2-1 ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Overview of Business Processes.

2-1©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart

Overview of Business Processes


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.


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


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.



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



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.



ExpenditureCycle

HumanResources

ProductionCycle

RevenueCycle

FinancingCycle

General Ledger & Reporting System


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 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


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


Check Pay for items.



Purchase order Order items.

Purchase requisition Request items.

Receiving report Receive items.

EXPENDITURE CYCLE



HUMAN RESOURCES CYCLE

W4 forms Collect employeewithholding data.

Time cards Record time worked by employees.

Job time tickets Record time spent on specific jobs.




GENERAL LEDGER AND REPORTING SYSTEM

Journal voucher Record entry posted togeneral ledger.



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


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.


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.



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?



1 Credit sales2 Cash receipts3 Purchases on account4 Cash disbursements



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


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.


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



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.



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


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 StatementsManagerial 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.


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


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


Introduction to e-Business


Learning Objectives

1. Explain what e-business is and how it affects organizations.

2. Discuss methods for increasing the likelihood of success and for minimizing the potential risks associated with e-business.

3. Describe the networking and communications technologies that enable e-business.


Introduction: E-Business

E-business refers to all uses of advances in information technology (IT), particularly networking and communications technology, to improve the ways in which an organization performs all of its business processes.



E-business encompasses an organization’s external interactions with its:SuppliersCustomersInvestorsCreditorsThe governmentMedia



E-business includes the use of IT to redesign its internal processes.

For organizations in many industries, engaging in e-business is a necessity.

Engaging in e-business in and of itself does not provide a competitive advantage.

However, e-business can be used to more effectively implement its basic strategy and enhance the effectiveness and efficiency of its value-chain activities.


E-Business Models

Business to Consumers (B2C): Interactions between individuals and organizations.

Business to Business (B2B): Interorganizational e-business.


Categories of E-Business

Type of E-Business Characteristics

B2C Organization-individualSmaller dollar valueOne-time or infrequent transactionsRelatively simple

B2B

B2G

B2E

InterorganizationalLarger dollar valueEstablished, on-going relationshipsExtension of credit by seller to customerMore complex


E-Business Effects on Business Processes

Electronic Data Interchange (EDI): Standard protocol, available since the 1970s, for electronically transferring information between organizations and across business processes.

EDI:Improves accuracyCuts costs


Recent EDI Facilitators

Traditional EDI was expensive. New developments that have removed this cost barrier are:

The Internet: Eliminates the need for special proprietary third-party networks.

XML: Extensible Markup Language – Set of standards for defining the content of data on Web pages.


Integrated Electronic Data Interchange (EDI)

Reaping the full benefits of EDI requires that it be fully integrated with the company’s AIS.

Suppliers

Customers

AIS

Company

EDIPurchase orders

Customer orders

EDI


E-Business Effects on Value Chain Activities

Value Chain – Primary Activities

E-Business Opportunity

Inbound logistics Acquisition of digitizable products Reduced inventory “buffers”

Operations Faster, more accurate production

Outbound logistics Distribution of digitizable products Continuous status tracking

Sales and Marketing Improved customer support Reduced advertising costs More effective advertising

Post-sale Support and Service Reduced costs 24/7 Service availability


E-Business Effects on Value Chain ActivitiesValue Chain –

Support Activities

E-Business Opportunity

Purchasing Human Resources Infrastructure

Source identification and reverse auctions Employee self-service EFT, FEDI, other electronic payments


Purchasing and Inbound Logistics The Internet improves the purchasing activity

by making it easier for a business to identify potential suppliers and to compare prices. Purchase data from different organizational

subunits can be centralized.• This information can be used to negotiate better

prices.• Number of suppliers can be reduced.• Reverse auctions can be held

For products that can be entirely digitized, the entire inbound logistics function can be performed electronically.


Internal Operations, Human Resources, and Infrastructure

Advanced communications technology can significantly improve:The efficiency of internal operations.Planning.The efficiency and effectiveness of the

human resource support activity.The efficiency and effectiveness of

customer payments.


Information Flows in Electronic Commerce

Buyer Seller1. Inquiries

2. Responses

3. Orders

4. Acknowledgment

5. Billing

6. Remittance data

7. PaymentsExplanations:

EDI = Steps 1-6

EFT = Step 7

FEDI = Steps 1-7


Financial Electronic Data Interchange (FEDI) The use of EDI to exchange

information is only part of the buyer-seller relationship in business-to-business electronic commerce.

Electronic funds transfer (EFT) refers to making cash payments electronically, rather than by check.

EFT is usually accomplished through the banking system’s Automated Clearing House (ACH) network.


Financial Electronic Data Interchange (FEDI)

An ACH credit is an instruction to your bank to transfer funds from your account to another account.

An ACH debit is an instruction to your bank to transfer funds from another account into yours.


Financial Electronic Data Interchange (FEDI)

Company A’sbank

Company B’sbank

Company A Company B

Remittance data and payment instruction

Remittance data and funds


Outbound Logistics

E-Business can improve the efficiency and effectiveness of sellers’ outbound logistical activities. Timely and accurate access to detailed

shipment information. Inventory optimization. For goods and services that can be digitized,

the outbound logistics function can be performed entirely electronically.


Sales and Marketing

Companies can create electronic catalogs to automate sales order entry.

Significantly reduce staffing needs. Customization of advertisements


Post-Sale Support and Service

Consistent information to customers. Provide answers to frequently asked

questions (FAQs).


