LESSON ONE

INTRODUCTION
ACCOUNTING INFORMATION SYSTEM

A systematic process of collecting, storing, and processing financial and accounting data. This
process is called an accounting information system (AIS). This system disseminates the company-
related information to respective stakeholders, which is extremely crucial for faster decision
making.

An accounting information system (AIS) is 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.

It is considered as one of the key responsibilities of an accountant, to work in-depth with AIS,
ensuring perfect accuracy in a company's financial transactions and record-keeping all while
keeping data intact and secure. This information should also be readily available and accessible to
users who need to refer them as and when required.

Benefits of accounting information system

Since an accounting information system provides a seamless flow of crucial and relevant data
across the organization, it has several benefits that help a business manage its operations even
better.

Better interdepartmental communication

A solid AIS paves way for the proper flow of information across various departments within the
organization. Let’s say the sales department has just uploaded the sales budget. This information
is vital for the inventory department for better inventory planning and stock management. Now
once the inventory is purchased based on the sales department’s inputs and analysis, this
information is shared with the accounts payable department whenever a new inventory is
purchased for an invoice to be raised. In a nutshell, an AIS ensures complete visibility of the
company’s transactions within various functions for better business planning and forecasting.

Data access controls

An AIS will allow users to define various security configurations based on the requirements. It is
obvious that not all departments need information about everything that is going on in the
organization, right? Well, that’s what AIS does. It ensures that only the relevant information is
disseminated to a specific user by providing controlled data access. With various levels of security
authorizations requiring approvals to access information, and AIS limits the information based on
the permissions given by the main authority.

Understanding Accounting Information Systems (AIS)

An accounting information system is a way of tracking all accounting and business activity for a
company. Accounting information systems generally consist of six primary components: people,
procedures and instructions, data, software, information technology infrastructure, and internal
controls. Below is a breakdown of each component in detail.

1. AIS People

The people in an AIS are the system users. An AIS helps the different departments within a
company work together. Professionals who may need to use an organization's AIS include:

 Accountants
 Consultants
 Business analysts
 Managers
 Chief financial officers
 Auditors
With a well-designed AIS, everyone within an organization can access the same system
and retrieve the same information. An AIS also simplifies the process of reporting
information to people outside of the organization, when necessary.

2. Procedures and Instructions

The procedure and instructions of an AIS are the methods it uses for collecting, storing, retrieving,
and processing data. These methods are both manual and automated. The data can come from both
internal sources (e.g., employees) and external sources (e.g., customers' online orders). Procedures
and instructions will be coded into the AIS software. However, the procedures and instructions
should also be "coded" into employees through documentation and training. The procedures and
instructions must be followed consistently in order to be effective.

3. 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. SQL allows the data that's in
the AIS to be manipulated and retrieved for reporting purposes. The AIS will also need various
input screens for the different types of system users and data entry, as well as different output
formats to meet the needs of different users and various types of information.

The data contained in an AIS is all of the financial information pertinent to the organization's
business practices. Any business data that impacts the company's finances should go into an AIS.

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

The data can be used to prepare accounting statements and financial reports, including accounts
receivable aging, depreciation or amortization schedules, a trial balance, and a profit and loss
statement. Having all of this data in one place—in the AIS—facilitates a business's record-keeping,
reporting, analysis, auditing, and decision-making activities. For the data to be useful, it must be
complete, accurate, and relevant.

On the other hand, examples of data that would not go into an AIS include memos, correspondence,
presentations, and manuals. These documents might have a tangential relationship to the
company's finances, but, excluding the standard footnotes, they are not really part of the company's
financial record-keeping.

4. 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. Managers rely on
the information it outputs to make decisions for the company, and they need high-quality
information to make sound decisions.
AIS software programs can be customized to meet the unique needs of different types of
businesses. If an existing program does not meet a company's needs, the software can also be
developed in-house with substantial input from end-users or can be developed by a third-party
company specifically for the organization. The system could even be outsourced to a specialized
company.

5. IT Infrastructure

Information technology infrastructure is just a fancy name for 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

In addition to cost, factors to consider in selecting hardware include speed, storage capability, and
whether it can be expanded and upgraded.

Perhaps most importantly, the hardware selected for an AIS must be compatible with the intended
software. Ideally, it would be not just compatible, but optimal—a clunky system will be much less
helpful than a speedy one. One way businesses can easily meet hardware and software
compatibility requirements is by purchasing a turnkey system that includes both the hardware and
the software that the business needs. Purchasing a turnkey system means, theoretically, that the
business will get an optimal combination of hardware and software for its AIS.
A good AIS should also include a plan for maintaining, servicing, replacing, and upgrading
components of the hardware system, as well as a plan for the disposal of broken and outdated
hardware, so that sensitive data is completely destroyed.

6. Internal Controls

The internal controls of an AIS are the security measures it contains to protect sensitive data. These
can be as simple as passwords or as complex as biometric identification. Biometric security
protocols might include storing human characteristics that don't change over time, such as
fingerprints, voice, and facial recognition.

An AIS must have internal controls to protect against unauthorized computer access and to limit
access to authorized users, which includes some users inside the company. It must also prevent
unauthorized file access by individuals who are allowed to access only select parts of the system.

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

All of the data in an AIS should be encrypted, and access to the system should be logged and
surveilled. System activity should be traceable as well.
An AIS also needs internal controls that protect it from computer viruses, hackers, and other
internal and external threats to network security. It must also be protected from natural disasters
and power surges that can cause data loss.

