Overview of Business Processes: Accounting Information Systems, 9/e, Romney/Steinbart

Overview of
Business Processes
Chapter 2
©2003 Prentice Hall Business Publishing, 2-1

Accounting Information Systems, 9/e, Romney/Steinbart
Basic Functions of AIS
 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
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.
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

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.

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.

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.

Financing Expenditure Human
Cycle Cycle Resources
General Ledger & Reporting System
Production Revenue
Cycle Cycle

The Data Processing Cycle
 The data processing cycle consists

of four steps:
1. Data input
2. Data storage
3. Data processing
4. Information Output

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
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.

Data Input
 Control over data collection is
improved by:
 prenumbering each source document
and using turnaround documents
 having the system automatically
assign a sequential number to each
new transaction
 employing source data automation

Common Source
Documents and Functions
REVENUE CYCLE
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

Common Source
EXPENDITURE CYCLE
Purchase requisition Request items.
Purchase order Order items.

Receiving report Receive items.
Check Pay for items.

Common Source
HUMAN RESOURCES CYCLE
W4 forms Collect employee

withholding data.
Time cards Record time worked

by employees.
Job time tickets Record time spent

on specific jobs.

Common Source
GENERAL LEDGER AND

REPORTING SYSTEM
Journal voucher Record entry posted to
general ledger.

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

Data Storage
 An entity is something about which
information is stored.
 Each entity has attributes or
characteristics of interest, which need
to be stored.

Record Transaction Data
in 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.

in 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?

in Journals
1 Credit sales
2 Cash receipts
3 Purchases on account
4 Cash disbursements

in Journals
Page 5 Sales Journal
Invoice Account Account Post
Date 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

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.

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
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.

Post Transactions to Ledgers
Sales Journal Page 5

Date Invoice Account Account Post Amount
Number Debited Number Ref.
Dec 1 203 DLK Co. 120-111 3 900.00
Total 2,400.00
120/502
General Ledger
Account: Accounts Receivable Account Number: 120
Date Description Post Ref. Debit Credit Balance
Dec 1 Sales SJ5 2,400 2,400

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.

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 Statements
 Managerial Reports

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.

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

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.

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.

Managerial Reports
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)

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.

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.

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
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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Overview of

©2003 Prentice Hall Business Publishing, 2-1

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4. The production cycle: involves activities

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General Ledger & Reporting System

©2003 Prentice Hall Business Publishing, 2-8

 The data processing cycle consists

©2003 Prentice Hall Business Publishing, 2-9

 The trigger for data input is usually

©2003 Prentice Hall Business Publishing, 2-11

©2003 Prentice Hall Business Publishing, 2-12

Sales order Take customer order.

Deposit slip Deposit cash receipts.

©2003 Prentice Hall Business Publishing, 2-13

Purchase requisition Request items.

Purchase order Order items.

©2003 Prentice Hall Business Publishing, 2-14

W4 forms Collect employee

Time cards Record time worked

Job time tickets Record time spent

©2003 Prentice Hall Business Publishing, 2-15

GENERAL LEDGER AND

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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

©2003 Prentice Hall Business Publishing, 2-22

©2003 Prentice Hall Business Publishing, 2-23

©2003 Prentice Hall Business Publishing, 2-25

Sales Journal Page 5

©2003 Prentice Hall Business Publishing, 2-26

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 Prepare a trial balance.

 Prepare the adjusted trial balance.

 Produce the income statement.

 Make closing entries.

 Produce the balance sheet.

 Prepare the statement of cash flows.

©2003 Prentice Hall Business Publishing, 2-29

 The AIS must also be able to provide

©2003 Prentice Hall Business Publishing, 2-30

©2003 Prentice Hall Business Publishing, 2-31

What is a performance report?

©2003 Prentice Hall Business Publishing, 2-32

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©2003 Prentice Hall Business Publishing, 2-35

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