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The Study of
Accounting
Information
Systems:
Essential Concepts
and Applications

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Dated: 31st March, 2015

Table of Contents
Page No.
1.

Introduction
3
Accounting
Information System

Accounting

2.

Information

System

5
Responsibilities of Accounting Information System

3. AIS - The MIS Subsystem

6

Decision-Making activities
General Ledger & Reporting System
Merchandising AIS Subsystem
The Operational System of a Manufacturing Firm
The Accounting Function
Production Cycle

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4. Objectives and Users of

13
5.
Resources
Required
for
an
AIS
13
6. Roles of Accountants with Respect to AIS
14
7.
Ethical
Standards
for
Consulting
14
8.
Reasons
for
Studying
AIS
15

Introduction
Before understanding the concept of Accounting Information
System, we all are aware of the general idea about the
Accounting and Information System distinctively that the
former is the language of business and the latter is a system
composed of people and computers that processes or
interprets information.
In a broader sense, accounting can be explained as, the
principal way of organizing and reporting financial information.
It has been called the language of business. The accounting

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system is used to identify, analyse, measure, record,

summarize, and communicate relevant economic information
to interested parties.
Information System can be explained as, it is a system
composed of people and computers that processes or
interprets information. The term is also sometimes used in
more restricted senses to refer to only the software used to run
a computerized database or to refer to only a computer
system.
But for an Information System, one must require data to
process it into proper categorized information when needed.
Therefore, data are raw facts and figures that are processed to
produce information.
And Information is data that have been processed and are
meaningful and useful to users. The terms meaningful and
useful are value-laden terms and usually subsume other
qualities such as timeliness, relevance, reliability, consistency,
comparability, etc.
What are the components that really make an information
system work? We'll explore IPO (input, process and output) and
how this system works.
Input is anything we wish to embed in a system for some type
of use. A variety of sources are used to input: keyboard,
scanner, microphone, mouse, even another computer. What we
input has a purpose or an objective that can be termed as a
data - but until and unless it is processed and generated in
some form of output, it is technically of no use or purpose to be
achieved.
Processing takes place in the internal parts of the computer
system. It is the act of taking inputted data and processing or
converting it into something useful. What we typically see on
the screen in today's computer world (known as what you see
is what you get or in short as WYSIWYG) is the result of our
input being processed by some logical program so we can have

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the required output: an English paper, an edited photograph,

this video you're watching.
Output or the processed information in a usable format comes
in various forms: monitor or printer for visual work, a speaker
for audio. Sometimes our output is short-term, such as printing
a photo, and sometimes what we work on needs to be kept
around for a while. That's where storage comes in.
Storage is the term used to indicate that we will be saving
data for a period of time. We store for many reasons: for future
reference; to prevent full loss of data; because we forget to
purge. But, storage is vital. There are several mediums on
which we can keep output and processed data: a hard disk, a
USB drive, a CD.
Feedback is where the output from a system is fed back into
the system in order to influence the input. For example, when
you try to withdraw too much money from your account at an
ATM a warning on the screen will advise you that it isnt
possible and will suggest that you try to withdraw a smaller
amount. This is a type of feedback because it is trying to
influence your input.

Fig 1.1: Diagrammatic Representation: Information

System
Accounting and Information Systems comprise the functional
area of business responsible for providing information to the

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other areas to enable them to do their jobs and for reporting

the results to interested parties.

Accounting Information
System
By combining the two concepts Accounting and Information
Systems together, can be expressed as, An Accounting
Information System (AIS) is a structure that a business uses to
collect, store, manage, process, retrieve and report its financial
data so that it can be used by accountants, consultants,
business analysts, managers, chief financial officers (CFOs),
auditors and regulatory and tax agencies.
In particular, specially trained accountants work with AIS to
ensure the highest level of accuracy in a company's financial
transactions and recordkeeping and to make financial data
easily available to those who legitimately need access to it, all
while keeping data intact and secure. This article will describe
the primary components of an AIS and some of its real-life
applications.
According to A Statement of Basic Accounting Theory (ASOBAT)
and Generally Accepted Accounting Principles (GAAP),
accounting system should provide information to assist
management in planning and decision making along with
there are many responsibilities are to be maintained to make it
successful.

Three
main
responsibilities
Information System are :

of

Accounting

Receiving and keeping data, for later access:

To collect and store data about the organizations business
activities and capture data about the transaction on source
documents with effectivity and efficiently. Later, recording of
transactional data in journals to ledgers under various accounts

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is required which can present a chronological order of

transactional events.

Converting data into information for decision making:

Providing management with information which will be useful for
decision making like planning, implementation and monitoring
all the accounting data for the betterment or the future aspects
of an organisation in terms of financial stability. In the manual
systems, this information is provided in the form of reports that
fall into two main categories:
o Financial Statements
o Managerial Reports

Establishing the appropriate internal controls:

It is to ensure that the information produced by the accounting
system is reliable or not, if not then corrections required for the
smooth accounting system to prevent accounting errors like
errors of commission: a transaction that is calculated
incorrectly or errors of omission: a transaction that is not
recorded, so that the business activities are performed
efficiently and in accordance with managements objectives
and safeguard and proper utilization of all the organizational
assets.

