▪ 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 organization’s
information system
▪ e.g., an airline reservation — no commitment by the
customer

Horizontal flows of information used primarily at the

operations level to capture transaction and operations data
Vertical flows of information
▪ downward flows — budgets, instructions, quotas,
▪ 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: What is an Accounting Information System?
▪needs to be appropriately managed ▪ Accounting is an information system.
▪is vital to the survival of contemporary businesses ▪ It identifies, collects, processes, and communicates
What is a System? economic information about a firm using a wide variety of
▪ A group of interrelated multiple components or subsystems technologies.
that serve a common purpose ▪ It captures and records the financial effects of the
▪ System or subsystem? firm’s transactions.
▪ A system is called a subsystem when it is viewed as ▪ It distributes transaction information to operations
a component of a larger system. personnel to coordinate many key tasks.
▪ A subsystem is considered a system when it is the
focus of attention.
System Decomposition versus System Interdependency
▪ System Decomposition AIS versus MIS
▪ the process of dividing the system into smaller ▪ Accounting Information Systems (AIS) process
subsystem parts ▪ financial transactions; e.g., sale of goods
▪ nonfinancial transactions that directly affect the
processing of financial transactions; e.g., addition of newly
approved vendors
▪ System Interdependency ▪ Management Information Systems (MIS) process
▪ distinct parts are not self-contained ▪ nonfinancial transactions that are not normally
▪ they are reliant upon the functioning of the other processed by traditional AIS; e.g., tracking customer
parts of the system complaints
▪ all distinct parts must be functioning or the system
will fail
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
 Functions for transforming data into information according to
the general AIS model:
1. Data Collection (CRV)
▪ Capturing transaction data
▪ Recording data onto forms
▪ Validating and editing the data
2. Data Processing (CTSBMCSC)
• Classifying
• Transcribing
• Sorting
• Batching
AIS Subsystems (TGM)
• Merging
▪ Transaction processing system (TPS)
• Calculating
▪ supports daily business operations
• Summarizing
▪ General Ledger/ Financial Reporting System
• Comparing
(GL/FRS)
3. Data Management(SRD)
▪ produces financial statements and reports
▪ Storing
▪ Management Reporting System (MRS)
▪ Retrieving
▪ produces special-purpose reports for internal
▪ Deleting
use
4. Information Generation(CAFP)
▪ Compiling
▪ Arranging
▪ Formatting
▪ Presenting

Characteristics of Useful
Information
▪ Regardless of physical form or technology,
useful information has the following
characteristics:
▪ Relevance: serves a purpose, ability to reduce uncertainty
▪ 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
user’s needs
Data Sources Information System Objectives in a Business Context
▪ Data sources are financial transactions that enter the ▪ The goal of an information system is
information system from internal and external sources. to support (SMF)
▪ External financial transactions are the most common source ▪ the stewardship function of management
of data for most organizations. ▪ management decision making
• E.g., sale of goods and services, purchase of ▪ the firm’s day-to-day operations
inventory, receipt of cash, and disbursement of cash (including Organizational Structure
payroll) ▪ The structure of an organization helps to allocate (RAA)
▪ Internal financial transactions involve the exchange or ▪ responsibility
movement of resources within the organization. ▪ authority
• E.g., movement of raw materials into work-in- ▪ accountability
process (WIP), application of labor and overhead to WIP, ▪ Segmenting by business function is a very
transfer of WIP into finished goods inventory, and depreciation common method of organizing.
of equipment
Transforming the Data into Information 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 Potential Advantages of DDP (Distributed Date Processing)
but does not actively participate. ▪ Cost reductions in hardware and data entry tasks
▪ Decisions makers in these functions require that ▪ Improved cost control responsibility
such vital information be supplied by an independent source to ▪ Improved user satisfaction since control is closer to the user
ensure its integrity. level
▪ Backup of data can be improved through the use of multiple
data storage sites
▪ 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.
Primary areas: APDM ▪ 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 REA model is an accounting framework for modeling
an organization’s
▪ 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.
Data Redundancy Problems Accountants as System Designers
▪ Data Storage - excessive storage costs of paper documents ▪ The accounting function is responsible for the conceptual
and/or magnetic form system, while the computer function is responsible for the
▪ Data Updating - changes or additions must be performed physical system.
multiple times ▪ The conceptual system determines the nature of the
▪ Currency of Information - potential problem of failing to information required, its sources, its destination, and the
update all affected files accounting rules that must be applied.
▪ Task-Data Dependency - user’s inability to obtain additional Accountants as System Auditors
information as needs change ▪ External Auditors
▪ Data Integration - separate files are difficult to integrate ▪ attest to fairness of financial statements
across multiple users ▪ 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
CHAPTER 2
A Financial Transaction
▪ an economic event that affects the assets and equities of the
firm, is reflected in its accounts, and is measured in monetary
terms.
▪ similar types of transactions are grouped together into three
transaction cycles:
▪ the expenditure cycle
▪ the conversion cycle
▪ the revenue cycle

