Understanding Accounting Information Systems

The Three Subsystems of AIS

To fulfill its role, the AIS is organized into three major subsystems, each serving a different purpose in the information flow:

1. Transaction Processing System (TPS): This subsystem manages the daily operational cycles of the business, including the revenue, expenditure, and conversion cycles.
2. General Ledger/Financial Reporting System (GL/FRS): This system produces nondiscretionary reports. These are reports that the organization is legally required to provide, such as balance sheets, income statements, and tax returns.
3. Management Reporting System (MRS): This system provides discretionary reports. Unlike the GL/FRS, the organization has the choice to decide what information to report and how to present it. These internal financial reports are used by management to make strategic decisions.

Data vs. Information: The General Model

A common mistake is to use the terms "data" and "information" interchangeably. However, in the context of an AIS, they represent different stages of a process.

• Data: Raw facts that may or may not be processed. Data alone often has no direct effect on a user.
• Information: Processed data that has been edited, summarized, or refined to a point where it causes a user to take an action.

The general model for an AIS describes the flow from data sources (internal or external transactions) through data collection, data processing, and finally information generation.

The Data Hierarchy and Database Management

To manage this flow, data is organized into a specific hierarchy:

1. Attributes: The smallest unit, representing a specific characteristic (e.g., a customer's name or credit limit).
2. Records: A collection of attributes relating to a single entity (e.g., one specific Accounts Receivable record).
3. Files: A collection of related records (e.g., the entire Accounts Receivable file).

These files are stored in a database, which is a physical repository for financial data. Database management involves using specialized software to ensure that data is organized efficiently and that users can only access the elements they are authorized to see.

Exam Tip: Remember that "nondiscretionary" means you must do it (like tax returns), while "discretionary" means you choose how to do it (like internal management reports).

Organizational Structure and Accounting Independence

Organizations are divided into functional segments—units such as Materials Management, Production, Marketing, and Finance. Within these segments, different resources are managed: materials, labor, financial capital, and information.

For an AIS to be effective and secure, the organization must maintain accounting independence. This is the principle of separating the record-keeping function of accounting from the functional areas that have physical custody of resources. For example, the person who handles the physical cash (custody) should not be the same person who records the cash transactions in the ledger (record-keeping).

Finally, the ultimate goal of these processes is to produce reliable information. Reliability ensures that the information is useful to both internal users (management and operations) and external users (creditors, stockholders, and regulatory agencies).