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Accounting Information Systems9th Edition

Marshall B. Romney

Paul John Steinbart

Chapter 2

Overview of Business Processes

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Learning Objectives

1 Explain the three basic functions performed by an accounting information system (AIS).

2 Describe the documents and procedures used in an AIS to collect and process transaction data.

3 Discuss the types of information that can be provided by an AIS.

4 Describe the basic internal control objectives of an AIS and explain how they are accomplished.

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Introduction: S&S, Inc.

The grand opening of S&S is two weeks away.

Scott and Susan recognize that they need qualified accounting help and have hired a full-time accountant, Ashton Fleming.

Ashton is responsible for creating an accounting information system (AIS).

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Introduction: S&S, Inc.

What questions does Ashton ask himself?How am I going to organize things?Where do I start?What information does S&S need in

order to operate effectively?How can that information be

provided?

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Introduction: S&S, Inc.

How am I going to collect and process data about all the types of transactions that S&S will engage in?

How do I organize all the data that will be collected?

How should I design the AIS so that the information provided is reliable and accurate?

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Learning Objective 1

Explain the three basic functions an accounting information system (AIS) performs.

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Introduction This chapter provides an overview

of how an AIS can perform its three basic functions :1. To collect and store data about the

organization’s business activities and transactions efficiently and effectively

2 To provide information useful for decision making

3 To provide adequate controls to ensure that data are recorded and processed accurately

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Introduction

This chapter will examine:Basic types of business activities in

which an organization engagesKey decisions that must be

considered when managing those activities

Information needed to make those decisions

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Introduction

This chapter: Describes how data about business

activity is collected, processed and transformed into useful information for management

Then, it will introduce the concept of internal controls

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The Three Basic Functions Performed by an AIS

1 To collect and store data about the organization’s business activities and transactions efficiently and effectively: Capture transaction data on source

documents. Record transaction data in journals, which

present a chronological record of what occurred.

Post data from journals to ledgers, which sort data by account type.

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The Three Basic Functions Performed by an AIS

2 To provide management with information useful for decision making:In manual systems, this information is

provided in the form of reports that fall into two main categories:

– financial statements– managerial reports

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The Three Basic Functions Performed by an AIS

3 To provide adequate internal controls:Ensure that the information produced

by the system is reliable.Ensure that business activities are

performed efficiently and in accordance with management’s objectives.

Safeguard organizational assets.

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Basic Subsystems in the AIS

1. The revenue cycle: involves activities of selling goods or services and collecting payment for those sales.

2. The expenditure cycle: involves activities of buying and paying for goods or services used by the organization.

3. The human resources/payroll cycle: involves activities of hiring and paying employees.

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Basic Subsystems in the AIS

4. The production cycle: involves activities converting raw materials and labor into finished goods.

5. The financing cycle: involves activities of obtaining necessary funds to run the organization, repay creditors, and distribute profits to investors.

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Basic Subsystems in the AIS

ExpenditureCycle

HumanResources

ProductionCycle

RevenueCycle

FinancingCycle

General Ledger & Reporting System

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Learning Objective 2

Describe the documents and procedures used in an AIS to collect and process transaction data.

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The Data Processing Cycle

The data processing cycle consists of four steps:

1. Data input

2. Data storage

3. Data processing

4. Information Output

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The Data Processing Cycle

The trigger for data input is usually business activity. Data must be collected about:

1. Each event of interest

2. The resources affected by each event

3. The agents who participate in each event

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Data Processing Cycle: Data Input

Historically, most businesses used paper source documents to collect data and then transferred that data into a computer.

Today, most data are recorded directly through data entry screens.

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Data Processing Cycle: Data Input

Control over data collection is improved by: prenumbering each source document

and using turnaround documentshaving the system automatically

assign a sequential number to each new transaction

employing source data automation

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Common Source Documents and Functions

Source Document Function

Sales order Take customer order.

Delivery ticket Deliver or ship order

Remittance advice Receive cash.

Deposit slip Deposit cash receipts.

Credit memo Adjust customer accounts

REVENUE CYCLE

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Check Pay for items.

Common Source Documents and Functions

Source Document Function

Purchase order Order items.

Purchase requisition Request items.

Receiving report Receive items.

EXPENDITURE CYCLE

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Common Source Documents and Functions

HUMAN RESOURCES CYCLE

W4 forms Collect employeewithholding data.

Time cards Record time worked by employees.

Job time tickets Record time spent on specific jobs.

Source Document Function

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Common Source Documents and Functions

GENERAL LEDGER AND REPORTING SYSTEM

Journal voucher Record entry posted togeneral ledger.

