Information Flows 2.

Middle Management is accountable for the short-term planning and

coordination of activities necessary to accomplish organizational objectives.
We begin the study of AIS with the recognition that information is a business 3. Top Management is responsible for longer-term planning and setting
resource. Like the other business resources of raw materials, capital, and labor, organizational objectives. Every individual in the organization, from business
information is vital to the survival of the contemporary business organization. Every to top management, needs information to accomplish his or her tasks.
business day, vast quantities of information flow to decision makers and other users
to meet a variety of internal needs. In addition, information flows out from the Notice in Figure 1 how information flows in two directions within the organization:
organization to external users, such as customers, suppliers, and stakeholders who horizontally and vertically.
have an interest in the firm.
 The horizontal flow supports operations-level tasks with highly detailed
Figure 1 presents an overview of these internal and external information flows. information about the many business transactions affecting the firm. This
includes information about events such as the sale and the shipment of
goods, the use of labor and the materials in the production process, and
internal transfer of resources from one department to another.
Figure 1.  The vertical flow distributes information downward form senior manager to
Internal and
External Flows junior managers and operations personnel in the form of instructions,
of Information quotas and budgets. In addition, summarized information pertaining to
operations and other activities flows upward to managers at all levels.
Management uses this information to support its various planning and
control functions.
 A third flow of information depicted in Figure 1 represents exchange
between the organization and users in the external environment. External
users fall into two groups: trading partners and stakeholders. Exchanges with
trading partners include customer sales and billing information, purchase
information for suppliers, and inventory receipts information. Stakeholders
are entities outside (or inside) the organization with a direct or indirect
interest in the firm. Stockholders, financial institutions, and government
Business operations form the base of the pyramid. These activities consist of product
agencies are examples of external stakeholders. Information exchanges with
oriented work of the organization, such as manufacturing, sales, and distribution.
these groups include financial statements, tax returns, and stock transaction
(Hall, Accounting Information System, 2011)
information. Inside stakeholders include accountants and internal auditors.
Above the base level, the organization is divided into three management tiers:
All user groups have unique information requirements. The level of detail and the
1. Operations Management is directly responsible for controlling day-to-day nature of the information these groups receive differ considerably. For example
operations. managers cannot use the highly detailed information needed by operations
personnel. Management information is thus more summarized and oriented toward
reporting on overall performance and problems rather than routine operations. The 5. The information technology infrastructure, including the computers,
information must identify potential problems in time for management to take peripheral devices, and network communications devices used in the AIS.
corrective action. External stakeholders, on the other hand, require information very 6. The internal controls and security measures that safeguard AIS data.
different from that of management and operations users. Their financial statement
information, based on generally accepted accounting principles (GAAP), is accrual The information system is the set of formal procedures by which data are
collected, processed into information, and distributed to users. The information
based and far too aggregated for most internal uses.
system accepts input, called transactions, which are converted through various
processes into output information that goes to users. A transaction as an event
that affects or is of interest to the organization and is processed by its
ACCOUNTING INFORMATION SYSTEM (Romney,Steinbart,Summers,&Wood,2021) information system as a unit of work. Transactions fall into two classes:
It has often been said that accounting is the language of business. If that is Financial transactions-is an economic event that affects the assets and
the case, then an accounting information system (AIS) is the intelligence-the equities of the organization, is reflected in its accounts, and is measured in
information-providing vehicle-of that language. Accounting is the systematic and monetary terms. Sales of products to customers, purchases of inventory from
comprehensive recording of an organization's financial transactions. It also includes vendors, and cash disbursements and receipts are examples of financial
summarizing, analyzing, and reporting these transactions to management, transactions. Every business organization is legally bound to correctly process
owners/investors oversight agencies, and tax collection entities. That means these types of transactions.
accounting is a data identification, collection, and storage process as well as an
information development, measurement, and communication process. By definition, Non-financial transactions-are events that do not meet the narrow
accounting is an information system, since an AIS collects, records, stores, and definition of a financial transaction. For example, adding a new supplier of raw
processes accounting and other data to produce information for decision makers. materials to the list of valid suppliers is an event that may be processed by the
enterprise's information system as a transaction. Important as this information
An AIS can be a paper-and-pencil manual system, a complex system using obviously is, it is not a financial transaction, and the firm has no legal obligation
the latest in IT, or something in between. Regardless of the approach taken, the to process it correctly-or at all.
process is the same. The AIS must collect, enter, process, store, and report data and
information. The paper and pencil or the computer hardware and software are GENERAL MODEL FOR AIS (Hall, Accounting Information System,2011)
merely the tools used to produce the information.
