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ACCOUNTING

INFORMATION SYSTEMS(AIS)

Introduction, Definition andimportance of AIS


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IntroductionWhen we have completed this session,we shall have been able to:

Define Accounting information systems (AIS),

Discuss why AIS is an important area of study forfuture accountantsCompare and contrast AIS with other Areas of studyin accountingExplain the structure of Accounting informationsystemsExplain qualities of information and sources of

Accounting information systems.Explain the structure and content of the remainderof the course.


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Definition

An Accounting information systems is (AIS): A set of interrelated activities, documents and technologies

designed to;

collect data, process it, and report Information to diverse groups of internal,

connected and external decision makers of anorganisation.

A well designed accounting information systems cansignificantly enhance decision making in an organisation byresponding to many elements of the Financial AccountingStandards Board (FASB) Conceptual Framework.


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What is the FASB Conceptual

Framework? Objective of Financial reporting: to provideinformation for decision making.

Elements of financial statement (F/S): Assets, Liabilities, Equity Revenue, Expense Gain, Losses Comprehensive income.

Qualities/Characteristics of F/S: There are two basic categories: Primary Xtics:

Relevance and reliability

Secondary Xtics: Comparability and Consistency


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Basic Elements of Financial

Statements Assets: Probable future

economic benefits resultingfrom past transactions

Liabilities: Probable futuresacrifices of economicbenefits resulting from pasttransactions

Equity: Residual orownership interest

Investment by Owners:Increases in net assets

Distributions to Owners:Decreases in net assets

Comprehensive Income: Allchanges in equity from non-owner sources

Revenues: Inflows fromentitys ongoing operations

Expenses: Outflows fromentitys ongoing operations

Gains: Increases in equityfrom incidental transactions

Losses: Decreases in equityfrom incidental transactions

Balance Sheet Income Statement


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Conceptual Framework (contd) Assumptions:

Financial statements are prepared on the assumption based on: A going concern, Economic entity Periodicity Monetary Unit

Principles: Historical Cost, realisation, matching and full disclosure.

Constraints: Cost effectiveness Materiality Conservatism

Industry practice


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Basic Assumptions

Economic Entity Assumption The economic entity can be identified with a

particular unit of accountability. The business is separate and distinct from its

owners. Entitys assets and other financial elements

are not commingled with those of the owners. The economic entity assumption is an

accounting concept, and not a legal construct.


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Basic Assumptions

Going Concern Assumption The business is assumed to continue

indefinitely unless terminated by owners. The basis of recording financial elements is

historical accounting .

Liquidation accounting (based onliquidation values) is not followed unless soindicated.


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Basic Assumptions

Monetary Unit Money is the c o m m o n u n i t o f m e as u r e

of economic transactions. Use of a monetary unit is relevant,

simple to understand and universallyavailable.

Price level changes are ignored inaccounting, leading to the assumptionthat the dollar remains relatively stable .


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Basic Assumptions

Periodicity (Time Period) Assumption Economic activity of an entity may be

artificially divided into time periods forreporting purposes.

Shorter time periods are subject torevisions but may be more tim ely.
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The Cost Principle

Historical Cost Principle Transaction is recorded at its acqu is i t ion

pr ice . It is not changed to reflect market price. The principle applies to most assets and liabilities. Users of financial statements may find fa i r value

information useful for certain types of assets andliabilities. The current system is a mixed attribute

incorporating historical cost, fair value, andcer tain o ther va luat ion bases .


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The Revenue Recognition

PrincipleRevenue Recognition Principle

Revenue is recognized when it is realized orrealizable and earned and the amount can beobjec t ive ly determined.

Revenue is recognized at time of sale . Thereare exceptions :1) During production: In long-term construction revenue

is recognized periodically based on % of job completed.2) End of production: Where active markets exist for the

product and there are no significant future costs..3) Receipt of cash: Used when there is uncertainty of

collection. In installment sales contracts payment isrequired in periodic installments.


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The Matching Principle

Expenses are matched to the revenues theyhelp generate.

There should be a logical, rational association of revenues and expenses.

If a cost does not benefit future periods, it isrecorded in the current period as an expense.


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The Full Disclosure Principle

Financial statements must report what areasonable person would need to know to

make an informed decision. Disclosure may be made:

within the body of the financial statements, as notes to those statements, or as supplementary information.