Source Document Function

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Data Processing Cycle: Data Processing

Batch processing is the periodic updating of the data stored about resources and agents

On-line, real-time processing is the immediate updating as each transaction occurs

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Data Processing Cycle: Data Storage

An entity is something about which information is stored.

Each entity has attributes or characteristics of interest, which need to be stored.

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Record Transaction Datain Journals

After transaction data have been captured on source documents, the next step is to record the data in a journal.

A journal entry is made for each transaction showing the accounts and amounts to be debited and credited.

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Record Transaction Datain Journals

The general journal records infrequent or nonroutine transactions.

Specialized journals simplify the process of recording large numbers of repetitive transactions.

What are the four most common types of transactions?

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Record Transaction Datain Journals

1 Credit sales2 Cash receipts3 Purchases on account4 Cash disbursements

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Record Transaction Datain Journals

Sales Journal

Invoice Account Account PostDate Number Debited Number Ref. Amount

Dec. 1 201 Lee Co. 120-122 3 800.00

Dec. 1 202 May Co. 120-033 3 700.00

Dec. 1 203 DLK Co. 120-111 3 900.00

TOTAL: 2,400.00

120/502

Page 5

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Post Transactions to Ledgers

Ledgers are used to summarize the financial status, including the current balance, of individual accounts.

The general ledger contains summary-level data for every asset, liability, equity, revenue, and expense account of an organization.

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Post Transactions to Ledgers A subsidiary ledger records all the

detailed data for any general ledger account that has many individual subaccounts.

What are some commonly used subsidiary ledgers?– accounts receivable– inventory– accounts payable

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Post Transactions to Ledgers

What is the general ledger account corresponding to a subsidiary ledger called?– control account

A control account contains the total amount for all individual accounts in the subsidiary ledger.

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Post Transactions to Ledgers

Sales Journal Page 5

Date Invoice Number

Account Debited

Account Number

Post Ref.

Amount

Dec 1 203 DLK Co. 120-111 3 900.00

Total

120/502

2,400.00

General Ledger

Account: Accounts Receivable Account Number: 120Date Description Post Ref. Debit Credit Balance

Dec 1 Sales SJ5 2,400 2,400

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What is the Chart of Accounts?

The chart of accounts is a list of all general ledger accounts used by an organization.

It is important that the chart of accounts contains sufficient detail to meet the information needs of the organization.

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Learning Objective 3

Discuss the types of information that an AIS can provide.

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Providing Information for Decision Making The second function of the AIS is to

provide management with information useful for decision making.

The information an AIS provides falls into two main categories:Financial StatementsManagerial Reports

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Financial Statements

Prepare a trial balance. Make adjusting entries. Prepare the adjusted trial balance. Produce the income statement. Make closing entries. Produce the balance sheet. Prepare the statement of cash flows.

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Managerial Reports

The AIS must also be able to provide managers with detailed operational information about the organization’s performance.

Two important types of managerial reports are– budget– performance reports

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Managerial Reports

What is a budget? A budget is the formal expression of

goals in financial terms. One of the most common types of

budget is a cash budget.

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Managerial Reports

What is a performance report? A performance report lists the

budgeted and actual amounts of revenues and expenses and also shows the variances, or differences, between these two amounts.

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Magic Co. Monthly Performance Report Budget Actual Variance

Sales $32,400 $31,500 ($900)

Cost of Goods 12,000 14,000 (2,000)

Gross Margin $20,400 $17,500 ($2,900)

Other Expenses 9,000 7,000 2,000

Operating Income $11,400 $10,500 ($900)

Managerial Reports

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Learning Objective 4

Describe the basic internal control objectives of an AIS and explain how they are accomplished.

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Internal Control Considerations

The third function of an AIS is to provide adequate internal controls to accomplish three basic objectives:

1 Ensure that the information is reliable.2 Ensure that business activities are

performed efficiently.3 Safeguard organizational assets.

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Internal Control Considerations

What are two important methods for accomplishing these objectives?

1 Provide for adequate documentation of all business activities.

2 Design the AIS for effective segregation of duties.

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Adequate Documentation

Documentation allows management to verify that assigned responsibilities were completed correctly.

What did Ashton encounter while working as an auditor that gave him a firsthand glimpse of the types of problems that can arise from inadequate documentation?– failure to bill for repair work

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What is Segregation of Duties? Segregation of duties refers to

dividing responsibility for different portions of a transaction among several people.

What functions should be performed by different people?– authorizing transactions– recording transactions– maintaining custody of assets

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End of Chapter 2