This is a general model because it describes all information systems,
COMPONENTS OF AN ACCOUNTING INFORMATION SYSTEM regardless of their technological architecture. The elements of the general model
are end users, data sources, data collection, data processing, database
There are six components of an AIS: management, information generation, and feedback.
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.
The External Environment External financial transactions are the most common source of data for
most organizations. These are economic exchanges with other business entities and
individuals outside the firm. Examples include the sale of goods and services, the
purchase of inventory, the receipt of cash, and the disbursement of cash (including
payroll).
Internal financial transactions involve the exchange or movement of
resources within the organization Examples include the movement of raw materials
into work-in-process (WIP), the application of labor and overhead to WIP, the
transfer of WIP into finished goods inventory, and the depreciation of plant and
equipment.
Data Collection
Data collection is the first operational stage in the information system. The
objective is to ensure that
End Users
Event data entering the system are valid, complete, and free from material
End users fall into two general groups: external and internal. External users errors. In many respects, this is the most important stage in the system. Should
include creditors, stockholders, potential investors, regulatory agencies, tax transaction errors pass through data collection undetected, the system may process
authorities, suppliers, and customers. Internal users include management at every the errors and generate erroneous and unreliable output. This, in turn, could lead to
level of the organization, as well as operations personnel. incorrect actions and poor decisions by the users
In contrast to external reporting, the organization has a great deal of latitude Two rules govern the design of data collection procedures: relevance and
in the way it meets the needs of internal users. Although there are some well- efficiency. The information system should capture only relevant data. A fundamental
accepted conventions and practices, internal reporting is governed primarily by what task of the system designer is to determine what is and what is not relevant. He or
gets the job done. System designer, including accountants, must balance the desires she does so by analyzing the user’s needs. Only data that ultimately contribute to
of internal users against legal and economic concerns such as adequate control and information (as defined previously) are relevant. The data collection stage should be
security, proper accountability, and the cost of providing altemative forms of designed to filter irrelevant facts from the system.
information. Thus, internal reporting poses a less structured and generally more
difficult challenge than external reporting. 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
Data Sources more than once leads to data redundancy and inconsistency. Information systems
Data sources are financial transactions that enter the information system have limited collection, processing, and data storage capacity. Data redundancy
from both internal and external sources. overloads facilities and reduces the overall efficiency of the system .Inconsistency
among redundant data elements can result in inappropriate actions and bad
decisions.
Data Processing Information generation is the process of compiling, arranging, formatting,
and presenting information to users. Information can be an operational document
Once collected, data usually require processing to produce such as a sales order, a structured report, or a message on a computer screen.
information .Tasks in the data processing stage range from simple to complex.
Examples include mathematical algorithms (such as linear programming models) Feedback
used for production scheduling applications, statistical techniques for sales
Feedback is a form of output that is sent back to the system as a source of
forecasting, and posting and summarizing procedures used for accounting
applications. 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
Database Management of inventory have fallen to, or below, heir minimum allowable levels. Internal
feedback from this information will initiate the inventory ordering process to
The organization’s database is its physical repository for financial and replenish the inventories. Similarly, external feedback about the level of uncollected
nonfinancial data. We use the term database in the generic sense. It can be a filing customer accounts can be used to adjust the organization’s credit-granting policies.
cabinet or a computer disk .Regardless of the database’s physical form, we can
represent its contents in a logical hierarchy. The levels in the data hierarchy- INFORMATION SYSTEM OBJECTIVES
attribute, record, and file.
Each organization must tailor its information system to the needs of its
Data attribute-is the most elemental piece of potentially useful data in the database. users. Therefore, specific information system objectives may differ from firm to firm.
An attribute is a logical and relevant characteristic of an entity about which the firm Three fundamental objectives are, however, common to all systems:
captures data. 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 To support the stewardship function of management. Stewardship refers to
management’s responsibility to properly manage the resources of the firm. The
relevant attribute diminishes or destroys the information content of the set. The
addition of irrelevant or illogical data would not enhance the information content of information system provides information about resource utilization to external users
via traditional financial statements and other mandated reports. Internally,
the set.
management receives stewardship information from various responsibility reports.
Record-is a complete set of attributes for a single occurrence within an entity class.
To support management decision making. The information system supplies
For example, a particular customer’s name, address, and account balance is one
occurrence (or record) within the AR class. To find a particular record within the managers with the information they need to carry out their decision-making
responsibilities.
database, we must be able to identity it uniquely. Therefore, every record in the
database must be unique in at least one attribute. 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
File-is a complete set of records of an identical class. For example, all the AR records
of the organization constitute the AR file. Similarly, files are constructed for other discharge of their daily tasks.
classes of records such as inventory, accounts payable, and payroll. The
organization’s database is the entire collection of such files
Information Generation