Business and Economics

ACW2851 Accounting Information Systems and Financial Modelling

Lecture 8

AIS and Business Processes

Adapted from:
Simkin, Rose, & Norman (2012) Core Concepts of Accounting Information Systems (12th ed.) and
Gelinas & Dull (2008) Accounting Information Systems (7th ed.)

Learning Objectives
Understand the steps in the financial accounting process
used by AISs
Recognise the objectives, inputs, and outputs of a range of
business processes, including: sales, purchasing, human
resource management, fixed asset management,
production, and financing
Appreciate ways in which technology can support those
business processes
Appreciate that some industries require specialised AISs
Understand the concepts of outsourcing and business
process reengineering

Link to textbook
Topic 5 & 6, 2nd edition, Page 139-203

Presentation title

28th February 2011

Link to other topics.

Important
International student attendance

What is a business process?

Presentation title

28th February 2011

Business Processes
A business process is a collections of activities or flow of
work that creates value
AISs collect and report data related to business processes
An economic event
is an economic activity
impacts financial statements (accounting transactions)
A business event
is important to the business
does not impact financial statements
e.g. hiring an employee; customer enquiry that doesnt
result in a sale

Business Processes
To simplify information processing (i.e. the recording,
maintaining, and reporting of business and economic
activities) we group similar activities into business
processes.
Business processes you will read about include:
Sales
Core process
Purchasing
Core process
Human resource management
Fixed asset management
Production
Financing

What are examples of business

processes?

Presentation title

28th February 2011

Example 1:
Steps in the
Financial
Accounting
Process Cycle

Journals
are a chronological record of economic events by
account. The account structure of an organisation is its
chart of accounts.
2 types of journals: a special journal captures specific types
types of transactions (usually ones
that occur frequently)
a general journal allows any type of
accounting transaction to be recorded

Special Journals for AISs

Sales Journal
Record of credit sales transactions
Purchases Journal
Record of credit purchase transactions
Cash Receipts Journal
Record of transactions involving receipts of cash
Cash Disbursements Journal
Record of transactions involving cash payments

General Journal

Presentation title

28th February 2011

13

Ledgers
General ledger
contains detailed monetary information about an
organisations
assets and liabilities
revenues and expenses
owners equity
The Chart of Accounts provides the organisational
structure for the general ledger
Subsidiary ledger
contains detailed records pertaining to a particular
account in the general ledger

Ledgers

Presentation title

28th February 2011

15

Subsidiary
ledger

Presentation title

28th February 2011

16

Trial Balances
A listing of all accounts with their debit and credit balances
Three end-of-period trial balances:
A pre-adjusting trial balance after all entries have been
posted

An adjusted trial balance after adjustments have been

recorded and posted
A post-closing trial balance after closing entries have
been recorded and posted

Presentation title

28th February 2011

18

Financial Statements
are the primary output of a financial accounting system
include the following Statements of :
Comprehensive Income (Income Statement)
Changes in Equity (Owners Equity)
Financial Position (Balance Sheet)
Cash Flows

Example 2: The Sales Process

The sales process
begins with a customer order for goods or services and
ends with the collection of cash from the customer.
The primary objectives of the sales process are to:
process sales in a timely and efficient manner
collect cash in a timely and efficient manner.
An organisation that generates revenues, but fails to collect
these revenues on a timely basis, may find itself in a position
where it cannot pay its bills.

44

The Sales Process

Sales Process Summary

Example 3: The Purchasing Process

The purchasing process begins with a request for goods or
services and ends with the payment of cash to the vendor

The primary objectives of the purchasing process are to:

purchase high-quality goods/services at best price
pay the vendors at the optimal time (often on credit terms)
Objectives of purchasing process
Tracking purchases of goods/services from vendors
Tracking amounts owed
Maintaining vendor records
Controlling inventory
Making timely and accurate vendor payments
Forecasting purchases and cash outflows

Purchasing Process

Purchasing Process Summary

Human Resource
Management Summary

Fixed Asset Management Summary

Production Process Summary

Financing Process Summary

Why is the business process

important to AIS and Financial
Computer System?

