Accounting Information Systems

Abdi Dufera

Overview of Business Processes

Learning Objectives
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.
1
Abdi D /AIS/2005/ S2

Learning Objective 1
Explain the three basic functions an accounting information system (AIS) performs.

Abdi D /AIS/2005/ S2

Introduction

This chapter provides an overview of how an AIS can perform its three basic functions :
1. To collect and store data about the 2 3

organizations business activities and transactions efficiently and effectively To provide information useful for decision making To provide adequate controls to ensure that data are recorded and processed accurately

Abdi D /AIS/2005/ S2

Introduction

This chapter will examine:

Basic types of business activities in which an

organization engages Key decisions that must be considered when managing those activities Information needed to make those decisions

Abdi D /AIS/2005/ S2

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

Abdi D /AIS/2005/ S2

The Three Basic Functions Performed by an AIS

1

To collect and store data about the organizations 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.
Abdi D /AIS/2005/ S2 8

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

Abdi D /AIS/2005/ S2

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 managements objectives. Safeguard organizational assets.

Abdi D /AIS/2005/ S2

10

Basic Subsystems in the AIS

1.

2.

3.

The revenue cycle: involves activities of selling goods or services and collecting payment for those sales. The expenditure cycle: involves activities of buying and paying for goods or services used by the organization. The human resources/payroll cycle: involves activities of hiring and paying employees.
Abdi D /AIS/2005/ S2

11

Basic Subsystems in the AIS

4.

5.

The production cycle: involves activities converting raw materials and labor into finished goods. The financing cycle: involves activities of obtaining necessary funds to run the organization, repay creditors, and distribute profits to investors.

Abdi D /AIS/2005/ S2

12

Basic Subsystems in the AIS

Financing Cycle Expenditure Cycle Human Resources

General Ledger & Reporting System

Production Cycle

Revenue Cycle

Abdi D /AIS/2005/ S2

13

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

Abdi D /AIS/2005/ S2

14

The Data Processing Cycle

The data processing cycle consists of four steps:

1. Data input

2. Data storage
3. Data processing 4. Information Output

Abdi D /AIS/2005/ S2

15

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

Abdi D /AIS/2005/ S2

16

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.

Abdi D /AIS/2005/ S2

17

Data Processing Cycle: 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

Abdi D /AIS/2005/ S2

18

Common Source Documents and Functions

HUMAN RESOURCES CYCLE
Source Document Function

W4 forms Time cards

Collect employee withholding data. Record time worked by employees.

Job time tickets

Record time spent on specific jobs.

Abdi D /AIS/2005/ S2 19

Common Source Documents and Functions

GENERAL LEDGER AND REPORTING SYSTEM
Source Document Function

Journal voucher

Record entry posted to general ledger.

Abdi D /AIS/2005/ S2

20

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

Abdi D /AIS/2005/ S2

21

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.

Abdi D /AIS/2005/ S2

22

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.

Abdi D /AIS/2005/ S2

23

Record Transaction Data 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?
Abdi D /AIS/2005/ S2 24

Record Transaction Data in Journals

1 2 3

Credit sales Cash receipts Purchases on account Cash disbursements

Abdi D /AIS/2005/ S2

25

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.
Abdi D /AIS/2005/ S2 26

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
Abdi D /AIS/2005/ S2 27

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.

Abdi D /AIS/2005/ S2

28

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.

Abdi D /AIS/2005/ S2

30

Learning Objective 3
Discuss the types of information that an AIS can provide.

Abdi D /AIS/2005/ S2

31

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
Abdi D /AIS/2005/ S2

32

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.
Abdi D /AIS/2005/ S2 33

Managerial Reports

The AIS must also be able to provide managers with detailed operational information about the organizations performance. Two important types of managerial reports are
budget
performance reports
Abdi D /AIS/2005/ S2 34

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.

Abdi D /AIS/2005/ S2

35

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.

Abdi D /AIS/2005/ S2

36

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)
Abdi D /AIS/2005/ S2 37

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

Abdi D /AIS/2005/ S2

38

Internal Control Considerations

1 2

The third function of an AIS is to provide adequate internal controls to accomplish three basic objectives: Ensure that the information is reliable. Ensure that business activities are performed efficiently. Safeguard organizational assets.
Abdi D /AIS/2005/ S2 39

Internal Control Considerations

1 2

What are two important methods for accomplishing these objectives? Provide for adequate documentation of all business activities. Design the AIS for effective segregation of duties.

Abdi D /AIS/2005/ S2

40

Adequate Documentation

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

Abdi D /AIS/2005/ S2

41

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
Abdi D /AIS/2005/ S2 42