C
HAPTER 1
Accounting Information
Systems:
An Overview
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INTRODUCTION
• Questions to be addressed in this chapter
include:
– What is the meaning of system, data, and
information?
– What is an accounting information system (AIS)?
– Why is the AIS an important topic to study?
– What is the role of the AIS in the value chain?
– How does the AIS provide information for decision
making?
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SYSTEMS, DATA, AND INFORMATION
• A system is:
– A set of interrelated components
– That interact
– To achieve a goal
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SYSTEMS, DATA, AND INFORMATION
• Most systems are composed of smaller
subsystems . . .
• . . . and vice versa!
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SYSTEMS, DATA, AND INFORMATION
• Every organization has goals.
– The subsystems should be designed to
maximize achievement of the organization’s
goals.
– Even to the detriment of the subsystem itself.
– EXAMPLE: The production department (a
subsystem) of a company might have to
forego its goal of staying within its budget in
order to meet the organization’s goal of
delivering product on time.
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SYSTEMS, DATA, AND INFORMATION
• Goal conflict occurs when the activity of a
subsystem is not consistent with another
subsystem or with the larger system.
• Goal congruence occurs when the
subsystem’s goals are in line with the
organization’s goals.
• The larger and more complicated a
system, the more difficult it is to achieve
goal congruence.
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SYSTEMS, DATA, AND INFORMATION
• The systems concept encourages integration
(i.e., minimizing the duplication of recording,
storing, reporting, and processing).
• Data are facts that are collected, recorded,
stored, and processed by an information system.
• Organizations collect data about:
– Events that occur
– Resources that are affected by those events
– Agents who participate in the events
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SYSTEMS, DATA, AND INFORMATION
• Information is different from data.
• Information is data that have been
organized and processed to provide
meaning to a user.
• Usually, more information and better
information translates into better
decisions.
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SYSTEMS, DATA, AND INFORMATION
• However, when you get more information
than you can effectively assimilate, you
suffer from information overload.
– Example: Final exams week!
• When you’ve reached the overload point,
the quality of decisions declines while the
costs of producing the information
increases.
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SYSTEMS, DATA, AND INFORMATION
Benefits of information
- Cost of producing information
Value of information
Benefits of information may include:
• Reduction of uncertainty
• Improved decisions
• Improved ability to plan and schedule activities
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SYSTEMS, DATA, AND INFORMATION
Benefits of information
- Cost of producing information
Value of information
Costs may include time and resources spent:
• Collecting data
• Processing data
• Storing data
• Distributing information to users
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SYSTEMS, DATA, AND INFORMATION
Benefits of information
- Cost of producing information
Value of information
Costs and benefits of information are often
difficult to quantify, but you need to try when
you’re making decisions about whether to
provide information.
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SYSTEMS, DATA, AND INFORMATION
• Characteristics that make information
useful:
– Relevance
It reduces uncertainty by helping you predict
what will happen or confirm what already has
happened.
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SYSTEMS, DATA, AND INFORMATION
• Characteristics that make information
useful:
– Relevance
– Reliability
It’s dependable, i.e., free from error or bias
and faithfully portrays events and activities.
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SYSTEMS, DATA, AND INFORMATION
• Characteristics that make information
useful:
– Relevance
– Reliability
– Completeness
It doesn’t leave out anything that’s important.
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SYSTEMS, DATA, AND INFORMATION
• Characteristics that make information
useful:
– Relevance
– Reliability
– Completeness
– Timeliness
You get it in time to make your decision.
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SYSTEMS, DATA, AND INFORMATION
• Characteristics that make information
useful:
– Relevance
– Reliability
– Completeness
– Timeliness
– Understandability
It’s presented in a manner you can
comprehend and use.
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SYSTEMS, DATA, AND INFORMATION
• Characteristics that make information
useful:
– Relevance
– Reliability
– Completeness
A consensus notion—the nature of the
– Timeliness
information is such that different people
would tend to produce the same result.
– Understandability
– Verifiability
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SYSTEMS, DATA, AND INFORMATION
• Characteristics that make information
useful:
– Relevance
– Reliability
– Completeness
– Timeliness
– Understandability
You can get to it when you need it and in a
format you can use.
– Verifiability
– Accessibility
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SYSTEMS, DATA, AND INFORMATION
• Information is provided to both:
– External users
– Internal users
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SYSTEMS, DATA, AND INFORMATION
• Information is provided to both:
– External users
– Internal users
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SYSTEMS, DATA, AND INFORMATION
• External users primarily use information
that is either:
– MANDATORY INFORMATION—required by a
governmental entity, such as Pension
contribution required by the Social Security
office; or
– ESSENTIAL INFORMATION—required to
conduct business with external parties, such
as purchase orders.