Presentation title

28th February 2011

30

Ans1: Business process requires and also

produces important source documents

A source document
records a business activity such as the purchase or sale of
goods, can be a piece of paper, or in electronic form.
evidence of transactions
Source documents help establish the authenticity of accounting
data in (more details see following slides) :
establishing an audit trail
testing for authorisation of cash disbursement cheques or
inventory movements
establishing accountability for the collection or distribution of
money
Presentation title

28th February 2011

31

Very important
Note these following source documents are important for
internal controls also.
More on this in the internal controls lecture

Presentation title

28th February 2011

32

The Sales Process - Inputs

Sales Order - prenumbered, usually prepared in multiple
copies at time of sale, and used to prepare sales invoice
Sales Invoice - prepared after shipment of goods or provision
of a service.
Remittance Advice produced by customer. Serves as
source document for credits to accounts receivable (often
accompanies payment). Often used as checking to make
sure which item of invoice are paid by your customer.
Shipping Notice - prepared after goods are released from
warehouse for shipment, and may serve as a packing slip.
Used as evidence of what we packed for shipment.
Debit/Credit memo - issued for sales returns and
allowances; debit memos increase amount customer owes

The Sales Process Outputs (1)

Customer Billing Statement
includes sales, returns, and cash receipts
Accounts Receivable Aging Report
contains data concerning the status of open balances of
all active credit customers and arranges the overdue
amounts by time periods
Bad Debt Report
contains info about collection follow-up
procedures for overdue customer accounts

Accounts Receivable Aging Report

The Sales Process Outputs (2)

Cash Receipts Forecast
data from source documents in revenue transactions are
inputs ($ amounts, terms, prior payment experience with
customers etc.). Important for cash budgeting and also
production can you remember prodplan.

Approved Customer Listing

list of customer approved for sales; includes customer
codes, contacts, shipping and billing addresses, credit
limits, and billing terms. Used to determine whether to sell
by credit to customer.

Purchasing Process Inputs (1)

Purchase Requisition
shows items requested; may indicate names of vendors.
Need authorisation before one can proceed.
Purchase Order (PO)
is based on purchase requisition including vendor
information. PO is sent to the vendor.
Receiving Report (RR)
reflects the count and condition of goods received. Used as
evidence that the items, amount and quality of items we
actually received.
Vendor Invoice
includes prices, shipping terms and discounts.

Sample Purchase Order

Purchasing Process Inputs (2)

Bill of lading
accompanies the goods sent and given by the freight
carrier to the supplier as a receipt (carrier assumes
responsibility for the goods)
Packing slip
indicates the specific quantities and items in the shipment
and those items that are on back order. It is sometimes
included in the merchandise package. This packing slip
will be produced by the vendor.

Debit/Credit Memoranda
debits or credits accounts payable. Vendor will advice us

Sample Packing Slip

Purchasing Process Outputs (1)

Vendor Cheques - supported by a voucher and signed by a
person designated by management. We need to match the
PO, RR and vendor invoice before paying.
Cheque Register - list of all cheques issued for a particular
period. Is there any cheques unaccounted for?

Discrepancy Reports - used to identify any differences

between quantities or amounts on the purchase order, the
receiving report, and the purchase invoice.
Cash Requirements Forecast - predicts future payments
and payment dates. Important for cash budget.

Ans2: Business process influence AIS

The purpose of any AIS is to capture info, process it and
transform into outputs for decision makers.
Data and info required are affected by different business
process. Also different industries and even companies have
different business processes. See example in the next few
slides.

Since the data and info required are different, these would
affect the requirements and the types of AIS used.

Presentation title

28th February 2011

42

Business Processes in Special Industries

Vertical market refers to markets or industries that are
distinct in terms of the services they provide or the goods
they produce
e.g. professional services, not-for-profit, health care,
construction, banking and financial services, and
hospitality.

These organisations may require more information than is

typically output from a traditional AIS
Examples of specialised information needs include
time and billing systems
activity based costing systems
point-of-sale systems

Industries with Specialised AISs

Professional service organisations have several unique
operating characteristics:
no merchandise inventory
professional employees
difficulty in measuring output

Not-for-profit
professional employees and volunteers
usually not affected by the market
sometimes have a political environment
extra focus on funds and (nonmonetary) process
measures

Professional Service Organisation Bill

Industries with Specialised AISs

Health care
Share many of the professional and not-for-profit
organisations special AIS needs
Special accounting needs because of third-party
billing - private and government
standardised/specialised codes for services
need to maintain (secure) patient information
practice management and specialised health
care software can enhance data capture,
process monitoring, and reporting.

