TOPIC 2 - ACCOUNTING INFORMATION SYSTEMS Flashcards
Describe the three major components of accounting.
(a) accounting Processes
This refers to a set of integrated processes to process accounting-related data which are used as the fundamental basis for decision making, taking calculated actions and fulfilling any financial reporting obligations of the business. In other words, it is the platform that converts data (usually figures and numbers) into information which can be used by the business.
(b) The Language of Business
Accounting is a generic concept in the field of business. Accounting not only involves the analysis of bookkeeping records which is able to show a healthy set of debit and credit of funds, but also the analysis of economic and financial data which is imperative for the survival of the business. To put it simply, it is the one language that every business speaks and interacts with.
(c) The Source of Financial Data
This refers to where the business gets its financial information from. In today’s business environment, financial information can be found online and from many other digital sources. Social media is another common source. Annual reports of some organizations are published on the Internet.
- List three processing tasks in AIS.
2. State the characteristics of useful information.
Data Sources
Financial transactions are used by the AIS for processing. These are called data sources and they can be sourced either internally or externally. Internal sources come in the form of exchange between the resources in the organisation such as the movements of raw materials from one department to another, depreciation of assets and equipment, and transferring of raw materials to finished goods and subsequently into the inventory system.
On the other hand, external data is sourced from business entities or other companies that are not within the organisation. These include purchases of goods and services as well as disbursements of funds such as salaries or wages.
Data Collection
The first operational stage in the AIS is data collection. What this stage sets out to achieve is to ensure that the data that enters the system is error-free. Besides that, the data should be complete and valid. That is why data collection is often regarded as the most important stage and component of the AIS. This is because errors in the data would produce unreliable outputs, resulting in users making wrong or poor decisions.
In designing the data collection method, two main rules are of utmost importance – relevance and efficiency. Firstly, only relevant data should be captured by the system. In this context, it means that the system designer must determine the relevance of the data being used. This is done by analysing what the user needs and to proceed from thereon. The most relevant data would be those that will contribute towards the forming of information.
Secondly, if the data collection procedures are efficient, it would only be necessary to collect the data once and the data can then be used by many users and repeatedly over time. If the same data is being captured more than once, it would then lead to redundancy and inconsistency in the data. It must be noted that information systems have limited capacity when it comes to collecting, processing and storage of data. When data redundancy occurs, it will cause overloading in the facility which in turn affects efficiency. As a result, it will lead to bad decisions.
Data Processing
Data would need to be processed after it is collected in order for information to be created. The tasks involved in the processing stage could range from very simple to highly complex, involving sophisticated algorithms such as linear programming models commonly used in applications for production and scheduling. Data processing could be a simple task, for example, adding numbers to compute the total sales or costs of raw materials.
On the other hand, it could be a complicated task when it involves large volumes of data from previous years, for example, to analyse future trends, make predictions and calculate budgets.
Database Management
A database in an organisation is the physical repository used to store financial or non-financial data. A database – a generic term which could refer to a disk drive or a filing cabinet – would, in most cases, be represented in a logical hierarchy consisting of data attributes, records and files.
(i) Data Attributes
A data attribute refers to the logical and relevant characteristics of the entity used to capture data by the organisation. It is often referred to as the most elemental piece of potentially useful data in the database. Every attribute in the entity is very important because it helps to build the content of the set of records. The information content will be lost or diminished if a single attribute is not present.
Records
Records are used in databases to refer to a full set of a single occurrence that includes all the attributes within the entity. For instance, in an Accounts Payable (AP) class, the name, address, contact and account balance could well be one occurrence referred to as one record.
Meanwhile each record must be uniquely identified within the database, meaning at least one attribute in the record must be unique. In most cases, we will assign artificial keys to the records because natural attributes such as name or address cannot ensure uniqueness in the record.
Files
In the database, a file is referred to as a full set of records. This is with regard to the situation of an identical class. Using the previous example, all the AP records of the organisation will form the AP file. This will be the same for other entities such as payroll and accounts receivable. Here, the entire collection of these files will form the database of the organisation.
(iv) Database Management Tasks
In database management, three fundamental tasks are involved – storage, retrieval and deletion. In the first task (storage), keys are assigned to new records and stored in a specific location within the database. In the second task (retrieval), an existing record will be located and extracted when needed. Once the processing is completed, the record in the database will be updated and this will invoke the storage task again. When a record is no longer needed (obsolete or redundant), it will be removed under the deletion task.
Information Generation
The process of compiling, arranging, formatting and presenting information to those who need it within an organisation is known as information generation. Information can be presented in many forms including as a report, a structured document, a message on the monitor or an operational document such as an invoice. For information to be useful, it should have the following characteristics, namely relevance, timeliness, accuracy, completeness and summarisation.
(i) Relevance
Whenever information is generated, it must have a purpose or reason. The contents of the report must be compiled to achieve an objective. For example, the information could be used for decision making or to help in completing a task. We had previously established that only data that is relevant to the userÊs action has information content. In other words, reports should only show relevant data. Irrelevant information will not only lead to wasted resources but it would be detrimental to the userÊs job, potentially leading to bad or wrong decisions.
(ii) Timeliness
Time taken is very important as it will help to determine if the information is useful. All information obtained must not be older than the time needed for the action to be completed. For instance, if you are a manager of a supermarket who makes the decision to replenish stocks based on a status report that shows the inventory of that day, then the information in the report would only be relevant for one day.
(iii) Accuracy
Material errors are very damaging. Hence, information should not contain material errors. Information should be as perfectly accurate as it can possibly be. Depending on the environment of the job, the level of accuracy might vary. Material errors can lead to poor and damaging decisions. In some situations, it might not be possible to obtain absolute accuracy within a short period of time. Hence, system designers would need to find information which is as accurate as possible and yet timely enough to be relevant.
Summarisation
In the hierarchy of the organisation, information needs to be cascaded according to the needs of the users. You will find that managers in the lower levels might need more detailed information while those at the top would need more summarised information.
(f) Feedback
Feedback, as the term implies, refers to information that is sent back to the source. This involves the output of the system being sent back into the system as a source of data, which can be either internal or external. Feedback is commonly used to influence a process, for example, as an alteration or to initiate a process. When an item in the inventory reaches low levels, the system sends a signal to the user involved, thereby driving the user to perform or initiate an ordering process. This is an example of internal feedback.
The basic subsystems of AIS can be categorised as follows:
(i) Revenue Cycle – The buy-and-sell process that covers the stages of selling products and services as well as payment transactions;
(ii) Expenditure Cycle – The process of buying and paying for products and services;
(iii) Human Resource or Payroll Cycle – The major human resource activities which include hiring of employees, payroll and others;
(iv) Production Cycle – The activities that convert raw materials into finished goods which are then ready to be sold; and
(v) Financing Cycle – The activities organised by the organisation to obtain funds for its existence which include repayment of debts and others.
(iv) Completeness
A piece of information that is not complete would be useless. Because of this, the completeness of the information should be ensured at all times and there should be no missin