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Constraints: The Cost Benefit

RuleCost-Benefit Relationship

The cost of providing information should not

outweigh the benefit derived. Costs and benefits are not always obvious or

measurable. Sound judgment must be used in providing

information .


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Constraints: Materiality

Materiality refers to an items importance toa firms overall financial operations.

An item must make a difference to be materialand be disclosed.

It is a matter of the relative significance of theelement.

Both quantitative and qualitative factors are tobe considered in determining relativesignificance.


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Constraints: Industry PracticesIndustry Practices

The nature of some industries sometimesrequire departures from basic accountingtheory.

If application of accounting theory results instatements that are not comparable or

consistent, then industry practices must beexamined for possible explanations.


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Constraints: Conservatism

Conservatism suggests that thepreparer, when in doubt, choose a

conservative solution . This solution will be least likely to

overstate assets and income.

Conservatism does not suggest that netassets or net income be deliberatelyunderstated.


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The double entry system No matter the level or form of your advancement

in technology you use in your accounting system,most accounting information systems is based on

the double entry (debit/credit) system. Note that: An account is an arrangement of transactions

affecting a given asset, liability or other element.Under this system, the two-sided effect of atransaction is recorded in the appropriateaccounts.

The recording is done by means of a debit-credit convention (set of rules) applying to all accounts.


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The Basic Accounting Equation

Accounting data is represented by thefollowing relationship among the assets,

liabilities and owners equity of a business: Assets = Liabilities + Owners Equity (Capital) The equation must be in balance after

every recorded transaction inthe system.


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The Debit-CreditConvention

Debit entries in an assetaccount

Debit entries in anexpense account

Credit entries in aliability account

Credit entries in Equityaccount

Credit entries in arevenue account

Credit entries in anasset account

Credit entries in anexpense account

Debit entries in aliability account

Debit entries in Equityaccount

Debit entries in arevenue account

Balance increases Balance decreases


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The Accounting Cycle: StepsThe Accounting Cycle entails the steps in gathering

Accounting data and summarizing it for re-use in otherreports ending within a specified time frame (e.g a yearend) for decision making. Steps are as following:

1. Analyze the transaction2. Journalize the transaction3. Post the transaction to accounts in Ledger4. Prepare the (unadjusted) Trial Balance5. Prepare necessary Adjusting Journal entries6. Prepare the (adjusted) Trial Balance

7. Prepare financial statements (Income statement/Balancesheets etc)8. Prepare closing Journal entries for the year9. Post closing trial balance


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Why AIS is an important area of study forfuture accountants

AIS is pretty new and emerging area for accountingmajors and it continues to grow.

With the exception of forensic accounting and fraudexamination, AIS may be the newest field of study foraccounting students and many professionals andpractitioners take different approaches in tackling thisnew area.

Therefore, AIS is typically a field of research and futureaccountants are keen to keep abreast with validinformation on the progress of their chosen career.

New certifications like, Certified Fraud Examiner, (CFE),Certified Information systems Auditor (CISA), CertifiedInternal Auditor (CIA) build upon knowledge in AIS.


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USES OF AIS: Planning: The plans of management are expressed formally as

budgets and the term budgeting is often applied to management planning.

Controlling: Reports that help focus a manager s attention on problems or opportunities that might otherwise go un-notice. A performance report is a detailed feedback system that helpsmanagement to compare actual data for a specific period with the

budgeted data. Organising and Directing: Managers have constant need for

accounting information in the routine conduct of day-to-dayoperations. E.g. HR - Hiring, promotion and firing decision,PROCUREMENT - volumes of inventory, MARKETING - Pricingstrategies etc, (REF . HANDOUT - Information requirement indifferent sectors)

Decision Making: Accounting is generally responsible for gatheringavailable cost and benefit data and for communicating it in a usableform to the appropriate manager.
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Stakeholders/Users of AIS Stakeholders - Definition:

Any individual or group who can affect or are affected bythe achievement or the non-achievement of a firm sobjectives. In AIS terms, Stakeholders aregroups/individuals that have interests in the well-being ofthe company and/or are affected by the goals, operations,and activities of the organisation and therefore are keen inthe financial performance of the organisation.

I n AI S terms, Stakeholders can be classif ied thr eecategories: Internal, Connected and External


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Stakeholders/Users of AIS (contd)

1. Internal stakeholders (e.g. employees, managers): The twokey internal roles that are directly related to accountinginformation systems, as stated earlier are the ManagementAccounting and Financial Accounting . (REF . TOHANDOUT - Distinction between Management Accountants andFinancial Accountants)

2. Connected Stakeholders: ( shareholders, customers, suppliers,financiers).

- What AIS would they claim or be interested in?