REA Model
Each Cycle has Two Primary Subsystems
▪ Expenditure Cycle: time lag between the two due to credit
relations with suppliers:
▪ physical component (acquisition of goods)
▪ financial component (cash disbursements to the
supplier)
▪ Conversion Cycle :
▪ the production system (planning, scheduling, and
control of the physical product through the manufacturing
process)
▪ the cost accounting system (monitors the flow of
cost information related to production)
▪ Revenue Cycle: time lag between the two due to credit
relations with customers :
▪ physical component (sales order processing)
▪ financial component (cash receipts)

Manual System Accounting Records

▪ Source Documents - used to capture and formalize
transaction data needed for ransaction processing
▪ Product Documents - the result of transaction processing
▪ Turnaround Documents - a product document of one
system that becomes a source document for another system

.
▪ Journals - a record of chronological entry
▪ special journals - specific classes of transactions
that occur in high frequency
▪ general journal - nonrecurring, infrequent, and
dissimilar transactions
▪ Ledger - a book of financial accounts
▪ general ledger - shows activity for each account
listed on the chart of accounts
▪ subsidiary ledger - shows activity by detail for each
account type
 ▪ many-to-many

Computer-Based Systems Data Flow Diagrams (DFD)…

▪ The audit trail is less observable in computer based systems ▪ use symbols to represent the processes, data sources, data
than traditional manual systems. flows, and entities in a system
▪ The data entry and computer programs are the physical ▪ represent the logical elements of the system
trail. ▪ do not represent the physical system
▪ The data are stored in magnetic files.
Computer Files
▪ Master File - generally contains account data (e.g., general
ledger and subsidiary file)
▪ Transaction File - a temporary file containing transactions
since the last update
▪ Reference File - contains relatively constant information
used in processing (e.g., tax tables, customer addresses)
▪ Archive File - contains past transactions for reference
purposes
Documentation Techniques
▪ Documentation in a CB environment is necessary for many
reasons.
System Flowchart
▪ Five common documentation techniques:(EDDSP)
▪ illustrate the relationship among processes and the
▪ Entity Relationship Diagram
documents that flow between them
▪ Data Flow Diagrams
▪ contain more details than data flow diagrams
▪ Document Flowcharts
▪ clearly depict the separation of functions in a system
▪ System Flowcharts
▪ Program Flowcharts
Entity Relationship Diagram (ERD)
▪ A documentation technique to represent the relationship
between entities in a system.
▪ The REA model version of ERD is widely used in AIS. REA
uses 3 types of entities:
▪ resources (cash, raw materials)
▪ events (release of raw materials into the production
process)
▪ agents (inventory control clerk, vendor, production
worker)
Cardinalities
▪ Represent the numerical mapping between entities:
▪ one-to-one
▪ one-to-many
System Flowcharts…
▪ are used to represent the relationship between the key
elements--input sources, programs, and output products--of
computer systems
▪ depict the type of media being used (paper, magnetic tape,
magnetic disks, and terminals)
▪ in practice, not much difference between document and
system flowcharts
Modern Systems versus Legacy Systems
▪ Modern systems characteristics:
▪ client-server based and process transactions in real
time
▪ use relational database tables
▪ have high degree of process integration and data
sharing
▪ some are mainframe based and use batch processing
▪ Some firms employ legacy systems for certain aspects of
their data processing.
▪ Accountants need to understand legacy systems.
▪ Legacy systems characteristics:
▪ mainframe-based applications
▪ batch oriented
▪ early legacy systems use flat files for data storage
 ▪ later legacy systems use hierarchical and network
databases
▪ data storage systems promote a single-user
environment that discourages information integration

