CHAPTER 29

ACCOUNTING INFORMATION SYSTEM

My Chapter talks about the following:
1.
2.
3.
4.
5.

Definition of accounting information system

Explanation of the objective of AIS
Essential elements and characteristics of an effective AIS
Principles in designing an AIS
Comparison of the accounting cycle in a computerized system with manual
system
6. Difference of computerized data processing and manual processing
7. Common business applications of computers
WHAT IS AN AIS?
The book defines it as an orderly arrangement of procedures, personnel, records,
equipment and devices utilized for a logical and orderly gathering, processing and
reporting of financial and other information essential to the efficient conduct and
evaluation of the activities of a business enterprise.
Through this definition we can say that AIS consists of:
o
o
o
o
o

People - who use the system

Procedures which are ways to collect, stored, retrieved and processed data
Data all the information that goes into an AIS
Software computer programs used for processing data
Information technology all the hardware used to operate the AIS

AIS perform in an organization to collect and stores data about activities and
transactions, to process data into information that is useful for making decisions and to
provide adequate controls to safeguard the organizations assets. Utilized for a logical &
orderly gathering, processing, & reporting of financial & other information.
Role of Consultants
System consultant for purchasing of computers or choosing programs.
Management consultant may be asked to evaluate efficiency and effectiveness of AIS
Information system auditors for analyzing risks associated with computerized
information systems
Overall, Consultant who works with accounting information systems might be called
upon to assess the inefficiencies in a company's system and make recommendations
for improvement. Because the consultant is not involved in the day-to-day use of the
system, he or she can provide a fresh perspective on the system's strengths and
weaknesses.

Objective of an Accounting information system

To collect, process and provide financial information needed by management and other
interested parties conducting and evaluating the business activities. These information
should be accurate, timely and prepared at the lowest cost possible.
Essential Elements of an Accounting Information System
1. Procedures
2. Statement of accounting policies and standards In order to protect information,
businesses need to follow implemented rules and controls to protect information
and systems that store and process this information.
3. Records and reports these are necessary for gathering, processing, restoring
and transmitting all information needed.
4. Bookkeeping system these are software systems that are programmed with a
set of rules that are specifically for recording financial information and various
financial transactions that occur in business.
5. Personnel
6. Equipment and devices -these are the hardware used in the system.
*others are already discussed above
These elements are essential meaning they are absolutely necessary! The elements
work together to provide reliable information effectively and efficiently.
Characteristics of an Effective Accounting Information system
Particular goals of an AIS:
1.Properly identify & record all valid transactions.
2.Describe transactions on timely basis & in enough detail for financial reporting.
3.Support transaction recording in the proper period.
4.Measure transaction value to support proper reporting in the f/s.
5. Permit proper presentation and disclosure in the f/s.
6. Assist management in planning, controlling and decision-making
To achieve foregoing goals, AIS must have ff. characteristics:
1. Compatibility to the companys organization
Of course, the system that will be used should be compatible with the business
firms organizational structure and policies.
2. Provision of necessary reports

The system should be able to provide timely, pertinent (relevant), accurate and
effective reports.
3. Provision for controls
The system should provide adequate (sufficient) controls. This will ensure the
reliability and accuracy of financial data, safeguard assets and minimize errors
and fraud.
4. Adequacy of provision for audit trail
The system should be designed to facilitate the tracing of data processing steps
from the financial statements and reports to the source document and vice versa.
Meaning, the system will make it easier for the users to trace data or other
information needed.
5. Presence of qualified and competent personnel
Personnels capabilities and limitation should be considered in a system. Since,
they are directly involved and responsible in accounting work.
6. Simplicity, flexibility, and favorable cost/benefit relationship
Simplicity will help the users to easily understand the system but regardless of its
simplicity, it should still be workable. Flexibility of the system will make it possible
to permit changes and modifications. System should be prepared at the lowest
cost possible. Also, cost should not exceed the benefit.
Principles of Accounting Information Systems Design
A. Design of accounting reports
Accounting reports are compilations of financial information that are derived from
the accounting records of a business. These reports are presented to
management to be used in planning and controlling operations. Also, for decision
making and implementation. Again, accounting reports should be relevant,
complete, concise, accurate, timely and presented at the least possible cost.
Accounting reports provide information that enable the management to:
- Evaluate operating performance and position
- Pinpoint the problems, deficiencies, inefficiencies and opportunities
- Evaluate alternative courses of action
B. Design of Procedures
Procedures indicate what work is to be done, who shall do it and when should be
done. Procedures should:
- Be consistent with company policies
- Consider the companys organizational structure
- Accomplish their objective efficiently and economically
- Provide necessary management and internal control requirements
- Be interrelated with other company procedures
- Consider the capabilities and limitations of the personnel
- Be flexible to accommodate normal variations in the workload