E-Business Success Factors

The degree to which e-business activities fit and support the organization’s overall business strategy.

The ability to guarantee that e-business processes satisfy the three key characteristics of any business transaction Validity Integrity Privacy


Encryption There are two principal types of encryption

systems: Single-key systems: Same key is used to

encrypt and decrypt the message• Simple, fast, and efficient• Example: the Data Encryption Standard (DES)

algorithm Public Key Infrastructure (PKI): Uses two keys:

• Public key is publicly available and usually used to encode message

• Private key is kept secret and known only by the owner of that pair of keys. Usually used to decode message


Advantages & Disadvantages of PKI

Advantages No sharing of key

necessary More secure than

single-key systems

Disadvantages Much slower than

single-key systems


Digital Signatures and Digests

Digital signature: An electronic message that uniquely identifies the sender of that message.

Digest: The message that is used to create a digital signature or digital summary. If any individual character in the original

document changes, the value of the digest also changes. This ensures that the contents of a business document have not been altered or garbled during transmission


Digital Certificates & Certificate Authorities Digital Certificate: Used to verify the identity of the

public key’s owner. A digital certificate identifies the owner of a particular

private key and the corresponding public key, and the time period during which the certificate is valid.

Digital certificates are issued by a reliable third party, called a Certificate Authority, such as: Verisign Entrust Digital Signature Trust

The certificate authority’s digital signature is also included on the digital certificate so that the validity of the certificate can also be verified.


Types of Networks

The global networks used by many companies to conduct electronic commerce and to manage internal operations consist of two components:

1 Private portion owned or leased by the company

2 The Internet


Types of Networks

The private portion can be further divided into two subsets:

1 Local area network (LAN) — a system of computers and other devices, such as printers, that are located in close proximity to each other.

2 Wide area network (WAN) — covers a wide geographic area.


Types of Networks

Companies typically own all the equipment that makes up their local area network (LAN).

They usually do not own the long-distance data communications connections of their wide area network (WAN).

They either contract to use a value-added network (VAN) or use the Internet.


Types of Networks

The Internet is an international network of computers (and smaller networks) all linked together.

What is the Internet’s backbone?– the connections that link those computers

together Portions of the backbone are owned by the

major Internet service providers (ISPs).


Types of Networks

What is an Intranet? The term Intranet refers to internal

networks that connect to the main Internet.

They can be navigated with the same browser software, but are closed off from the general public.

What are Extranets?


Types of Networks

Extranets link the intranets of two or more companies.

Either the Internet or a VAN can be used to connect the companies forming the extranet.

Value-added networks (VAN) are more reliable and secure than the Internet, but they are also expensive.


Company A

AISVPN

equipmentISP

Internet

Types of Networks

Companies build a virtual private network (VPN) to improve reliability and security, while still taking advantage of the Internet.


Data Communications System Components There are five basic components in any

data communication network (whether it is the Internet, a LAN, a WAN, or a VAN):

1 The sending device2 The communications interface device3 The communications channel4 The receiving device5 Communication software


Data Communications System Components

The following are components of the data communications model:

– interface devices– communications software– communications channel


Interface Devices

There are six basic communication interface devices that are used in most networks:

1 Network interface cards2 Modems3 Remote access devices4 Hubs5 Switches6 Routers


Interface Devices

Company APC-1NIC

PC-2 PC-3NIC NIC

Switch

Router

Hub 1

Hub 1OtherLANs

Internet service provider

Remote accessdevice

Frame relayswitch

Router


Interface Devices

Home PCModem

Remote accessdevice

Frame relayswitch

Router

Home PCModem

Internet service provider


Communications Software

Communications software manages the flow of data across a network.

It performs the following functions:– access control– network management– data and file transmission– error detection and control– data security


Communications Channels

A communications channel is the medium that connects the sender and the receiver.

– standard telephone lines– coaxial cables– fiber optics– microwave systems– communications satellites– cellular radios and telephones


Communications Channels

Satellite

Microwave stations


Network Configuration Options

Local area networks (LANs) can be configured in one of three basic ways:

1 Star configuration2 Ring configuration3 Bus configuration


Network Configuration Options A star configuration is a LAN

configured as a star; each device is directly connected to the central server.

All communications between devices are controlled by and routed through the central server.

Typically, the server polls each device to see if it wants to send a message.



The star configuration is the most expensive way to set up a LAN, because it requires the greatest amount of wiring.

Host computeror server

A B C

G F E

DH



In a LAN configured as a ring, each node is directly linked to two other nodes

A

H

B

D

C

EGF



In a LAN configured as a bus, each device is connected to the main channel, or bus.

Communication control is decentralized on bus networks.

A B C

GFE

D

H

Host computeror server

Bus channel



Wide area networks (WANs) can be configured in one of three basic ways:

1 Centralized system2 Decentralized system3 Distributed data processing



In a centralized WAN, all terminals and other devices are connected to a central corporate computer.


Network Configuration Options In a decentralized WAN, each departmental unit

has its own computer and LAN. Decentralized systems usually are better able

to meet individual department and user needs

than are centralized systems.



A distributed data processing system WAN is essentially a hybrid of the centralized and decentralized approaches


Network Configuration Options Many WANs, and most LANs, are set up as

client/server systems. Each desktop computer is referred to as a

client. The client sends requests for data to the

servers. The servers perform preprocessing on the

database and send only the relevant subset of data to the client for local processing.

2-1 ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Overview of Business Processes.

Documents

accounting information

information useful

types of information

basic functions

manual systems

store data

basic subsystems

post data