Accounting information systems overview of business processes

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Accounting information systems overview of business processes

  1. 1. Chapter 2 02/10/12
  2. 2. <ul><li>Explain the three basic functions performed by an accounting information system (AIS). </li></ul><ul><li>Describe the documents and procedures used in an AIS to collect and process transaction data. </li></ul><ul><li>Discuss the types of information that can be provided by an AIS. </li></ul><ul><li>Describe the basic internal control objectives of an AIS and explain how they are accomplished. </li></ul>02/10/12
  3. 3. <ul><li>The grand opening of S&S is two weeks away. </li></ul><ul><li>Scott and Susan recognize that they need qualified accounting help and have hired a full-time accountant, Ashton Fleming. </li></ul><ul><li>Ashton is responsible for creating an accounting information system (AIS). </li></ul>02/10/12
  4. 4. <ul><li>What questions does Ashton ask himself? </li></ul><ul><ul><li>How am I going to organize things? </li></ul></ul><ul><ul><li>Where do I start? </li></ul></ul><ul><ul><li>What information does S&S need in order to operate effectively? </li></ul></ul><ul><ul><li>How can that information be provided? </li></ul></ul>02/10/12
  5. 5. <ul><ul><li>How am I going to collect and process data about all the types of transactions that S&S will engage in? </li></ul></ul><ul><ul><li>How do I organize all the data that will be collected? </li></ul></ul><ul><ul><li>How should I design the AIS so that the information provided is reliable and accurate? </li></ul></ul>02/10/12
  6. 6. <ul><li>Businesses engage in a variety of activities, including: </li></ul><ul><li>Acquiring capital </li></ul><ul><li>Buying buildings and equipment </li></ul><ul><li>Hiring and training employees </li></ul><ul><li>Purchasing inventory </li></ul><ul><li>Doing advertising and marketing </li></ul><ul><li>Selling goods or services </li></ul><ul><li>Collecting payment from customers </li></ul><ul><li>Paying employees </li></ul><ul><li>Paying taxes </li></ul><ul><li>Paying vendors </li></ul>02/10/12
  7. 7. <ul><li>Types of information needed for decisions: </li></ul><ul><li>Some is financial </li></ul><ul><li>Some is nonfinancial </li></ul><ul><li>Some comes from internal sources </li></ul><ul><li>Some comes from external sources </li></ul><ul><li>An effective AIS needs to be able to integrate information of different types and from different sources. </li></ul>02/10/12
  8. 8. 02/10/12
  9. 9. <ul><li>To collect and store data about the organization’s business activities and transactions efficiently and effectively </li></ul><ul><li>To provide management with information useful for decision making </li></ul><ul><li>To provide adequate internal controls </li></ul>02/10/12
  10. 10. <ul><li>A transaction is: </li></ul><ul><li>An agreement between two entities to exchange goods or services; OR </li></ul><ul><li>Any other event that can be measured in economic terms by an organization. </li></ul><ul><li>EXAMPLES: </li></ul><ul><li>Sell goods to customers </li></ul><ul><li>Depreciate equipment </li></ul>02/10/12
  11. 11. <ul><li>The transaction cycle is a process: </li></ul><ul><li>Begins with capturing data about a transaction </li></ul><ul><li>Ends with an information output, such as financial statements </li></ul>02/10/12
  12. 12. <ul><li>Many business activities are paired in give-get exchanges </li></ul><ul><li>The basic exchanges can be grouped into five major transaction cycles. </li></ul><ul><ul><li>Revenue cycle </li></ul></ul><ul><ul><li>Expenditure cycle </li></ul></ul><ul><ul><li>Production cycle </li></ul></ul><ul><ul><li>Human resources/payroll cycle </li></ul></ul><ul><ul><li>Financing cycle </li></ul></ul>02/10/12
  13. 13. <ul><li>The revenue cycle: involves activities of selling goods or services and collecting payment for those sales. </li></ul><ul><li>The expenditure cycle: involves activities of buying and paying for goods or services used by the organization. </li></ul><ul><li>The human resources/payroll cycle: involves activities of hiring and paying employees. </li></ul>02/10/12
  14. 14. <ul><li>The production cycle: involves activities converting raw materials and labor into finished goods. </li></ul><ul><li>The financing cycle: involves activities of obtaining necessary funds to run the organization, repay creditors, and distribute profits to investors. </li></ul>02/10/12
