit the specific needs of the owner or primary user of the data. Such structuring, however, may exclude data attributes that are useful to other users, thus preventing successful integration of data across the organization. For example, because the accounting function is the primary user of accounting data, these data are often captured, formatted, and stored to accommodate financial reporting and generally accepted accounting principles. THE DATABASE MODEL An organization can overcome the problems associated with flat files by implementing the database model to data management. With the organization’s data in a central location, all users have access to the data they need to achieve their respective objectives. Access to the data resource is controlled by a database management system (DBMS). The DBMS is a special software system that is programmed to know which data elements each user is authorized to access. The user’s program sends requests for data to the DBMS, which validates and authorizes access to the database in accordance with the user’s level of authority. THE REA MODEL REA is an accounting framework for modeling an organization’s critical resources, events, and agents (REA) and the relationships between them. Once specified, both accounting and nonaccounting data about these phenomena can be identified, captured, and stored in a relational database. Resources Economic resources are the assets of the organization. They are defined as objects that are both scarce and under the control of the enterprise. This definition departs from the traditional model because it does not include AR. An account receivable is an artifact record used simply to store and transmit data. Events Economic events are phenomena that affect changes in resources. They can result from activities such as production, exchange, consumption, and distribution. Economic events are the critical information elements of the accounting system and should be captured in a highly detailed form to provide a rich database. Agents Economic agents are individuals and departments that participate in an economic event. They are parties both inside and outside the organization with discretionary power to use or dispose of economic resources. Examples of agents include sale clerks, production workers, shipping clerks, customers, and vendors. The REA model requires that accounting phenomena be characterized in a manner consistent with the development of multiple user views. ENTERPRISE RESOURCE PLANNING SYSTEMS

Understanding Accounting Information Systems: Structure and Subsystems, Study notes of Advanced Accounting

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