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SYSTEMS, DATA, AND INFORMATION
• In providing mandatory or essential
information, the focus should be on:
– Minimizing costs.
– Meeting regulatory requirements.
– Meeting minimum standards of reliability and
usefulness.
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SYSTEMS, DATA, AND INFORMATION
• Information is provided to both:
– External users
– Internal users
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SYSTEMS, DATA, AND INFORMATION
• Internal users primarily use discretionary
information.
• The primary focus in producing this
information is ensuring that benefits
exceed costs, i.e., the information has
positive value.
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WHAT IS AN AIS?
• An AIS is a system that collects, records,
stores, and processes data to produce
information for decision makers.
• It can:
– Use advanced technology; or
– Be a simple paper-and-pencil system; or
– Be something in between.
• Technology is simply a tool to create,
maintain, or improve a system.
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WHAT IS AN AIS?
Accounting information system It includes people, procedures and
instructions, data, software,
information technology infrastructure,
and internal controls and security
measures
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WHAT IS AN AIS?
There are six components of an AIS:
1. The people who use the system
2. The procedures and instructions used to collect, process,
and store data
3. The data about the organization and its business activities
4. The software used to process the data
5. The information technology infrastructure, including the
computers, peripheral devices, and network communications
devices used in the AIS
6. The internal controls and security measures that
safeguard AIS data
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WHAT IS AN AIS?
• The functions of an AIS are to:
– Collect and store data about events,
resources, and agents.
– Transform that data into information that
management can use to make decisions
about events, resources, and agents.
– Provide adequate controls to ensure that the
entity’s resources (including data) are:
• Available when needed
• Accurate and reliable
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WHAT IS AN AIS?
An AIS Processes Data to Produce Information for
Decision Makers
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WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
• It’s fundamental to accounting.
• Accounting is an information-providing
activity, so accountants need to
understand:
– How the system that provides that
information is designed, implemented,
and used.
– How financial information is reported.
– How information is used to make
decisions.
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WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
• It’s fundamental to accounting.
• Other accounting courses focus on how
the information is provided and used.
• An AIS course places greater emphasis
on:
– How the data is collected and
transformed.
– How the availability, reliability, and
accuracy of the data is ensured.
• AIS courses are not number-crunching
courses.
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WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
• It’s fundamental to accounting.
• The skills are critical to career success.
• Auditors need to evaluate the accuracy
and reliability of information produced by
the AIS.
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WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
• It’s fundamental to accounting.
• The skills are critical to career success.
• Tax accountants must understand the
client’s AIS adequately to be confident that
it is providing complete and accurate
information for tax planning and
compliance work.
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WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
• It’s fundamental to accounting.
• The skills are critical to career success.
• In private industry and not-for-profit,
systems work is considered the most
important activity performed by
accountants.
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WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
• It’s fundamental to accounting.
• The skills are critical to career success.
• In management consulting, the design,
selection, and implementation of
accounting systems is a rapid growth area.
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WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
• It’s fundamental to accounting.
• The skills are critical to career success.
• The AIS course complements other
systems courses.
• Other systems courses focus on design and
implementation of information systems,
databases, expert systems, and
telecommunications.
• AIS courses focus on accountability and
control.
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WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
• It’s fundamental to accounting.
• The skills are critical to career success.
• The AIS course complements other
systems courses.
• AIS topics impact corporate strategy
and culture.
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How an AIS Can Add Value to an
Organization?
A well-designed AIS can add value to an organization by:
1. Improving the quality and reducing the costs of products or
services. For example, an AIS can monitor machinery so
operators are notified immediately when performance falls
outside acceptable quality limits. This helps maintain
product quality, reduces waste, and lowers costs.
2. Improving efficiency. For example, timely information makes
a just-in-time manufacturing approach possible, as it
requires constant, accurate, up-to-date information about
raw materials inventories and their locations.
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How an AIS Can Add Value to an
Organization?
A well-designed AIS can add value to an organization by:
3. Sharing knowledge. Sharing knowledge and
expertise can improve operations and provide a
competitive advantage.
4. Improving the efficiency and effectiveness of its
supply chain. For example, allowing customers to
directly access inventory and sales order entry
systems can reduce sales and marketing costs,
thereby increasing customer retention rates
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How an AIS Can Add Value to an
Organization?
A well-designed AIS can add value to an organization by:
5. Improving the internal control structure. An AIS
with the proper internal control structure can help
protect systems from fraud, errors, system failures,
and disasters.
6. Improving decision making. Improved decision
making is vitally important and is discussed below
in more detail.
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SUMMARY
• What we’ve learned so far:
–
–
–
–
The meaning of system, data, and information.
What an AIS is.
Why it’s an important topic to study.
How it provides information for decision making.
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End of Chapter One
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