3. External Stakeholders:( government, the community, pressuregroups).

- What AIS would they claim or be interested in?
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Trends in AIS

AISs combine the study and practice ofaccounting with the design, implementation, and

monitoring of information systems. Such systemsuse modern information technology resourcestogether with traditional accounting controls andmethods to provide users the financial informationnecessary to manage their organizations.


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Trends in AIS (continued) In Accounting as seen from above, AIS was previously a paper-based

process , most businesses now use accounting software (ComputerisedAccounting).

In an electronic financial accounting system, the steps in the accountingcycle are dependent upon the system itself. E.g, some systems allow direct

journal posting to the various ledgers and others do not.

These systems, commonly including accounting software , make it easierto compile financial data for use in:

taxes,

payroll, other bookkeeping requirements and the preparation ofGeneral purpose financial reports:

trial balance,

statement of Comprehensive income,

balance sheets,

cash flow statements as well as other financial data analysis)
http://en.wikipedia.org/wiki/Accounting_softwarehttp://en.wikipedia.org/w/index.php?title=Electronic_financial_accounting&action=edit&redlink=1http://en.wikipedia.org/wiki/Ledgerhttp://en.wikipedia.org/wiki/Ledgerhttp://en.wikipedia.org/w/index.php?title=Electronic_financial_accounting&action=edit&redlink=1http://en.wikipedia.org/wiki/Accounting_software


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Compare and contrast other

areas of study in Accounting Like other areas AIS includes consideration of:

Financial report

Internal report and performance analysis

Unlike other areas AIS includes: Open- ended problems that dont have deterministic

responses

Accounting sub-divisions (financial accounting,managerial accounting etc) as well as other disciplinese.g. management and information systems/technology.


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The AIS Generic Structure

Input Process Output Storage Internal Controls (detail will be treated

later in the course.


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Information: Definition Information is a data that have been processed,

interpreted and understood by the recipient of themessage.

This means that data is the raw stage ofinformation. Data goes through some analysis,summarisation or processing in some otherfashion to produce a message or report which isconventionally deemed to be management information .

Data only becomes information if it isunderstood by the recipient.

l d


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Knowledge Knowledge is an enabled ability and experience

resulting from the continuous application of information. It is therefore an advanced level of information . Some

people describe information as knowledge. However,knowledge has a bigger dimension than information.

Knowledge can therefore be described a pattern ofinformation that has been experienced over time. Thisdefinition is just rudimentary as many researchers haveclearly stated that there is no one definition of

Knowledge; yet Knowledge may be described as acollection of information.

A combination of knowledge forms ones wisdom ortruth.


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Qualities of InformationEffective information must have the following qualities:

Relevance: This is the overriding quality of information.Information must be relevant to the problem beingconsidered. Irrelevant information makes the understandingtoo difficult and causes frustration to the user. Relevance is,

in fact, affected by many of the factors below such ascompleteness, timeliness and detail.

To be relevant:

The information must be timely .

The information should have predictive value : (behelpful in making predictions about ultimate outcomesof past, present and future events). The information should have feedback value (helpsusers to confirm prior expectations .)


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Qualities of information (contd) Consistency: Accounting information is consistent, if the same

accounting principles are applied in a similar manner from oneperiod to the next. Accounting principles may be changed, if the change results

in better reporting.

If principles are changed, the justification for, and the nature andeffect of the change, must be disclosed. Comparability : For information to be comparable, it must be:

measured and reported in a similar manner for differententerprises.

useful in the allocation of resources to the areas ofgreatest benefit.

useful to users in identifying real differences betweenenterprises.

Sampson Anomah2009


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Qualities of Information Accuracy: Although there is no such thing as absolute accuracy,

information must possess sufficient accuracy necessary to help the decisionmaking required.

Reliability/Confidence in source : Information is reliable, when it can berelied on to represent the true, underlying situation.

To be reliable, information must be: Verifiable

representationally faithful, and NeutralSource confidence is enhanced by:

Past reliability record of the source

Good interactive communication between the information producerand the manager.

Sampson Anomah2009


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Qualities of information (continued) Completeness : The information must be sufficiently available for the decision.