C. Classification and Coding of Accounts

Chart of ledger accounts is used to classify and summarize the mass of detailed
transactions in a concise form. In a chart of accounts the following should be
observed:
- The number of accounts in the chart should be adequate. Meaning there is
enough information needed.
- An account should contain only one kind of data. Putting different kinds of
data in a one account will make the account messy and unorganized.
Therefore, will make it harder for users to understand.
- Nature and purpose should be clearly indicated
- Accounts should be arranged; Legal requirements, control of operation as
well as establishing accountabilities should be considered.
D. Design of Ledgers
Ledger primary function: classify & summarize transactions into concise & useful
form suitable for financial statements/reports.
*observe principles in assigning charts of accounts (see previous discussion)
E. Design of Journal
Journals: show transaction information in one place, chronological transaction
records, facilitate posting to ledger
Design principles:
1.Special journals used for repetitive transactions of same class/nature
2.General journal used for transactions other than #1
3. Frequently specific column headings should be written in advance
4. Sundry accounts should be provided.
*The word sundry is synonymous with the word miscellaneous. Therefore,
sundry accounts generally list all revenue streams that do not fit into other
revenue categories
5.Facilitate economical and efficient recording of transaction
F. Design of Forms
Business forms: historical record of completed transactions, means of
transmitting info-fix responsibility for performing transaction processing stages
(initiation, verification, approval, etc.)
Forms should:
- properly identified
- serially numbered if necessary for accountability
- arranged (data)
- facilitated (recording of data)
- Provide necessary signatures
- Considered internal control requirements
Comparison of the accounting cycle in a computerized system with manual
system

To summarize the explanation and information in the book we could see that;
Manual
System

Computerized
System

Analyze source
documents

Manual

Manual

Record
transactions in
journal

Manual

Manual data
entry includes
manual electronic
coding

Post to Ledger
accounts

Manual

Automatic

Prepare
Unadjusted Trial
Balance

Manual

Automatic

Journalize
adjusting entries

Manual

Manual

Post adjusting
entries

Manual

Automatic

Prepare adjusted
Trial Balance

Manual

Automatic

Journalize closing
entries

Manual

Automatic

Post closing
entries

Manual

Automatic

10

Prepare postclosing Trial

Balance

Manual

Automatic

11

Prepare financial
statements

Manual

Automatic

Steps In
Accounting Cycle
1

It is apparent that the processes in the accounting cycle for both systems are
basically the same. Some of the processes in the computerized system are
automated. Some of the time-consuming processes are eliminated in the
computerized system. Furthermore, a computerized accounting system is preprogrammed and some defaults may also be set to eliminate human errors. On the
computerized system, any transactions or data is automatically updated and reports
are readily available at any time. Once any data is entered, you may at a few
mouse-clicks or by pressing a few keys, retrieve (or generate) reports to view the
results of your data. Any of the available standard reports as well as customized or
user reports can be retrieved (or generated) at any time to check the accuracy of the
data entered. These reports can be used for analyses and interpretation to make
decisions regarding your business financial performance and position.

Difference of computerized data processing (EDP) and manual processing

Point of difference:

