The Islamic University of Gaza Accounting Information Systems An Introduction Dr. Hisham Madi

Introduction 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

Introduction Transactions A transaction is a business event. Financial transactions economic events that affect the assets and equities of the organization (sales, and purchase). Nonfinancial transactions all other events processed by the organization’s. adding new supplier of raw materials.

Introduction Financial Transactions User Information Decision System Making Information Nonfinancial Transactions 10

Introduction What is Accounting Information Systems? Applying information technology (IT) to accounting systems Financial accounting Managerial accounting Auditing Taxation It identifies, collects, processes, and communicates economic information about a firm using a wide variety of technologies

Introduction Accounting information systems exists at the intersection of two important disciplines: (1) accounting and (2) information systems An Accounting Information System (AIS) Data and processing procedures Creates needed information for users

Accounting Versus Management Information System Accounting Information Systems (AIS) process financial transactions; e.g., sale of goods and nonfinancial transactions that directly affect the processing of financial transactions; e.g., addition of newly approved vendors. Management Information Systems (MIS) process nonfinancial transactions that are not normally processed by traditional AIS; e.g., tracking customer complaints, production planning, control, sales forecasting.

Accounting Versus Management Information System IS AIS GLS/FRS TPS MRS MIS Finance Marketing Production HRS Distribution AIS versus MIS? 11

The General AIS Model

Information Versus Data Raw facts No organization or meaning Have not processed (edited, summarized, or redefined) Have no direct effect on the users. Information Processed data Meaningful to users Cause the user to take an action.

AIS Components

Transforming the Data into Information Functions for transforming data into information according to the general AIS model: 1. Data Collection 2. Data Processing 3. Data Management 4. Information Generation

Transforming the Data into Information Data Collection Capturing transaction data Recording data onto forms Validating and editing the data Data Processing Merging Calculating Summarizing Comparing

Transforming the Data into Information Data Management Storing Retrieving Deleting Information Generation Compiling Arranging Formatting Presenting

Characteristics of Useful Information Relevance: serves a purpose 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

The Importance of IT to Accountants Accountants often help clients make software and hardware purchases Auditors must evaluate computerized systems Often asked to evaluate the efficiency and effectiveness of existing system Understanding is vital to passing most certification exams

Introduction to Transaction Processing An economic event that affects the assets and equities of the firm. Similar types of transactions are grouped together into three transaction cycles: the expenditure cycle, the conversion cycle, and the revenue cycle.

Introduction to Transaction Processing 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 transaction processing Product Documents - the result of transaction processing Turnaround Documents - a product document one system that becomes a source document for system

Creation a source Document

A Product Document

A Turnaround Document

Manual System Accounting Records 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

Computer-Based Systems Master File - generally contains account data (e.g., general ledger and subsidiary file) Transaction File - a temporary file containing transactions since the last update (sales orders, cash receipt, and inventory receipt). 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 Five common documentation techniques: Entity Relationship Diagram Data Flow Diagrams Document Flowcharts System Flowcharts

Data Flow Diagrams (DFD) Use symbols to represent the processes, data sources, data flows, and entities in a system Entities represent the sources of Data. Entities may be external to the organization such as customer or supplier. DFD shows what logical tasks are being done, but not how they are done or who is performing them

Data Flow Diagram Symbols Entity Name Data Store Name N Process Description Direction of data flow 25

Data Flow Diagram Symbols

Entity Relationship Diagram (ERD) ERD is a documentation technique to represent the relationship between entities in a system Entities are Resources (cash, raw materials) Events (release of raw materials into the production process) Agents (inventory control clerk, vendor, production worker)

Entity Relationship Diagram (ERD) Cardinality Is numeric mapping between two entity Relationship between tow entities. one-to-one (1:1) one-to-many (1: M) many-to-many (M : M)

Cardinalities 1 1 1 M M M Assigned Places Supply Entity Relationship Type Sales- person Assigned 1 M Customer Places Order M M Vendor Supply Inventory 23

System Flowcharts A system flowchart is the graphical representation of the physical relationships among key elements of a system.

Document Flowcharts A document flowchart traces the physical flow of documents through an organization—i.e., from the departments, groups, or individuals who first create them to their final dispositions. Constructing a document flowchart begins by identifying the different departments or groups that handle the documents of a particular system

Computer Operations Department Sales Department Computer Operations Department Warehouse Shipping Department Customer A Sales Order1 Edit and Credit Check Credit File Customer Order Sales Order 3 Picks Goods Stock Records Sales Order2 Sales Orders Terminal AR File Update Program Picks Goods Sales Order1 Inventory Customer Order Sales Order2 Sales Order3 N A N Sales Order1 Sales Order 3 Sales Order2 Sales Order1 Customer Finished System Flowchart Showing All Facts Translated into Visual Symbols

Computer-Based Accounting Systems Two broad classes of systems: batch systems real-time systems

Batch Processing A batch is a group of similar transactions that are accumulated over time and then processed together. There is always a time lag between the point at which an economic event occurs and the point at which it is reflected in the firm’s accounts. The amount of lag depends on the frequency of batch processing A time lag exists between the event and the processing.

Advantages of Batch Processing Organizations can increase efficiency by grouping large numbers of transactions into batches rather than processing each event separately. Batch processing provides control over the transaction process via control figures.

Real-Time Systems Process transactions individually at the moment the economic event occurs. Have no time lag between the economic event and the processing

Why Do So Many AIS Use Batch Processing? The processing of such high-volume checks can be done during an off-peak computer time. This is one reason why batch processing maybe done using real-time data collection.