AIS The MIS Subsystem

Accounting information systems are subsystems of the
management information system (MIS). MIS can be defined as a
set of organized procedures that provides information to
support decision making and control in the organization.

Decision-Making activities
There are three basic levels of managerial activities:

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Strategic planning these activities are primary

concern of a top management (e.g. identification of major
markets and product lines).
Management control these activities are primarily
concern of middle management. Their aim is to operate
their segments efficiently while achieving the objectives
identified by top management.
Operational control these activities are implemented
by department heads and supervisors, the lowest-level
managers in an organization. Their aim is to achieve those
specific tasks assigned to them by middle management.
Main accounting information systems as components of MIS
Transaction processing system The most structured
component of the MIS. It provides information used by
clerical and managerial personnel at the operational level.
Budgeting system It allows top management to
communicate corporate objectives to all managers in the
organization. This system provides top-down information
flows, utilizes both internal and external data, is predictive
in nature and involves estimates that are frequently
imprecise. It is used in semi-structured decision processes
involving management control activities.
Responsibility Reporting System It summarizes
historical data on a periodic basis and provides bottom-up
information flows. It is a example of highly structured
information system that is useful for management control.
In order to explain how accounting information system could
achieve the mentioned responsibilities, it is needed to classify
organizations activities into five main cycles which are the
subsystems of AIS:
Expenditure cycle It consists of activities that involve
the buying and

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paying for goods and services used by the organization for

cost allocation and appropriation.
Production cycle It includes activities which convert
raw materials and labours to the finished products.
Human resources cycle which consists of activities
that are involved in employing and paying staff salaries.
Revenue cycle It includes sales of goods or services or
receiving the cash.
Financing cycle It includes activity that provides the
funds needed for operations.

Some examples of AIS subsystems based on the five main

cycles are:

General Ledger & Reporting System

The General ledger is a subsystem of the AIS. It accumulates
financial transaction data, classifies the data by general ledger
accounts, records the data in those accounts and serves as a
basis for financial reporting and managerial reporting
subsystems. The general ledger serves as the hub from which
general purpose and external financial reports are prepared.
The external financial reports must conform to GAAP and
maybe prepared using the general ledger.

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Fig 1.2: Diagrammatic Representation: AIS subsystems

Merchandising AIS Subsystem

The revenue cycle in a merchandising firm processes millions of
bits of data every year related to sales order processing [(i.e.
preparing invoices, granting credit, shipping products or
rendering services), billing customers, and recording
transactions in the accounts (i.e. accounts receivables,
inventory, expense and sales)]. This cycle also processes
millions of transactions related to cash receipts processing (i.e.
collecting cash, depositing cash in the bank, and recording
these transactions in the appropriate accounts, such as
accounts receivable and cash). The Expenditure cycle on the
other hand processes millions of transactions every year
related
to
purchase/accounts payable systems,
cash
disbursements systems and payroll systems while the
Production cycle processes transactions related to the
production system and cost accounting system. No Planning,
Control, Investment, or Production Cycles are reflected here.

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Fig 1.3: Diagrammatic Representation: Merchandising

AIS Subsystem

The Operational System of a Manufacturing

Firm
THE ACCOUNTING FUNCTION
Accounting manages the financial information in the system
with resources available in the firm or how it is utilized and also
for the end-users. In this regard, it plays two important roles in
transaction processing. First, accounting captures and records
the financial effects of the economic events that constitute the
firms 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, accounting distributes transaction

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information to operations personnel to coordinate many of their

key tasks. The following accounting functions contribute
directly to business operations: inventory control, cost
accounting, payroll, accounts payable, accounts receivable,
billing, fixed asset accounting, and the general ledger.
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 attributesrelevance,
accuracy, completeness, summarization, and timeliness. When
these attributes are consistently present, information has
reliability and provides value to the user. Unreliable information
has no value. At best, it is a waste of resources; at worst, it can
lead to dysfunctional decisions. Consider the following
example:
A marketing manager signed a contract with a customer to
supply a large quantity of product by a certain deadline. He
made this decision based on information about finished goods
inventory levels. However, because of faulty record keeping,
the information was incorrect. The actual inventory levels of
the product were insufficient to meet the order, and the
necessary quantities could not be manufactured by the
deadline. Failure to comply with the terms of the contract
resulted in litigation.
This poor sales decision was a result of flawed information.
Effective decisions require information that has a high degree
of reliability.
Information reliability rests heavily on the concept of
accounting
independence.
Simply
stated,
accounting
activities must be separate and independent of the functional
areas that manage and maintain custody of physical resources.
For example, accounting monitors and records the movement
of raw materials into production and the sale of finished goods
to customers. Accounting authorizes purchases of raw materials
and the disbursement of cash payments to vendors and

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employees. Accounting supports these functions with

information but does not actively participate in the physical
activities.

