Skip to main content

Accounting Information Systems

ACCOUNTING INFORMATION SYSTEMS

An accounting information system (AIS) combines the study and practice of accounting with the design, implementation, and monitoring of an information system. Such a system involves applying modern information technology resources to traditional accounting controls and methods to provide users the financial information necessary to manage their organizations. This system is often a component of an entity's management information system.

TECHNOLOGY

Contemporary technological capabilities permit a range of possible designs for an AIS. Yet, the basic structure of a system continues to include essentially the same three components: input, processing, and output.

Input

The input devices commonly associated with an AIS include standard personal computers (PCs) or workstations running applications, scanning devices for standardized data entry, and electronic communication devices for electronic data interchange (EDI) and electronic commerce (e-commerce). In addition, many financial systems come "Web enabled" to allow devices that connect to the World Wide Web AIS access.

Processing

Basic processing is achieved through computer systems ranging from individual PCs to large-scale enterprise servers. Conceptually, however, the underlying processing model is still the double-entry accounting system invented many centuries ago.

Output

The output devices used include computer displays, impact and nonimpact printers, and electronic communication devices for EDI and e-commerce. The output content may encompass almost any type of financial report, from budgets and tax reports to multinational financial statements and sustainability reports.

MANAGEMENT INFORMATION SYSTEMS

Management information systems (MISs) are interactive human/machine systems that support decision making for users both in and out of traditional organizational boundaries. These systems are used to support an organization's daily operational activities, current and future tactical decisions, and overall strategic direction. MISs are made up of several major applications, including the financial information and human resources systems.

Financial Information Applications

Financial information applications make up the heart of AIS in practice. Modules commonly implemented include: general ledger, payables, procurement/purchasing, receivables, billing, inventory, assets, projects, and budgeting.

Human Resource Applications

Human resource applications make up another major part of modern information systems. Modules commonly integrated with the AIS include: human resources, benefits administration, pension administration, payroll, and time and labor reporting.

INFORMATION SYSTEMS IN CONTEXT

AISs cover all business functions from backbone accounting transaction processing systems to sophisticated financial management planning and processing systems.

Financial Reporting

Financial reporting starts at the operational levels of the organization where the transaction processing systems capture important business events such as normal production, purchasing, and selling activities. These events (transactions) are classified and summarized for internal decision making and for external financial reporting.

Cost Accounting Systems

Cost accounting systems such as activity-based costing (ABC) systems are used primarily in manufacturing environments, but increasingly are being applied to service companies, such as banks, real estate firms, and insurance companies. These allow organizations to track the costs associated with production of goods and performance of services.

Management Accounting Systems

Management accounting systems such as master budgets are used to facilitate organizational planning, monitoring, and control for a variety of activities. Such systems allow all managerial levels to have access to prompt reporting and statistical analysis. The systems are used to gather information to consider alternative scenarios, and to identify an optimal answer among the hypothetical scenarios.

DEVELOPMENT OF AN AIS

The development of all AISs includes the basic phrases of planning, analysis, design, reporting, implementation, and support. The time associated with each of these phrases can be as short as a few weeks or as long as several years.

Planning

The first phase of systems development is the planning of the project. This entails determination of the scope and objectives of the project, the definition of project responsibilities, control requirements, project phases, project budgets, and project deliverables.

Analysis

The analysis phase requires a thorough evaluation and documentation of the accounting and business processes in use by the organization. This phase may include reengineering to take advantage of modern best practices and the operating characteristics of modern system solutions.

Data analysis involves a thorough review of the accounting information that is being collected by an organization. Such data are often compared to budgeted data prepared for financial management and for external financial reporting.

Decision analysis is a through review of the decisions a manager is responsible for making. The primary decisions that managers are responsible for are identified on an individual basis. Then models are created to support the manager in gathering financial and related information, developing and designing alternatives, and making actionable choices. This method is used when decision support is the system's primary objective.

Process analysis is a thorough review of the organization's business processes. Organizational processes often are identified and segmented into a series of events that either add or change data. These processes can then be modified or reengineered to improve the organization's operations in terms of lowering cost, improving service, improving quality, and improving management information.