Steps in Batch Processing/Sequential File

▪ Keystroke - source documents are transcribed by clerks to
magnetic tape for processing later
▪ Edit Run - identifies clerical errors in the batch and places
them into an error file
▪ Sort Run - places the transaction file in the same order as
the master file using a primary key
▪ Update Run - changes the value of appropriate fields in the
master file to reflect the transaction
▪ Backup Procedure - the original master continues to exist
and a new master file is created
Advantages of Batch Processing
Computer-Based Accounting Systems ▪ Organizations can increase efficiency by grouping large
▪ Two broad classes of systems: numbers of transactions into batches rather than processing
▪ batch systems each event separately.
▪ real-time systems ▪ Batch processing provides control over the transaction
Batch Processing process via control figures.
▪ A batch is a group of similar transactions that are
accumulated over time and then processed together. Real-Time Systems…
▪ The transactions must be independent of one another during ▪ process transactions individually at the moment the
the time period over which the transactions are accumulated in economic event occurs
order for batch processing to be appropriate. ▪ have no time lag between the economic event and the
▪ A time lag exists between the event and the processing. processing
▪ generally require greater resources than batch processing
since they require dedicated processing capacity; however,
these cost differentials are decreasing
▪ oftentimes have longer systems development
Time
Why Do So Many AIS Use Batch Processing?
▪ AIS processing is characterized by high-volume, Alphabetic Codes
independent transactions, such are recording cash receipts ▪ Used for many of the same purposes as numeric codes
checks received in the mail. ▪ Can be assigned sequentially or used in block and group
▪ The processing of such high-volume checks can be done coding techniques
during an off-peak computer time. ▪ May be used to represent large numbers of items
▪ This is one reason why batch processing maybe done using ▪ Can represents up to 26 variations per field
real-time data collection. ▪ Disadvantage:
Uses of Coding in AIS ▪ arbitrary information
▪ Concisely represent large amounts of complex information Mnemonic Codes
that would otherwise be unmanageable ▪ Alphabetic characters used as abbreviations, acronyms, and
▪ Provide a means of accountability over the completeness of other types of combinations
the transactions processed ▪ Do not require users to memorize the meaning since the
▪ Identify unique transactions and accounts within a file code itself is informative – and not arbitrary
▪ Support the audit function by providing an effective audit ▪ NY = New York
trail ▪ Disadvantages:
Sequential Codes (SBGAM) ▪ limited usability and availability
▪ Represent items in sequential order
▪ Used to prenumber source documents
▪ Track each transaction processed
▪ Identify any out-of-sequence documents
▪ Disadvantages:
▪ arbitrary information
▪ hard to make changes and insertions
Block Codes
▪ Represent whole classes by assigning each class a specific
range within the coding scheme
▪ Used for chart of accounts
▪ The basis of the general ledger
▪ Allows for the easy insertion of new codes within a block
▪ Don’t have to reorganize the coding structure

▪ Disadvantage:
▪ arbitrary information