AE112 Accounting Information Systems
Ch01 Definition and Nature of AIS
By: Robert E. Regala
OPENING SLIDE
Hi! It’s Zira, Sir Rob's electronic voice assistant! Today I am going to talk about the definition
and nature of Accounting Information Systems. You will notice that the ensuing discussions are
largely repetitions of our last topic in AE111 IT Business Tools last semester. However, I have
updated some substance to segue to this course and make it more IT-oriented.
SLIDE 2
The topics of this presentation starts with the rationale why we can refer to Accounting as an
information system. Then, we will look at the 3 components of A.I.S. After that, we will look at
how A.I.S. is distinguished from Management Information System (or M.I.S.). Next, we will
then go into the 3 major stages of, or the major processes performed by, an A.I.S., or any type
of information system, for that matter. An lastly, we will have a look at the objectives of A.I.S.
And so we’re off to our first topic in the next slide.
SLIDE 3
As was discussed in your Basic Accounting subject, one characteristic of Accounting is that it is
an information system. By “system” we mean that there are several components working
inter-dependently. In a later topic, we will learn about the components of an information
system, the most important of which is “People.” Without people, all other components will
not function. In fact, in any organization, project or system, people is the most important
factor in any endeavor.
These interdependent components following a pre-defined process that includes specific tasks
like authorization, processing, recording, reporting, and housekeeping. Some are manual,
some are automated, driven by pre-defined instructions which is known in the IT-world as
programs. The tasks that the interdependent component do progresses toward the common
goal, and particular to A.I.S., that goal is none other than to provide the financial information
needed by management and other users, internal and external, to make important economicdecisions.
SLIDE 4
A.I.S. is usually surrounded by sub-systems (or small segments of it, which are also complete
systems by themselves) that process financial and non-financial transactions that directly
affect the processing of financial transactions. For example, infrequent updates to the Chart of
Accounts are made to keep the list current. Although not technically a financial transaction,
these changes provide vital information for processing future financial transactions. P.O.S.,
Fixed Assets and Inventory are what we call “Transaction Processing Systems” (or T.P.S.) and
their function is to capture day-to-day transactions and feed them to A.I.S. using either of the
2 methods of processing, Real-time or batch process.
These sub-systems are only some of the many that businesses have. The bigger the
organization, the more sub-systems that feed into A.I.S.
SLIDE 5
The AIS is composed of three major subsystems, namely: (1) the Transaction Processing
System (TPS), which supports daily business operations with numerous reports, documents,
and messages for users throughout the organization; (2) the General Ledger/Financial
Reporting system (GL/FRS), which produces the traditional financial statements, such as the
income statement, balance sheet, statement of cash flows, tax returns and other reports
required by law; and (3) the Management Reporting System (MRS), which provides internal
management with special-purpose financial reports and information needed for decisionmaking such as budgets, variance reports, and responsibility reports.
The MRS is also an important component of Management Advisory Services (or M.A.S.)
rendered by professional accountants, as source of financial data. However, increasingly
nowadays, the MRS is being transformed by IT into what is now popularly known as “Data
Analytics” or “Business Intelligence.” That means that in order for M.A.S. to stay relevant,
professional accountants must also train to become competent in business intelligence, data
mining, and data science.
SLIDE 6
In your other subjects, you must have learned about the Management Information System (or
M.I.S.). Management often requires information that goes beyond the capability of A.I.S. As
organizations grow in size and complexity, specialized financial areas emerge, requiring
additional information for production planning and control, sales forecasting, inventory
warehouse planning, market research, and so on. The M.I.S. processes non-financial
transactions that are not normally processed by traditional A.I.S. These transactions include,
but are not limited to capital budgeting systems, market analysis, delivery scheduling, job skill
tracking, etc.
Why is it important to distinguish between A.I.S. and M.I.S.? Because of the highly integrative
nature of modern information systems, management and auditors need a conceptual view of
the information system that distinguishes key processes and areas of risk and legal
responsibility, from the other non-legally binding aspects of the system. For example, A.I.S.
must be distinguished from M.I.S. to identify a boundary of the P.F.R.S., Sarbanes-Oxley, or
S.E.C. and B.I.R. scope of responsibilities of the management.
