Page 36 - Accounting Information Systems

C H A P TER 1 The Information System: An Accountant’s Perspective 7

backup (redundant) subsystem that comes into play when the primary subsystem fails. Control should be
provided on a cost-benefit basis. It is neither economical nor necessary to back up every subsystem.
Backup is essential, however, when excessive negative consequences result from a subsystem failure.
Hence, virtually every modern automobile has a backup braking system, whereas very few have backup
stereo systems.
Like automobile designers, information system designers need to identify critical subsystems, antici-
pate the risk of their failure, and design cost-effective control procedures to mitigate that risk. As we shall
see in subsequent chapters, accountants feature prominently in this activity.

AN INFORMATION SYSTEMS FRAMEWORK
The information system is the set of formal procedures by which data are collected, processed into infor-
mation, and distributed to users.
Figure 1-3 shows the information system of a hypothetical manufacturing firm decomposed into its
elemental subsystems. Notice that two broad classes of systems emerge from the decomposition: the
accounting information system (AIS) and the management information system (MIS). We will use this
framework to identify the domain of AIS and distinguish it from MIS. Keep in mind that Figure 1-3 is a
conceptual view; physical information systems are not typically organized into such discrete packages.
More often, MIS and AIS functions are integrated to achieve operational efficiency.
The distinction between AIS and MIS centers on the concept of a transaction, as illustrated by Figure 1-4.
The information system accepts input, called transactions, which are converted through various processes
into output information that goes to users. Transactions fall into two classes: financial transactions and
nonfinancial transactions. Before exploring this distinction, let’s first broadly define:
A transaction as an event that affects or is of interest to the organization and is processed by its infor-
mation system as a unit of work.

This definition encompasses both financial and nonfinancial events. Because financial transactions are
of particular importance to the accountant’s understanding of information systems, we need a precise def-
inition for this class of transaction:
A financial transaction is an economic event that affects the assets and equities of the organization,
is reflected in its accounts, and is measured in monetary terms.
Sales of products to customers, purchases of inventory from vendors, and cash disbursements and
receipts are examples of financial transactions. Every business organization is legally bound to correctly
process these types of transactions.
Nonfinancial transactions are events that do not meet the narrow definition of a financial transaction.
For example, adding a new supplier of raw materials to the list of valid suppliers is an event that may be
processed by the enterprise’s information system as a transaction. Important as this information obviously
is, it is not a financial transaction, and the firm has no legal obligation to process it correctly—or at all.
Financial transactions and nonfinancial transactions are closely related and are often processed by the
same physical system. For example, consider a financial portfolio management system that collects and
tracks stock prices (nonfinancial transactions). When the stocks reach a threshold price, the system places
an automatic buy or sell order (financial transaction). Buying high and selling low is not against the law,
but it is bad for business. Nevertheless, no law requires company management to design optimal buy-
and-sell rules into their system. Once the buy-or-sell order is placed, however, the processing of this
financial transaction must comply with legal and professional guidelines.

The Accounting Information System
AIS subsystems process financial transactions and nonfinancial transactions that directly affect the proc-
essing of financial transactions. For example, changes to customers’ names and addresses are processed
by the AIS to keep the customer file current. Although not technically financial transactions, these
changes provide vital information for processing future sales to the customer.