Design

The design phase takes the results of the analysis phase and turns them into detailed specific designs that can be implemented in a subsequent phase. It involves the detailed design of all inputs, processing, storage, and outputs of the proposed accounting system. Inputs may be defined using screen layout tools and application generators. Processing can be shown through the use of flowcharts or business process maps that define the system logic, operations, and work flow. Logical data storage designs are shown by modeling the relationships between the organization's resources, events, and agents in diagrams. Also, entity relationship diagram modeling is used to document large-scale database relationships. Output designs are documented through the use of a variety of reporting tools such as report writers, data extractions tools, query tools, and online analytical processing tools.

Data capture and storage

Screen designs and system interfaces are the primary data capture devices of AISs and are developed through a variety of tools. Storage is achieved through the use of normalized databases that increase functionality and flexibility.

Processing

Business process maps and flowcharts are used to document the operations of the systems. Modern AISs use specialized databases and processing designed specifically for accounting operations. This means that much of the base processing capabilities come delivered with the accounting or enterprise software.

Reporting

Reporting is the driving force behind AIS development. If the system analysis and design are successful, the reporting process provides the information that helps drive management decision making and external financial reporting. Accounting systems make use of a variety of scheduled and on-demand reports. The reports can be tabular, showing data in a table or tables; graphic, using images to convey information in a picture format; or matrices, to show complex relationships in multiple dimensions.

There are numerous characteristics to consider when defining reporting requirements: The reports must be accessible through the system's interface. They should convey information in a proactive manner. They must be relevant. Accuracy and reliability must be considered. Lastly, reports must meet the information processing (cognitive) style of the audience they were meant to inform and meet applicable reporting standards.

Management reports come in three basic types:

  • Filter reports separate selected data from a database, such as a monthly check register
  • Responsibility reports such as a weekly sales report for a regional sales manager
  • Comparative reports created to show period differences, percentage breakdowns and differences (variances) between actual and budgeted expenditures, such as a report showing the expenses from the current year and the prior year as a percentage of sales

Implementation

The implementation phase consists of two primary parts, construction and delivery. Construction includes the selection of hardware, software, and vendors for the implementation; building and testing the network communication systems; building and testing the databases; writing and testing the new program modifications; and installing and testing the total system from a technical standpoint. Delivery is the process of conducting final system and user acceptance testing, preparing the conversion plan, installing the production database, training the users, and converting all operations to the new system.

Tool sets

Tool sets are a variety of application development aids that are vendor specific and used for customization of delivered systems. They allow the addition of fields and tables to the database along with ability to create screen and other interfaces for data capture. In addition, they help set accessibility and security levels for adequate internal control within the accounting applications.

Security

Security exists in several forms, including physical security. In typical AISs the equipment is located in a locked room with access granted only to technicians. Software access controls are set at several levels, depending on the size of AIS. The first level of security occurs at the network level, which protects the organization's communication systems. Next is the operating system level security, which protects the computing environment. Then database security is enabled to protect the organizational data from theft, corruption, and other threats. Lastly, application security is used to keep unauthorized persons from performing operations within the AIS.

Testing

Testing is performed at four levels. Stub or unit testing is used to ensure the proper operation of individual modifications. Program testing involves the interaction between the individual modification and the program it enhances. System testing is used to determine that the program modifications work within the AIS as a whole. Acceptance testing ensures that the modifications meet user expectations and that the entire AIS performs as designed.

Conversion

Conversion entails the method used to change from an old to a new AIS. Several methods are available to achieve this goal. One is to run the new and old systems in parallel for a specified period. A second method is to directly cut over to the new system at a specified time. A third method is to phase in the system, either by location or system function. A fourth method is to pilot the new system at a specific site before converting the rest of the organization.

Support

The support phase has two objectives. The first is to update and maintain the AIS. This includes fixing problems and updating the system for business and environmental changes. For example, changes in generally accepted accounting principles (GAAP) or new regulations such as the Sarbanes-Oxley Act of 2002 might necessitate changes to the AIS. The second objective of support is to continue development by continuously improving the business through adjustments to business and environmental changes. These changes might result in future problems, new opportunities, or management or governmental directives requiring additional system modifications.

