Chapter 1

The Information System:

An Accountants Perspective
Accounting Information Systems

Objectives for Chapter 1

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
Two main stages in the evolution of information
systems
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

Users of AIS and their needs

and demand
INTERNAL USERS
Management
They use the information for planning that is the
development of short term and long term plans
Supervisors
Controlling activities that involve motivating
employees and evaluation of people and other
resources within the organisation

Internal users
3.Internal auditors
They use the information that enables to access
operational and internal controls .
4 employees
They use the information in order to carryout their
daily duties.

External users
Tax accountants must understand the
clients AIS adequately to be confident that
it is providing complete and accurate
information for tax planning and compliance
work.
Potential investors
They want information that will enable them to
access the feasibility of investing their funds in a
particular entity or to withdraw their funds and
invest it else where. Information can be obtained
from the SOFP, SOCI and SOCE

External users
Creditors
They want to access the ability of the company to
settle its debts.
Debtors
They are mainly concerned about the going
concern of a company
This will assure them if the company is able to
supply them with raw materials in the
future(continued business).

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.

THREE MAIN CHARACTERISTICS OF

A SYSTEM
Component parts/ tangible features .
These imply structure and order. The
components are arranged to help achieve
objectives for example a computer system is
designed around an input device, a central
processing unit, an output device and one or
more storage units. When linked together they
work as a whole system to produce
information.

CHARACTERISTICS OF A SYSTEM
CONTINUE

Process.
This is whereby the component parts co-ordinate in a
defined way. Process refers to the manner in which
each components function with other components of
the system.
For example, in a computer system the CPU must
interact with the input device to solve a problem, in
turn the main memory holds the program and data
that the arithmetic unit uses for computation.
This means that the parts of the system depend on
each other and they are coordinate and linked
together according to plan.

CHARACTERISTICS OF A SYSTEM
CONTINUED
Goal
These are the objectives which the
components parts are coordinated. The
objectives may be real or stated. In most
organizations, they state an objective and
operate to achieve it.

WHAT ARE SUB-SYSTEMS AND SUPER SYSTEMS.

Sub-system.
A subsystem is a system that exists in another
system; its existence depends upon the
existence of a super system. A sub system
contributes to the proper working of the entire
system
For example, an auto mobile system consists of
many sub-systems like acceleration system,
fuel injection system and the braking system.
Every sub-system is responsible for the proper
functioning of the entire auto mobile system.

Super system
A super system is a system responsible for
monitoring the overall working of its subsystems therefore it contains many subsystems. It decides the constraints and
resources to be put on its sub-systems.
For example; the central government system
which has the state government under its
control which form the sub-system.

Why should an accountant be

knowledgeable about these
systems?
1. Enables the accountant to navigate

suitable system software; the knowledge

will enable the accountant to confirm and
record actual business transaction,
describe economic events, perform
activities timely and sufficiently, sort the
economic property in the financial
reports.

2.

Enables accountants; to access the barriers

for implementation of financial control of
owners connectivity with financial
managers. The accountant will seek ways
to improve and reach maximum
operations if he reviews that the subsystem and super systems and becoming
obsolete.

3. Enables

the accountant; to evaluate the

business performance correctly and predict
the prospects of the enterprise.
4. Analysis of systems theory and corporate
financial control; knowing the
characteristics of systems and there organic
in nature, an accountant can promote the
smooth development of corporate financial
activities.

System Decomposition
versus System
System Decomposition
Interdependency
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

BOUNDARIES AND INTERFACES IN A

SYSTEM

Boundaries
A boundary is anything marking a limit that
separate the internal components of a system
from external entities. Boundaries can be
classified in to two, permeable and
impermeable boundaries.

Boundaries
Permeable boundaries allow a certain
degree of interactions between the system
and its environment for example relatively
closed system.
Impermeable boundaries do not allow
interactions between the system and its
environment for example closed systems.

Interfaces
An interface is a shared boundary or
connection between two similar systems
through which information is passed; the
information can be either physical or
logical.

It is necessary to create boundaries and

interfaces;
To enable efficiency allocation of
resources to each sub-system.
To make it easier for accountants and
auditors to review on the effectiveness of
internal controls.

It is necessary to create boundaries and

interfaces;
To enable the achievement of almost every
characteristic of a successful system since
the components parts, processes and goals
will be established against each boundary.
Boundaries simplify the process of
organizing subsystems so as to reduce the
number of interconnections, which is a
potential interface for communication
among sub-systems.

