January 26, 2022

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Three Major Subsystems of an Accounting Information System

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Accounting Information System (AIS) processes financial and nonfinancial transactions that are related to financial transactions of an entity. AIS is a subsystem of a business’ Management Information System, MIS. However, as a field of study, AIS is made up of three major components subsystems.

Major components of AIS

Transaction processing system: The Transaction processing system or TPS is the lifeblood of all the Accounting Information System. This subsystem captured daily economic events and conditions. These daily economic events can be in hundreds in a small firm or thousands in a large organization.

The TPS documents these events and conditions on a daily basis and produces reports to various units and departments of the organization.

As a result of the huge amount of events captured by the transaction processing system, the data is subdivided into three transaction cycles. Revenue cycles, expenditure cycle, and conversion cycles. These are discussed in detail later on.

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To help understand this economy event read my lesson on business transactions. These transactions are what is processed by the TPS in an AIS.

General ledger and financial reporting system: The General ledger and financial reporting system (GL/FRS) are two separate subsystems in an AIS. Because of their interdependence and relatedness, they are grouped as a single subsystem.

The General ledger subsystem or GLS is where the bulk of all TPS outputs are processed. Here the TPS output which is known input to GLS is used to update the general ledger control account.

Let’s look at it this way. In a non-computerized accounting system, transactions are captured in source documents and prime books which is the TPS in the computerized accounting system. This is then processed into a ledger book and a trial balance, control account, and reconciliations accounts are prepared, that is, the GLS.

Furthermore, other less routine economic events such as lawsuits and inventory transactions go directly in these GLS.

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Next, is the Financial Reporting System or FRS. This provides summaries of reports that are processed by the GLS. This report includes financial statements, tax return, and other statutory reports.

Management Reporting System: Management reporting system or MRS provides internal reports. Unlike the Financial Reporting System, the reports provided by MRS are peculiar to management. That is, only management needs the reports and not required by law. These reports include budgets, variance reports, and other responsibility reports.

The subsystem in an AIS is all-embracing and this theory matches all types of organization AIS system. In this next lesson, the components of an AIS will be examined.

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