1. Transaction (audit) trail

Some EDP are designed so that a complete transaction trail that is useful for
audit purposes might exist for only a short period of time or only in computer
readable form. Where a complex application system performs a large number of
processing steps, there may not be a complete trail. Accordingly, errors
embedded in an application's program logic may be difficult to detect on a timely
basis by manual (user) procedures.
2. Uniform processing
Computer processing uniformly processes like transactions with the same
processing instructions. Thus, the clerical errors ordinarily associated with
manual processing are virtually eliminated. Conversely, programming errors (or
other systematic errors in hardware or software) will ordinarily result in all
transactions being processed incorrectly.
3. Segregation of functions
Many control procedures that would ordinarily be performed by separate
individuals in manual systems may be concentrated in EDP. Thus, an individual
who has access to computer programs, processing or data may be in a position
to perform incompatible functions.
4. Visibility of information
The potential for human error in the development, maintenance and execution of
EDP may be greater than in manual systems, partially because of the level of
detail inherent in these activities.
5. Unauthorized access
the potential for individuals to gain unauthorized access to data or to alter data
without visible evidence may be greater in EDP than in manual systems.
6. Transaction initiation/execution by computer
EDP may include the capability to initiate or cause the execution of certain types
of transactions, automatically. The authorization of these transactions or
procedures may not be documented in the same way as those in a manual
system, and management's authorization of these transactions may be implicit in
its acceptance of the design of the EDP and subsequent modification.
7. System changes
System changes are often more difficult to implement and control in EDP than in
manual systems.
8. Potential for increased management supervision
EDP can offer management a variety of analytical tools that may be used to
review and supervise the operations of the entity. The availability of these

additional controls, if used, may serve to enhance the entire internal control
structure.
9. Dependence of controls on computer processing controls
Computer processing may produce reports and other output that are used in
performing manual control procedures. The effectiveness of these manual control
procedures can be dependent on the effectiveness of controls over the
completeness and accuracy of computer processing. In turn, the effectiveness
and consistent operation of transaction processing controls in computer
applications is often dependent on the effectiveness of general EDP controls.
Common business applications of computers
Computers are used as an audit tool. The most common application of computer,
however, is to process large masses of accounting data relating to routine repetitive
operations such as accounts receivables, accounts payable, inventory, payroll and
general ledger.
TYPE OF BUSINESS APPLICATION SYSTEMS:
a.
b.
c.
d.
e.
f.

Management information system (already discussed in chapter 28)

Transaction processing system
Office automation system
Decision support system
Spreadsheet programs
To be discussed by the next reporter
Artificial Intelligence

TRANSACTION PROCESSING SYSTEM

Computerized accounting. systems: vary in complexity & extent of computer
use:
1. Batch mode vs. real time
Real-time processing is the processing and output of data as soon as input is
received. In contrast, batch processing occurs after all input has been received, with
the processing and output completed at a specified time.
2. Simple processing vs. complex & integrated
Simple processing is where all documents are manually prepared and processing
involves mainly of recording or posting of transactions and printing reports. Whereby
complex & integrated are computer processing which is usually automated and data
are being entered.

A transaction processing system (TPS) is an information processing system for

business transactions involving the collection, modification and retrieval of all

transaction data. Characteristics of a TPS include performance, reliability and

consistency.
A transaction is an agreement between two entities to exchange goods or services OR
any other event that can be measured in economic terms by an organization.
EXAMPLES: Sell goods to customers; depreciate equipment.
The transaction cycle is a process that begins with capturing data about a transaction
and ends with an information output, such as a set of financial statements. Many
business activities are paired in give-get exchanges. The basic exchanges can be
grouped into five major transaction cycles.
1. The Revenue cycle: involves activities of selling goods or services and collecting
payment for those sales.
2. The Procurement cycle: involves activities of buying and paying for goods or services
used by the organization.
3. The production cycle: involves activities converting raw materials and labor into
finished goods.
4. The personnel/payroll cycle: involves activities of hiring and paying employees.
5. The finance cycle

To be discussed by the next reporter

Thousands of transactions can occur within any of these cycles, but there are relatively
few types of transactions in a cycle. Every transaction cycle relates to other cycles and
interfaces with the general ledger and reporting system, which generates information for
management and external parties.
The revenue cycle gets finished goods from the production cycle; provides funds to
the finance cycle; and provides data to the general ledger and reporting system.
The procurement cycle gets funds from the finance cycle; provides raw materials to
the production cycle; and provides data to the general ledger and reporting system.
The production cycle gets raw materials from the procurement cycle; gets labor
from the personnel/payroll cycle; provides finished goods to the revenue cycle; and
provides data to the general ledger and reporting system.
The personnel/payroll cycle gets funds from the finance cycle; provides labor to the
production cycle; and provides data to the general ledger and reporting system.
The finance cycle gets funds from the revenue cycle; provides funds to the
procurement and personnel/payroll cycles; and provides data to the general ledger
and reporting system.
The general ledger and reporting system gets data from all of the cycles and provides
information for internal and external users.

CHAPTER 29

(for pages 644-683)

ACCOUNTING
INFORMATION
SYSTEM
ACCOUNTING 15

Written report by:

Samonte, Jemimah G.