Characteristics of a
system

Correct and reliable information

Timely information
User satisfaction
Satisfy the organizations needs
a)current
b)Future
Adopt to technological changes
Reasonable time for development

Correct and reliable

information

implement adequate internal controls

1)through segregation of duties
2)use of confirmations and inquiries
3)independent verification that is to check to assess
if the information produced is correct
-maintenance, servings and reviewing of the
system at intervals
-Correct procedures of recording transactions

Timely information
Chose a processing method suitable to users
needs. For example use of online processing
method as it processes transactions at the
moment the event occurs

User satisfaction

-user input in setting policies

-user support for project
-activate user participation in project
-user responsibility for the system
-training programs to familiarize the user with the
new system

Satisfy
the
organizations
a)current
Getting steering committee approval for new
needs
system development

b)future
Have a long range system master plan this
governs the objectives of the organization.

Adopt to technological
changes

higher creative and innovative employees

have systems analyst and expertise responsible
for research and development. For example pastel
use can easily change from version 8 to 17.

Reasonable time for

development
-properly define the scope of the system
-use project management techniques

Different types of
systems

Closed System
Relatively Closed system
Open System
Feedback control system

TYPES OF SYSTEMS
CLOSED SYSTEM
is a system that does not interact with the
environment
There are no interfaces.
Has no effects on the outside of its boundaries
and the environment has no effects on the
process within the system. For example, a watch.

CLOSED SYSTEM
It is a system which maintains itself on a limited
amount of resources that are firmly established in
that particular system hence being difficult to
change it.
Such a system is a theoretical concept rather than
being a practical concept.

CLOSED SYSTEM
EXAMPLE
Certain departments within an organisation can
be set up as closed system.
A research and development (R&D) department
within a computer organisation may be set up as
a closed system with no interaction outside the
division.
The purpose is to protect trade secretes and
invention that are being produced inside.

CLOSED SYSTEMS
ADVANTAGES
There are no disturbances in the system.
It is highly effective and efficient.

CLOSED SYSTEMS
LIMITATIONS
Can hamper growth since the flow of information
stays within the system.
Has no chance to interact with or build on
knowledge from the outer world.
It does not adapt to technological changes.
It practically does not exist because it lacks the
need for interaction.

RELATIVELY CLOSED
SYSTEM

RELATIVELY CLOSED SYSTEM

It reacts with its environment in a known and
controlled way.
The interactions consist of system inputs (if they
flow from the environment to the system) and
outputs (which are interactions flowing in the
opposite direction)
The system contains interfaces with the
environment and controls the effects of the
environment on its process.

RELATIVELY CLOSED
SYSTEM

RELATIVELY CLOSED SYSTEM

It interacts with its environment in a restricted way
that does not eliminate but limits its susceptibility
to the environment.
For example, labour negotiations can limit the
effects of strike.
It is semi permeable.

RELATIVELY CLOSED SYSTEMS

ADVANTAGES
Able to meet user needs as they are able to take
inputs for development purposes.
It is flexible adapts to technological changes.
It allows for a reasonable level of sharing and
exchange of information.
Minimises the impact of disturbances as there are
control measures.

RELATIVELY CLOSED
SYSTEMS

DISADVANTAGES
It is not reliable for it is prone to disturbances
from the environment

OPEN SYSTEM
Is one in which the systems interaction with the
environment is not controlled.
Has many interfaces with its environment ,that
is ,system that interacts freely with its
environment, taking input and returning output.
Contains subsystems which help in converting
input into output.

OPEN SYSTEM
It permits interactions across its boundary , it
receives inputs from and delivers outputs to the
outside.
System designers anticipate the things that can
go wrong in the environment and create
processes and interfaces to control them.
For example, media and internet.

 Have flexible boundaries since it interacts with the

environment.
Promote effective problem solving.
Subsystems help in resolving conflicts as well as
allocating resources.

DISADVANTAGES
The system has disturbances of uncontrolled
inputs that affect the processed resources within
the system.

FEEDBACK CONTROLLED
SYSTEM
A portion of the system is retained as an input to
the system.
For example, in accounting system ,revenue
output by other goods can be used as capital in
costing and variances can be output that can be
used in decision making.
Designed to provide feedback
Uses interfaces to permeate information bottom
up and top down.

FEEDBACK CONTROLLED
SYSTEM
Uses the function of a prescribed relationship
between the output and reference input to control
the process of resources in that system.
The difference between the output of the process
under control and the reference input is amplified
and used to control the process so that the
difference is continuously reduced

ADVANTAGES
Can be used for decision making.
Provide the feedback which help the system to
obtain its goals and enhance employee
motivation.
Provide management with meaningful information
on how effective its planning effort was.
The effect of unwanted disturbances can be
effectively reduced.