Communicated to the Right person : Each manager has his defined sphere ofactivity in carrying out his duties.

Note the difference between a

Management Accounting information and

Financial Accounting information.

Timely: Too rapidly communicated or too slowly communicated informationlooses its validity and relevance.

Detail : Information should contain the least amount of details consistent with

effective decision making. Information Overload should be avoided.


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Benefits of Efficient AIS

To quantify the benefits of AIS, several factors need to beconsidered:1. Increased turnover: Improved data collection,

storage and analysis tools through efficient database

management (e.g. centralised or distributed) with itsassociated data-mining software and tools (e.g. SQLas well as neural networks, fuzzy logic and otherintelligent techniques) also known as Data-warehousing.

2. Cost reduction (to achieve competitive advantage)- Cost advantage- Differentiation advantage (per Michael Porter)

3. Enhanced Services:


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Benefits of Efficient AIS (cont d)

1. Improved decision making - Enhanced Forecasting Developing Scenarios

(e.g. Making provision for uncertain timing, changinginterest rates etc)

Market Analysis: Demand, supply elasticity andpricing decisions

Project evaluation: Investment appraisals andthe application of time value of money fordecision making.

M t I f ti S t (MIS) d


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Management Information Systems (MIS) comparedwith Accounting Information Systems (AIS)

The information role of the AIS has been given above.It should be noted that the AIS is part of the MIS.

MIS is interactive human/machine systems that support decisionmaking for users both in and out of traditional organizational

boundariesThe MIS also includes information systems or applications

for:

- marketing - production- internal auditing - personnel (HR)- data processing, etc.


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Structure and content of the

remainder of the course Since the course is designed for Accounting

students, concentration on accounting and preparation of financial reports and performanceanalysis will not be prominent but the concentrationwill be on the management of BusinessInformation processing, technology and

management Systems to produce quality reportthat support users decision.


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The following areas will be the focus:

AIS Technology : Hardware

Computer Architecture CPU, Memory, Storage types, Operating systems

Input devices Processing Output devices

Storage: Units of Computer memory Binary/Decimal/Hexadecimal


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Remainder of the course (contd) Recording and Sharing of Information

Networking Server software Client software

Peer to peer Software

Bespoke software or an off-the-shelf accounting package Customised versions of standard packages

Outsourcing strategies Development AIS Systems and systems thinking The 7-stage description Rich picture

Defining a System: CATWOE


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Remainder of the course (contd) The information age and Ethics in business

Applications of information systems Asset Accounting Information Security threats identification Attacks and intrusion on Accounting information

systems and controls

Risk management Information Security models and classification Access control

Business Process Re-Engineering (BPR) and ManagingChange System Changeover/ Conversion strategies Resistance to change


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Remainder of the course (contd)

Knowledge and Business IntelligenceManagement

Organisational learning, knowledge creation anddissemination Electronic Commerce and Management Systems Classification of E-Commerce by the Nature and

Interactions


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Reading list and materials

Course handout, and if you come across: Hurt R. L (2008) Accounting information systems, basicconcepts and current issues , McGraw Hills.

www.wikipedia.org for references, definitions furtherance ofclarification

Turban E. et al (2006) Electronic Commerce, Amanagerial perspective.

Lucey T. (1996) Management Information Systems . Atkinson A. A et al (2006) Management Accounting,

international edition , Kaplan consulting. Harris S. (2002) All in One book for CISSP Certification,

McGraw Hills.
http://www.wikipedia.org/http://www.wikipedia.org/


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Reading list and materials (contd) Boczko, T. (2007). Corporate Accounting Information

Systems , (1st edition), Prentice Hall.) Romney, M. B. & Steinbart, P. J ., Accounting Information

Systems . (11th edition.), Prentice Hall. Chaffey, D. and Wood, S. (2005) , Business Information

Management: Improving Performance Using InformationSystems , (1st edition), Prentice Hall.

Bocij, P., Chaffey, D., Greasley, A. and Hickie, S.,Business Information Systems: Technology,Development and Management for the e-business , (3rd

edition), Prentice Hall. Laudon, C. and Laudon, J. Management Information

Systems: Managing the digital firm , (9th edition),Prentice Hall.

Sampson Anomah2009


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Assignment 1

Submission date 21/01/2010 You will be having a presentation

exercise in the week of submission ofexercise.

Click here to view the assignment

A maximum of 2000 words.

Sampson Anomah
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