CHAPTER 1

FOUNDATION OF ACCOUNTING
INFORMATION SYSTEM
Accounting Information Systems, 6th / 7th edition
James A. Hall

University of Papua New Guinea, 2022 AIS. Prepared by Fletcher SAM.

LEARNING OUTCOMES
 Primary information flows within the business environment
 Accounting information systems and management information
systems
 The general model for information systems
 Financial transactions from non-financial transactions
 The functional areas of a business
 Three roles of accountants in an information system
Internal & External Information Flows
INTERNAL INFORMATION
FLOWS
• Horizontal flows of information used primarily at the operations
level to capture transaction and operations data
• Vertical flows of information
• downward flows — instructions, quotas, and budgets
• upward flows — aggregated transaction and operations data
INFORMATION
REQUIREMENTS
• Each user group has unique information requirements.
• The higher the level of the organization, the greater the need for more
aggregated information and less need for detail.
INFORMATION IN
BUSINESS
• Information is a business resource that:
• needs to be appropriately managed
• is vital to the survival of contemporary
businesses
WHAT IS A SYSTEM?
• 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.
SYSTEM DECOMPOSITION VERSUS
SYSTEM INTERDEPENDENCY
• System Decomposition
• the process of dividing the system into smaller subsystem parts
• System Interdependency
• distinct parts are not self-contained
• they are reliant upon the functioning of the other parts of the system
• all distinct parts must be functioning or the system will fail
WHAT IS AN INFORMATION
SYSTEM?
An information system is the set of
formal procedures by which data are
collected, processed into information, and
distributed to users.
TRANSACTIONS
• A transaction is a business event.
• Financial transactions
• economic events that affect the assets and equities of the
organization
• e.g., purchase of an airline ticket
• Nonfinancial transactions
• all other events processed by the organization’s information system
• e.g., an airline reservation — no commitment by the customer
TRANSACTIONS

Financial

Transactions User
Information
Decision
Nonfinancial System
Information Making

Transactions
WHAT IS ACCOUNTING
INFORMATION SYSTEMS?
• Accounting is an 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.
AIS VERSUS MIS
• Accounting Information Systems (AIS) process
• financial transactions; e.g., sale of goods
• and nonfinancial transactions that directly affect the processing of
financial transactions; e.g., addition of newly approved vendors
• Management Information Systems (MIS) process
• nonfinancial transactions that are not normally processed by traditional
AIS; e.g., tracking customer complaints
AIS SUBSYSTEMS

• Transaction processing system (TPS)

• supports daily business operations
• General Ledger/ Financial Reporting System
(GL/FRS)
• produces financial statements and reports
• Management Reporting System (MRS)
• produces special-purpose reports for internal use
The General AIS Model
DATA SOURCES
• Data sources are financial transactions that enter the
information system from internal and external sources.
• External financial transactions are the most common source of data for
most organizations.
• E.g., sale of goods and services, purchase of inventory, receipt of
cash, and disbursement of cash (including payroll).
• Internal financial transactions involve the exchange or movement of
resources within the organization.
• E.g., movement of raw materials into work-in-process (WIP),
application of labor and overhead to WIP, transfer of WIP into
finished goods inventory, and depreciation of equipment.
TRANSFORMING THE DATA INTO
INFORMATION
Functions for transforming data into information according to
the general AIS model:
1. Data Collection
2. Data Processing
3. Data Management
4. Information Generation
1. DATA COLLECTION

• Capturing transaction data

• Recording data onto forms
• Validating and editing the data
2. DATA PROCESSING

• Classifying
• Merging
• Transcribing
• Sorting • Calculating
• Batching • Summarizing
• Comparing
3. DATA MANAGEMENT
• Storing
• Retrieving
• Deleting
4. INFORMATION GENERATION

• Compiling
• Arranging
• Formatting
• Presenting
CHARACTERISTICS OF USEFUL
INFORMATION
• Regardless of physical form or technology, useful
information has the following characteristics:
• Relevance: serves a purpose
• Timeliness: no older than the time period of the action it supports
• Accuracy: free from material errors
• Completeness: all information essential to a decision or task is present
• Summarization: aggregated in accordance with the user’s needs
INFORMATION SYSTEM OBJECTIVES
IN A BUSINESS CONTEXT

• The goal of an information system is to

support
• the stewardship function of management
• management decision making
• the firm’s day-to-day operations
FUNCTIONAL AREAS
• Inventory/Materials Management
• purchasing, receiving and stores
• Production
• production planning, quality control, and maintenance
• Marketing
• Distribution
• Personnel
• Finance
• Accounting
• Computer Services
MANUAL PROCESS
MODEL
• Transaction processing, information processing, and accounting are
physically performed by people, usually using paper documents.
• Useful to study because:
• helps link AIS courses to other accounting courses
• often easier to understand business processes when not shrouded in
technology
• facilitates understanding internal controls
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
systems development projects to ensure appropriate
systems design.
ACCOUNTANTS AS 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 the accounting rules that
must be applied.
ACCOUNTANTS AS SYSTEM
AUDITORS
• External Auditors
• attest to fairness of financial statements
• assurance service: broader in scope than traditional
attestation audit
• IT Auditors
• evaluate IT, often as part of external audit
• Internal Auditors
• in-house IS and IT appraisal services