Software Development Process

A formal systems development process provides an environment that is conducive to successful

systems development. This includes:

(1) An information systems strategy that guides developers in building systems that are consistent
with the organization’s technical and operational goals,

(2) Standards that guide in the selection of hardware, software, and developing new systems,

(3) Policies and procedures that support the organization’s goals and objectives, and

(4) Project management that ensures projects are completed on time and within budget. Auditors
can assist organizations by reviewing the systems development process to ensure that developed
systems comply with the organization’s strategy and standards.

Software Development Phases

The systems development process can be broken down into four phases:

 Planning
 Development
 Implementation
 Maintenance

The planning phase sets the stage for the success of the development effort. If not done properly,
the budget and schedule may not be sufficient, the problem may not be adequately defined, the
final project may not solve the business problem, and the right people may not be involved. The
planning phase of systems development includes the following activities:

 Needs analysis: a study to determine whether a new system should be developed

 Current system review: a study of the current system to identify existing processes and
procedures that will continue in the new system
 Conceptual design: preparation of the proposed system flow and other information
illustrating how the new system will operate
 Equipment requirements: hardware configuration needed to process and use the new
systems (e.g., processing speed, storage space, and transmission media)
 Cost benefits analysis: detailed financial analysis of the cost to develop and operate the
new system, the savings or additional expense, and the return on investment
 Project team formation: identify people from programming, user departments, and support
departments to develop and implement the new system
 Project plan: an overall project plan with defined tasks and deliverables to monitor actual
results and ensure successful progress

Auditing can be involved in the planning process to develop an understanding of the proposed
system, make sure time is built into the schedule to adequately define controls, and verify that all
the right people are involved.

There is a definite correlation between a well-managed systems development process and a

successful system. The use of a proven system development methodology increases the probability
that the system’s internal controls will be effective and reliable. As discussed under the traditional
development approach, systems development includes the following phases:

 Analysis: Define what is required of the new system.

 Design: Define how to build the new system to satisfy the requirements.
 Construction: Build the new system using the design information.
  Testing: Verify that the completed system meets the users’ needs and functions without
fault.
 Implementation: Deliver the completed system to the end users; obtain satisfactory
feedback.
 Maintenance: Modify the system as needed to correct problems or meet changing needs.

Auditing can review the development process to ensure the software is designed with user
requirements documented, that management approves the design, and that the application is tested
before implementation. An additional focus is ensuring that the end user is able to use the system
based on a combination of skills and supporting documentation.

What is transaction processing system (TPS)

One of the most fundamental and important subsystems of AIS. As we define it in our previous
lecture, when we discussed the framework of AIS. This system (TPS) is responsible for converting
financial events into transactions. Recording of Transaction in Journals and vouchers and
distributing necessary information for daily operations. Examples of transaction processing
systems in AIS are sales order entry, payroll, employee records, manufacturing, and shipping
management systems.

Transaction processing system definition

In an Accounting information systems, TPS is the most fundamental system that is responsible for
recording of Transaction in Journals and vouchers and distributing necessary information for daily
operations.

Types of transaction processing system in AIS

There are three main Subsystems of TPS including the revenue cycle, the expenditure Cycle and
the conversion cycle. all of these cycles support different objectives. All of these have similar
characteristics. For example, all three capture financial transactions, record the effects of
transactions, and produce information about transactions to support day-to-day activities.

What is Transaction in TPS?

“ An economic event that affects the assets and equities of the firm, is reflected in its accounts,
and is measured in monetary terms.” e.g. Sale of goods or services, the purchase of inventory, the
discharge of financial obligations and the receipt of cash on account from customers. Financial
transaction can initialized by internal events like the depreciation of fixed assets, the application
of labor raw materials overhead to the production process, transfer of inventory from one
department to another, There may thousands of transactions for a business in a day. The only way
to handle these efficiently is to group them. Figure shows the relationship of these cycles and
examples of all transactions processing systems in an AIS.

Every business starts with the purchase of materials, property, and labor in exchange for cash.
Most expenditure transactions are based on a credit relationship between the trading parties. The
actual disbursement of cash takes place at some point after the receipt of the goods or services.
Thus, from a systems perspective, this transaction has two parts: a physical component (the
acquisition of the goods) and a financial component (the cash disbursement to the supplier).

Subsystems of Expenditure Cycles

Purchases/accounts payable system. This system identifies the need to acquire physical inventory
(such as raw materials) for example Places an order with the vendor. After receiving goods the
purchases system records the event by increasing inventory and establishing an account payable
to be paid at a later date.

Cash disbursements system is responsible for authorizing the payment, disburses the funds to the
vendor and records the transaction by reducing the cash and accounts payable accounts.
Payroll system is another example of TPS that collects labor usage data for each employee,
computes the payroll, and disburses paychecks to the employees.

Fixed asset system works with transactions involving the acquisition, maintenance, and disposal
of its fixed assets. These are relatively permanent items that collectively often represent the
organization’s largest financial investment. Examples of fixed assets include land, buildings,
furniture, machinery, and motor vehicles.

The Conversion Cycle

The Conversion Cycle is composed of two major subsystems: the production system: activities?
The production system involves the planning, scheduling, and control of the physical product
through the manufacturing process, determining raw material requirements, authorizing the work
to be performed and the release of raw materials into production.

The cost accounting system is major in this cycle and it monitors the flow of cost information
related to production. It generated cost Information which is useful for inventory valuation,
budgeting, cost control, performance reporting and management decisions.

The Revenue Cycle

Firms sell their finished goods to customers through the revenue cycle. All transactions that include
cash sales and credit sales are recorded and processed by this cycle of TPS. Revenue cycle
transactions also have a physical and a financial component, which are processed separately.

Sales order processing subsystem is responsible for preparing sales orders, granting credit,
shipping products (or rendering of a ser-vice) to the customer and billing customers. Cash receipts.
For credit sales, some period of time (days or weeks) passes between the point of sale and the
receipt of cash.