SLIDES 7 & 8
All information systems follow a basic model of transforming data into useful information,
driven by the concept of “input-process-output.” A.I.S. is not an exception. The basic model of
any information system is comprised of 3 major stages, namely:
(1) Data Collection. The task of this stage is to collect data from various sources, primarily
the transaction processing systems or T.P.S., via the On-line Transaction Processing (or
O.L.T.P.) facility of the IT infrastructure. The data collected can come from internal, as
well as external sources. TPS is a type of system that is most-widely used in an
organization. Because it is designed to accommodate the day-to-day transactions of the
business, it is built to be robust, highly-reliable, highly-available and designed to be userfriendly. The main purpose of the Data Collection stage is to ensure that event data
entering the system are valid, and free from material errors. In many respects, this is the
most important stage in the system. Should transaction errors pass through data
collection undetected, the system may process the errors and generate erroneous and
unreliable output. This, in turn, could lead to poor decisions, and actions, by the users.
Two rules govern the design of data collection procedures: relevance and efficiency. The
information system should capture only relevant data. A fundamental task of the system
analyst or designer is to determine what is and what is not relevant. He or she does this
by analyzing the user’s needs. Only data that the user determines to ultimately
contribute to information are relevant and thus, captured by the TPS. Therefore, this
stage should be designed to filter irrelevant facts from the system.
Efficient data collection procedures are designed to collect data only once. These data
can then be made available to multiple users. Capturing the same data more than once
leads to data redundancy and inconsistency. Information Systems have limited
collection, processing, and data storage capacity. Data redundancy overloads facilities
and reduces the overall efficiency of the system. Inconsistency among redundant data
elements can also result in bad decisions and inappropriate actions.
SLIDE 9
(2) The second operational stage of the information system is Data Processing. Once
collected, data is processed (again, i.e., edited, summarized, or refined), to produce
information. Tasks in the data processing stage range from simple to complex,
depending on how the system was designed. Examples include mathematical algorithms
(such as linear programming models) used for production scheduling applications,
statistical techniques for sales forecasting, and posting and summarizing procedures for
accounting applications.
An important task related to data processing is Database Management. Database
management involves three fundamental tasks: (1) storage, (2) retrieval and (3)
deletion. The storage task assign keys to new records and stores them in their proper
location in the database. Retrieval is the task of locating and extracting an existing
record from the database for processing. After processing is complete, the storage task
restores the updated record to its place in the database. Deletion is the task of
permanently removing obsolete or redundant records from the database.
The organization’s database is its physical repository for financial and non-financial data.
When we use the term “database” in the generic sense, it could mean a filing cabinet or
a computer disk. Regardless of the database’s physical form, we can represent its
content in a logical hierarchy. On succeeding slides, you can see the levels in the data
hierarchy—attribute, record, and file—in both physical and logical sense. In an IT
information system setup however, database management refers to the hardware and
software that manages the data, and defines a logical barrier that limits the access to
data by users. It is usually referred to as the Database Management System (or DBMS).
Database management tasks are usually performed during off-peak hours, when the
users are not actively using the databases.
The double-headed arrow indicates a two-way flow of data between the two elements
of data processing. That is because data processing is an iterative process, meaning, it
processes data, sends the processed data to the DBMS, retrieves the data when some
users need it. The data might get updated, deleted or some data might be added to the
database, if the users are allowed to do these things.
SLIDE 10
(3) The 3rd stage in the basic information system model is Information Generation. This is
the process of compiling, arranging, formatting and presenting information to users.
Information can be an operational document (such as a sales order), a structured report
(such as a variance analysis report), or a message on a computer screen (such as a
customer alert cautioning a customer officer about a customer sensitivity). Regardless
of physical form, useful information has the following characteristics: relevance,
timeliness, accuracy, completeness and summarization.
Relevance requires that the contents of a report or document must serve a purpose.
This could be to support a manager’s decision or a clerk’s task. We have established that
only data relevant to a user’s action have information content. Therefore, the
information system should present only relevant data in its reports, depending on who
the users are. Reports containing irrelevancies waste resources and may be counterproductive to the user. Irrelevancies detract attention from the true message of the
report and may result in incorrect decisions or actions.
Timeliness dictates that the age of information is a critical factor in determining its
usefulness. Information must be no older than the time of the action it supports. For
example, if a manager makes decisions daily to purchase inventory from a supplier
based on an inventory status report, then the information in the report should be no
more than a day old.
Accuracy requires that information must be free from material errors. However,
materiality is a difficult concept to quantify. It has no absolute value; it is a problemspecific concept. This means that, in some cases, information must be perfectly
accurate. In other instances, the level of accuracy may be lower. Material error exists
when the amount of inaccuracy in information causes the user to make poor decisions
or to fail to make necessary decisions. We sometimes must sacrifice absolute accuracy
to obtain timely information. Often, perfect information is not available within the
user’s decision time frame. Therefore, in providing information, system designers seek a
balance between information that is as accurate as possible, yet timely enough to be
useful.