Fig 1.4: Diagrammatic Representation: The Operational

System of a Manufacturing Firm

Production Cycle
The Production Cycle is a recurring set of business activities
and related data processing operations associated with the
manufacture of products.
Information flows to the production cycle from other cycles,
e.g.:
Revenue cycle provides information on customer orders
and sales forecasts for use in planning production and
inventory levels.
Expenditure/Purchasing cycle provides information about
raw materials acquisitions and overhead costs.
Human resources/payroll cycle provides information about
labour costs and availability

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Information also flows from the expenditure cycle:

Revenue cycle receives information from the production
cycle about finished goods available for sale.
Expenditure cycle receives information about raw
materials needs.
Human resources/payroll cycle receives information about
labour needs.
General ledger and reporting system receives information
about cost of goods manufactured.

Fig 1.5: Diagrammatic Representation: Flow of

Production Cycle

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Fig 1.6: Diagrammatic Representation: Detailed

Flow of Production Cycle

Objectives and Users of AIS

Each organization must tailor its information system to the
needs of its users. Therefore, specific information system
objectives may differ from firm to firm. Three fundamental
objectives are, however, common to all systems:

To
support
management.

the

stewardship

function

of

Stewardship refers to managements responsibility to properly

manage the resources of the firm. The information system
provides information about resource utilization to external users
via traditional financial statements and other mandated
reports.
Internally,
management
receives
stewardship
information from various responsibility reports.

To support management decision making.

The information system supplies managers with the information
they need to carry out their decision-making responsibilities
with the help and support of Trend Analysis, availability and
acquiring of quantitative and qualitative data, and find out nontransactional sources for management decision making.

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To support the firms day-to-day operations.

The information system provides information to operations

personnel to assist them in the efficient and effective discharge
of their daily tasks through transaction processing in the AIS.

Resources Required for an

AIS
An accounting information system that combines traditional
accounting practices such as the Generally Accepted
Accounting Principles (GAAP) with the available modern
information technology resources. Seven elements compose
the typical accounting information system:
People - the system users.
Processor(s): Manual or Computerized
Procedure and Instructions - Methods for retrieving and
processing data.
Database - Information pertinent to the organization's
business practices.
Software - computer programs used to process data.
Information Technology Infrastructure - Hardware
used to operate the system i.e. input-output devices.
Internal Controls - Security measures to protect
sensitive data.

Roles of Accountants with

Respect to AIS
Financial accountants prepare financial information for
external decision-making in accordance with GAAP
Managerial accountants prepare financial information
for internal decision-making

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Auditors - evaluate controls and attest to the fairness of

the financial statements.
Accounting managers - control all accounting activities
of a firm.
Tax specialists - develop information that reflects tax
obligations of the firm.
Consultants - devise specifications for the AIS.

Ethical Standards for

Consulting

Professional competence
Exercise due professional care
Plan and supervise all work
Obtain relevant data to support reasonable recommendations
Maintain integrity and objectivity
Understand and respect the responsibilities of all parties
Disclose any conflicts of interest

Reasons for Studying

Accounting Information
Systems
Accountants provide the information necessary to determine
and evaluate the long term and short term financial stability of
companies, organization or individuals. Accountants track
expenses, provide detailed insight about the expenses and
future paths, as well as prepare, analyse and verify financial
documents. They look for ways to be more financially efficient,
keep public records and make sure taxes are paid properly.
Accounting information systems provides businesses with the
ability to record all types of financial information for future use.
In addition, these systems are huge time-savers and make the

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accounting processes and procedures easily repeatable.

Because of that, these systems save companies money
because the number of people needed to complete accounting
processes is reduced. Also, the risk of human error is drastically
reduced because the computer systems manage the
accounting processes, and documents are automatically
created by the systems. It is imperative that businesses keep
accurate books, and accounting information systems make this
requirement much easier to meet.
Reasons
Accounting information systems provides businesses with the
ability to record all types of financial information for future use.
In addition, these systems are huge time-savers and make the
accounting processes and procedures easily repeatable.
Because of that, these systems save companies money
because the number of people needed to complete accounting
processes is reduced. Also, the risk of human error is drastically
reduced because the computer systems manage the
accounting processes, and documents are automatically
created by the systems. It is imperative that businesses keep
accurate books, and accounting information systems make this
requirement much easier to meet.
The accounting information systems profession is growing
rapidly with the advent of businesses computerizing their
accounting processes. As a result, businesses are seeking
professionals with not only an information systems background,
but also people who understand accounting concepts like
system and managerial accountants and auditors, system
analysts and industrial engineers. Although students pursuing
an accounting information systems degree are faced with
pretty rigorous coursework, pursuing this line of study will reap
many rewards because the career outlook for this profession is
excellent in terms of job growth and financial rewards.

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Professional certifications are also increasing like Certified

Computing Professional, Certified Information Systems Auditor,
Certified Managerial Accountant, Certified Fraud Examiner, etc.