ASSURANCE, AUDIT, AND ATTESTATION

Quality control of AISs involves many activities, including the services of both external auditors (public accountants) and internal auditors. External auditors can provide a variety of services, including providing assurance that the controls over external financial reporting are adequate and attestations that the external financial statement are "fairly presented" in accordance with GAAP. Internal auditors focus on providing assurance that AISs are effective and efficient in providing information to assist managerial decision making.

Continuous improvement of AISs change the way internal controls are implemented and the types of audit trails that exist within a modern organization. The lack of traditional forensic evidence, such as paper, necessitates the involvement of accounting and auditing professionals in the design of such systems. Periodic involvement of public auditing firms can be used to make sure the AIS is in compliance with current internal control requirements, such as the Section 404 requirements of the Sarbanes-Oxley Act and revised financial reporting standards.

After the implementation, the focus of attestation is the review and verification of system operation. This requires adherence to such standards as ISO 9000 for software design and development, as well as standards for control of information technology.

Periodic functional business reviews should be conducted to make sure the AIS remains in compliance with the intended business functions. Quality standards dictate this review should be done according to a periodic schedule.

TRADITIONAL AIS AND MODERN ENTERPRISE RESOURCE PLANNING SYSTEMS

Enterprise resource planning (ERP) systems are large-scale information systems that affect an organization's AIS. These systems permeate all aspects of the organization and require such technologies as client/server and relational databases. Other system types that affect AISs are supply chain management and customer relationship management.

Traditional AISs recorded financial information and produced financial statements on a periodic basis according to GAAP pronouncements. Modern ERP systems provide a broader view of organizational information, enabling the use of advanced accounting techniques such as ABC and improved managerial and financial reporting using a variety of analytical techniques.

see also Accounting; Information Systems; Management Information Systems

bibliography

Hall, James A. (2007). Accounting information systems (5th ed.). Cincinnati: Thomson South-Western.

Jones, F., and Rama, D. (2006). Accounting information systems: A business process. Cincinnati: Thomson South-Western.

O'Brien, J. A., and Marakas, G. (2006). Management information systems (7th ed.). New York: McGraw-Hill.

Theodore J. Mock

Cite this article
Pick a style below, and copy the text for your bibliography.

  • MLA
  • Chicago
  • APA

"Accounting Information Systems." Encyclopedia of Business and Finance, 2nd ed.. . Encyclopedia.com. 20 Sep. 2018 <http://www.encyclopedia.com>.

"Accounting Information Systems." Encyclopedia of Business and Finance, 2nd ed.. . Encyclopedia.com. (September 20, 2018). http://www.encyclopedia.com/finance/finance-and-accounting-magazines/accounting-information-systems

"Accounting Information Systems." Encyclopedia of Business and Finance, 2nd ed.. . Retrieved September 20, 2018 from Encyclopedia.com: http://www.encyclopedia.com/finance/finance-and-accounting-magazines/accounting-information-systems

Learn more about citation styles

Citation styles

Encyclopedia.com gives you the ability to cite reference entries and articles according to common styles from the Modern Language Association (MLA), The Chicago Manual of Style, and the American Psychological Association (APA).

Within the “Cite this article” tool, pick a style to see how all available information looks when formatted according to that style. Then, copy and paste the text into your bibliography or works cited list.

Because each style has its own formatting nuances that evolve over time and not all information is available for every reference entry or article, Encyclopedia.com cannot guarantee each citation it generates. Therefore, it’s best to use Encyclopedia.com citations as a starting point before checking the style against your school or publication’s requirements and the most-recent information available at these sites:

Modern Language Association

http://www.mla.org/style

The Chicago Manual of Style

http://www.chicagomanualofstyle.org/tools_citationguide.html

American Psychological Association

http://apastyle.apa.org/

Notes:
  • Most online reference entries and articles do not have page numbers. Therefore, that information is unavailable for most Encyclopedia.com content. However, the date of retrieval is often important. Refer to each style’s convention regarding the best way to format page numbers and retrieval dates.
  • In addition to the MLA, Chicago, and APA styles, your school, university, publication, or institution may have its own requirements for citations. Therefore, be sure to refer to those guidelines when editing your bibliography or works cited list.