Completeness means that no piece of information essential to a decision or task should
be missing. For example, a report should provide all necessary calculations and present
its message clearly and unambiguously.
Summarization is aggregation in accordance with the user’s needs. Lower-level
managers tend to need information that is highly detailed. As information flows upward
through the organization to top management, it becomes more summarized.
SLIDE 11
Feedback is a form of output that is sent back to the system as a source of data. Feedback may
be internal or external and is used to initiate or alter a process. For example, an inventory
status report signals the inventory control clerk that items of inventory have fallen to, or
below, their minimum allowable levels. Internal feedback from the information will initiate the
inventory ordering process to replenish the inventories. Similarly, external feedback about the
level of uncollected customer accounts can be used to adjust the organization’s credit policies.
SLIDE 12
At this point, it is appropriate to distinguish “data” from “information.” Data are facts, which
may or may not be processed (edited, summarized, or refined) and have no direct effect on
the user. By contrast, information causes the user to take an action that he or she otherwise
could not, or would not, have taken. Information is often defined simply as “processed data.”
This is an inadequate definition. Information is determined by the effect it has on the user, not
by its physical form.
For example, a purchasing agent receives a daily report listing raw material inventory items
that are at low levels. This report causes the agent to place orders for more inventory. The
facts in this report have information content for the purchasing agent. However, this same
report in the hands of the personnel manager is a mere collection of facts, or data, causing no
action and having no information content.
We can see from this example that one person’s information is another person’s data. This
information is not just a set of processed facts arranged in formal report. Information allows
users to take action to resolve conflicts, reduce uncertainty, and make decisions. We should
note that action does not necessarily mean a physical act. For instance, a purchasing agent
who receives a report showing that inventory levels are adequate will respond by ordering
nothing. The agent’s action to do nothing is a conscious decision, triggered by information and
different from doing nothing because of being misinformed.
The distinction between data and information has pervasive implications for the study of
information systems. If output from the information system fails to cause users to act, the
system serves no purpose and has failed in its primary objective.
SLIDE 13
As mentioned, we can speak of database in physical form (such as a collection of customer
data in a folder), or electronic form (such as the same customer data encoded into an Excel
spreadsheet).
Data Attribute. The data attribute is the most elemental piece of potentially useful data in the
database. An attribute is a logical and relevant characteristic of an entity about which the firm
captures data. The attributes shown on the slide are logical because they all relate sensibly to
a common entity—Customer Information. The attributes in both physical and electronic data
are Customer Number, Name, Address and Credit Limit. Each attribute is also relevant because
it contributes to the information content of the entire set. As proof of this, the absence of any
single relevant attribute diminishes or destroys the information content of the set. The
addition of irrelevant or illogical data (such as the name of a customer's pet), would not
enhance the information content of the set (unless the database is about animals).
Record. A record is a complete set of attributes for a single occurrence within an entity class.
For example, a particular customer in the sample on the slide has Customer Number, Name,
Address and Credit Limit. This complete set is one occurrence (or record) within the class.
To find a particular record within the database, we must be able to identify it uniquely.
Therefore, every record in the database must be unique in at least one attribute. This unique
identifier attribute is the primary key. Because no natural attribute (such as a customer name)
can guarantee uniqueness, we typically assign artificial keys to records. In our example, the
key for the Customer Info is the Customer Number, which is an arbitrary number.
File. A file is a complete set of records of an identical class, in our example, a complete set of
customer records. Similarly, files are constructed for other classes of records such as accounts
receivable, inventory, accounts payable and payroll. The organization’s database is the entire
collection of such files.
Information System Objectives
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:
1. To support the stewardship function of management. Stewardship refers to management’s
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.
2. To support management decision-making. The information system supplies managers with
the information they need to carry out their decision-making responsibilities.
3. To support the firm’s 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.
END SLIDE
There it is! An introduction to Accounting Information System, including the three components
of A.I.S., basic information system model, the three basic stages or processes, as well as a
comparison of A.I.S. and M.I.S., and data and information. On the slide is the reference I used
in the production of this topic discussion video. For comments and questions, please visit our
FB group and post a comment on the post related to this video presentation, or you can send
me a personal message. I discourage commenting on the Youtube post as I don’t normally look
at the comments to my videos.
Our next topic will be about the brief history of information systems
Thank you and stay safe always!