In this chapter we begin by explaining important terms and discussing the kinds of information that organizations need and the business process used to produce that information. We continue with an explanation of what an accounting information system (AIS) is, how it adds value to an organization and more.

A system is a set of two or more interrelated components that interact to achieve a goal. Most systems are composed of smaller subsystems that support the larger system.

Goal conflict occurs when a subsystem is inconsistent with the goals of another subsystem or with the system as a whole.

Goal congruence occurs when a subsystem achieves its goals while contributing to the organization’s overall goal. The larger the organization and the more complicated the system, the more difficult it is to achieve goal congruence.

Data are facts that are collected, recorded, stored, and processed by an information system. Companies need to collect several kinds of data. Information is data that have been organized and processed to provide meaning and improve the decision making process.

There are limits to the amount of information the human mind can absorb and process. An information overload occurs when those limits are passed, resulting in a decline in decision making quality and an increase in the cost of providing that information. Information systems designers use information technology (IT) to help decision makers more effectively filter and condense information.

The value of information is the benefit produced by the information minus the cost of producing it. Benefits of information are reduced uncertainty, improved decisions, and improved ability to plan and schedule activities. The cost are the time and resources spent to produce and distribute the information.

All organizations have certain business processes that they are continuously engaged in. A business process is a set of related, coordinated, and structured activities and tasks that are performed by a person or by a computer or a machine, and that help accomplish a specific organizational goal. To make effective decisions, organizations must decide what decisions they need to make, what information they need to make the decisions, and how to gather and process the data needed to produce the information.

It’s possible to reorganize a business process into groups of related transactions. A transaction is an agreement between two entities to exchange goods or services or any other event that can be measured in economic terms by an organization. The process that begins with capturing transaction data and ends with informational output, such as the financial statements, is called transaction processing.

Many business activities are pairs of events involved in a give-get exchange. Most organizations engage in a small number of give-get exchanges, but each type of exchange happens many times.

These exchanges can be grouped into five business processes of transaction cycles:

• Revenue cycle, where goods and services are sold for cash or a future promise to receive cash.

• Expenditure cycle, where companies purchase inventory for resale or raw materials to use in producing products in exchange for cash or a future promise to pay cash.

• Production or conversion cycle, where raw materials are transformed into finished goods.

• Human resource/payroll cycle, where employees are hired, trained, compensated, evaluated, promoted, and terminated.

• Financing cycle, where companies sell shares in the company to investors, and borrow money and where investors are paid dividends and interest is paid in loans.

It has often been said that accounting is the language of business. An accounting information system (AIS) is the intelligence, the information providing vehicle, of that language. Accounting is a data identification, collection, and storage process as well as an information development, measurement, and communication process. An AIS can be a paper-and-pencil manual system, a complex system using the latest in IT, or something in between. The AIS must collect, enter, process, store and report data and information. The paper and pencil are more the tools used to produce the information.

There are six components of an AIS:

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

5. The information technology infrastructure

6. The internal controls and security measures that safeguard AIS data

These components enable an AIS to fulfil three important business functions:

1. Collect and store data about organizational activities, resources, and personnel.

2. Transform data into information so management can plan, execute, control, and evaluate activities, resources and personnel.

3. Provide adequate controls to safeguard the organization’s assets and data.

A well-designed accounting information system can add value to an organization by:

1. Improving the quality and reducing the cost of products or services.

2. Improving efficiency

3. Sharing knowledge

4. Improving the efficiency and effectiveness of its supply chain

5. Improving the internal control structure

6. Improving decision making

There are three factors that influence the design of an accounting information system (see figure 1.4 page 33).

1. Organizational culture

2. Business strategy

3. Information technology

Predictive analysis is based on historical trends and calculated probabilities. Predictive analysis provides an educated guess of what one may expect to see in the near future allowing companies to make better business decisions and improve their process.

An organization’s AIS plays an important role in helping it adopt and maintain a strategic position. Achieving a close fit among activities requires that data be collected about each activity. It is also important that the information system collect and integrate both financial and non-financial data about the organization’s activities.

To provide value to their customers, most organizations perform a number of different activities. Figure 1-5 page 34 shows that those activities can be conceptualized as forming a value chain consisting of five primary activities that directly provide value to customers:

1. Inbound logistics. Consists of receiving, storing, and distributing the materials an organization uses to create the services and products it sells.

2. Operations. Activities transform inputs into final products or services.

3. Outbound logistics. Activities distribute finished products or services to customers.

4. Marketing and sales. Activities help customers buy the organization’s products or services.

5. Service. Activities provide post-sale support to customers.

Support activities allow the five primary activities to be performed efficiently and effectively. There are grouped into four categories:

1. Firm infrastructure. Is the accounting, finance, legal, and general administration activities that allow an organization to function.

2. Human resources. Activities include recruiting, hiring, training, and compensating employees.

3. Technology. Activities improve a product or service.

4. Purchasing. Activities procure raw materials, supplies, machinery, and the buildings used to carry out the primary activities.

An organization’s value chain is a part of a larger system, called the supply chain.