DISADVANTAGES
The time the manager may get the information ,
the damage might already have been done thus
making feedback irrelevant
It is expensive to set up and the cost of feedback
is first manifested in the increased number of
components and the complexity of the system.

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 organizations
information system
e.g., an airline reservation no commitment by the
customer

Transactions
Financial
Transactions
Nonfinancial
Transactions

Information
System

Information

User
Decision
Making

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 firms 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 versus MIS?

Differences between AIS

and MIS
AIS

MIS

is concerned about
day to day running
of the business with
subsystems such as
Transaction
Processing System
(TPS).

MIS is mainly used

for strategic
planning which
involves identifying
a companys long
run goal and
developing plans for
achieving these
goals.

Differences between AIS

and MIS
AIS

MIS

records financial
transactions which
are economic events
that affect assets and
equities of a firm and
is measured in
monetary terms for
instance sale of
goods to customers
cash movements etc.

goes beyond AIS in

that it records
financial
transactions and
non-financial
transactions.

Differences between AIS

and MIS
AIS

provides
information for
internal and
external use.

MIS

MIS principally
provides
information to
internal parties.

Differences between AIS

and MIS
AIS

MIS

AIS is used as a tool

for short term
decision making.
It uses historical
data.

MIS gives data for

long term decision
making and control.
MIS is futuristic
that is decisions are
made based on
projections.

Differences between AIS

and MIS
AIS

MIS

supports stewardship
management with
information contained
in the financial
statements and
responsibility report.
Information is about
how resources are
utilised and
safeguarded.

MIS is used as a
yardstick for
measuring
performance.
Managers make
future projections
and hence actual
results are
compared with the
projections made.

Differences between AIS

and MIS
AIS

MIS

provide information
that conforms to
Generally Accepted
Accounting
Principles (GAAP).

Albright (2006)
goes on to say it is
produced in a
variety of formats
that meet the
particular
information needs
of a companys
managers.

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
Transcribing
Sorting
Batching

Merging
Calculating
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
users 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 firms day-to-day operations

Organizational Structure
The structure of an organization helps to allocate
responsibility
authority
accountability

Segmenting by business function is a very common

method of organizing.

Functional Areas
Inventory/Materials Management
purchasing, receiving and stores

Production
production planning, quality control, and maintenance

Marketing
Distribution
Personnel
Finance
Accounting
Computer Services

Accounting Independence
Information reliability requires
accounting independence.
Accounting activities must be separate and
independent of the functional areas maintaining
resources.
Accounting supports these functions with
information but does not actively participate.
Decisions makers in these functions require that
such vital information be supplied by an
independent source to ensure its integrity.

The Computer Services

Function

Distributed Data
Processing

Most companies fall in between.

Reorganizing the
computer services
function into small
information processing
units that are distributed
to end users and
placed under their control

Centralized Data
Processing
All data processing
is performed by
one or more large
computers housed
at a central site
that serves users
throughout the
organization.
Primary areas:
database administration
data processing
systems development
systems maintenance

Organization of Computer Services Function in a

Centralized System

Organizational Structure for a Distributed Processing

System

Potential Advantages of DDP

Cost reductions in hardware and data entry tasks
Improved cost control responsibility
Improved user satisfaction since control is closer to
the user level
Backup of data can be improved through the use of
multiple data storage sites

Potential Disadvantages of
DDP
Loss of control

Mismanagement of company resources

Hardware and software incompatibility
Redundant tasks and data
Consolidating tasks usually segregated
Difficulty attracting qualified personnel
Lack of standards

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

The Evolution of IS Models: The Flat-File

Model

Data Redundancy
Problems
Data Storage - excessive storage costs of

paper documents and/or magnetic form

Data Updating - changes or additions
must be performed multiple times
Currency of Information - potential
problem of failing to update all affected files
Task-Data Dependency - users inability
to obtain additional information as needs
change
Data Integration - separate files are
difficult to integrate across multiple users

The Evolution of IS Models: The Database

Model

An REA Data Model

Example
R
Inventory

E
M

Line items

Sales

M
M

Party to

Sales
person

M
1
Pays for

Made to

Customer
1

Cash

Increases

Cash
Collections M

Received
from
Received
by

Cashier
34

REA Model
The REA model is an accounting
framework for modeling an
organizations
economic resources; e.g., assets
economic events; i.e., affect changes in resources
economic agents; i.e., individuals and departments that
participate in an economic event
Interrelationships among resources, events and agents

Entity-relationship diagrams (ERD) are

often used to model these relationships.

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