Mini-based Hospital System

Ans3: AIS also influence business process

Some large computer system such as ERP (Enterprise
Resource Planning or Enterprise System) are generic and
difficult and too expensive to modify extensively.
These software contain generic best-practice business
process because they are mass produced and businesses
have to change their business processes to fit into the
software.
These changes are risky cause lots of pain and costs.
More on this in the Lecture on AIS

Presentation title

28th February 2011

48

How does business cope with

changes to business processes?

Presentation title

28th February 2011

49

Why does business process have to change?

Business process change because
Changes in regulations and laws.

Eg GST introduction
Changes in technology
Eg introduced ERP in company (see slides in
lecture on AIS, used cloud for accounting s/w)
Changes in business strategy

Eg change to high volume production, invest in

new market

Ans 1: Oursourcing?
What is outsourcing?
Instead of doing the business process in-house, the
organization transfers their business process outside
the organization. Outsourcing is hiring an outside
company to handle all or part of an organisations
business process activities.

Common business processes outsourced

human resources & payroll
finance and accounting
customer services
learning services and training
information technology

Outsourcing Potential Advantages

Business processes are outsourced for a range of reasons,
including to gain strategic competitive advantage and to
save costs

Allow business to focus on its key competencies

Better asset utilisation
Access to greater expertise & better technology
Lower costs
Less development time
Reduce cost effect of seasonal usage
Facilitate downsizing
30

Outsourcing Success or failure?

Not all outsourcing efforts are successful!!!!
Estimated 25-50% fail rate, often due to:
a lack of planning and company buy-in
blind imitation of competitors

shifting responsibility for a bad process to someone else

overlooking deeper company problems
ill-defined outsourcing agreements
difficult to manage a systems development undertaken by
outsiders

Outsourcing Disadvantages
Other possible disadvantages include:

Inflexibility and locked-in system

Loss of control
Reduced competitive advantage
Unfulfilled goals
Poor service

Increased risk

Ans2: Business Process Reengineering

(BPR)

A drastic, one-time-event approach to redesigning

business processes that are no longer efficient or effective
May result in the integration of functional activities that
were previously performed by several staff and/or
departments
3 principles for successful BPR
organise around outcomes, not tasks
centralise and disperse data
capture data once at their source
38

When should a process be reengineered?

Three forces drive companies to redesign business processes
(The 3 cs - Hammer & Champy, 1993)
Customers
are becoming increasingly more demanding
Competition
has intensified and is harder to predict
Change
in technology
constant pressure to improve & design new products
faster (flexibility and ability to change fast are
requirements for business survival!)

Common reasons for BPR failures

1. Lack of support from senior management
2. Unrealistic expectations
3. Poor understanding of the organisation and infrastructure
4. Inability to deliver the necessary technology
5. Employee resistance (fear of downsizing)
6. Neglecting peoples values and beliefs

Ans3: Business Process Management

(BPM)

Due to the low-ish success rate of BPR, these principles

have evolved into BPM, a systematic approach to
continuously improving and optimising an organisations
business processes - a more gradual and ongoing business
process improvement that is supported and enabled by
technology.
BPM key principles - Business processes:
can produce competitive advantages
must be managed end to end
should be agile
must be aligned with organisational strategy and needs

Further Reading
Davenport, Thomas (1998) Putting the enterprise
into the enterprise system.
http://www.jpsdir.com/forum/uploads/12967/Davenport_1998.pdf
Note: An interesting paper that shows how important
business process is to any AIS (in this case ERP).

Presentation title

28th February 2011

59

Conclusion
Recognise the importance of source documents
used as internal controls
Appreciate ways in which technology can support
those business processes
Appreciate that some industries require specialised
AISs

Understand the concepts of outsourcing and

business process reengineering

Presentation title

28th February 2011

60