  15. 15. <ul><li>Thousands of transactions can occur within any of these cycles. </li></ul><ul><li>But there are relatively few types of transactions in a cycle. </li></ul>02/10/12
  16. 16. 02/10/12 Expenditure Cycle Human Resources Production Cycle Revenue Cycle Financing Cycle General Ledger & Reporting System
  17. 17. <ul><li>The data processing cycle consists of four steps: </li></ul><ul><ul><li>Data input </li></ul></ul><ul><ul><li>Data storage </li></ul></ul><ul><ul><li>Data processing </li></ul></ul><ul><ul><li>Information Output </li></ul></ul>02/10/12
  18. 18. <ul><li>The trigger for data input is usually business activity. Data must be collected about: </li></ul><ul><ul><li>Each event of interest </li></ul></ul><ul><ul><li>The resources affected by each event </li></ul></ul><ul><ul><li>The agents who participate in each event </li></ul></ul>02/10/12
  19. 19. <ul><li>Historically, most businesses used paper source documents to collect data and then transferred that data into a computer. </li></ul><ul><li>Today, most data are recorded directly through data entry screens. </li></ul>02/10/12
  20. 20. <ul><li>Control over data collection is improved by: </li></ul><ul><ul><li>prenumbering each source document and using turnaround documents </li></ul></ul><ul><ul><li>having the system automatically assign a sequential number to each new transaction </li></ul></ul><ul><ul><li>employing source data automation </li></ul></ul>02/10/12
  21. 21. <ul><li>Source Document Function </li></ul>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 02/10/12
  22. 22. <ul><li> </li></ul><ul><li>Source Document Function </li></ul>Check Pay for items. Purchase order Order items. Purchase requisition Request items. Receiving report Receive items. EXPENDITURE CYCLE 02/10/12
  23. 23. <ul><li>HUMAN RESOURCES CYCLE </li></ul>W4 forms Collect employee withholding data. Time cards Record time worked by employees. Job time tickets Record time spent on specific jobs. Source Document Function 02/10/12
  24. 24. <ul><li>GENERAL LEDGER AND </li></ul><ul><li>REPORTING SYSTEM </li></ul>Journal voucher Record entry posted to general ledger. Source Document Function 02/10/12
  25. 25. <ul><li>Ledger </li></ul><ul><li>General ledger </li></ul><ul><li>Subsidiary ledger </li></ul><ul><li>Coding techniques </li></ul><ul><li>Chart of Accounts </li></ul><ul><li>Journals </li></ul><ul><li>Audit trails </li></ul>
  26. 26. <ul><li>Ledger </li></ul><ul><li>A ledger is a file used to store cumulative </li></ul><ul><li>information about resources and agents. We </li></ul><ul><li>typically use the word ledger to describe the set </li></ul><ul><li>of t-accounts. The t-account is where we keep </li></ul><ul><li>track of the beginning balance, increases, </li></ul><ul><li>decreases, and ending balance for each asset, </li></ul><ul><li>liability, owners’ equity, revenue, expense, gain, </li></ul><ul><li>loss, and dividend account. </li></ul>
  27. 27. <ul><li>Ledger – example: </li></ul>
  28. 28. <ul><li>General Ledger </li></ul><ul><li>The general ledger is the summary level </li></ul><ul><li>information for all accounts. Detail information is </li></ul><ul><li>not kept in this account. </li></ul><ul><li>Example: Suppose XYZ Co. has three customers. Anthony Adams owes XYZ $100. Bill Brown owes $200. And Cory Campbell owes XYZ $300. The balance in accounts receivable in the general ledger will be $600, but you will not be able to tell how much individual customers </li></ul><ul><li>owe by looking at that account. The detail isn’t there. </li></ul>
  29. 29. <ul><li>Subsidiary ledger </li></ul><ul><li>The subsidiary ledgers contain the detail accounts associated with the related general ledger account. The accounts receivable subsidiary ledger will contain three separate t-accounts— one for Anthony Adams, one for Bill Brown, and one for Cory Campbell. </li></ul><ul><li>e.g. </li></ul><ul><ul><li>accounts receivable </li></ul></ul><ul><ul><li>inventory </li></ul></ul><ul><ul><li>accounts payable </li></ul></ul>
  30. 30. Relationship between General and Subsidiary ledger
  31. 31. Relationship between General and Subsidiary ledger
  32. 32. <ul><li>Subsidiary ledger </li></ul><ul><li>Advantages: </li></ul><ul><ul><li>1 Shows transactions affecting one customer or one creditor in a single account </li></ul></ul><ul><ul><li>2 Frees the general ledger of excessive details </li></ul></ul><ul><ul><li>3 Helps locate errors in individual accounts </li></ul></ul><ul><ul><li>4 Reduces the number of accounts in one ledger and by using control accounts </li></ul></ul><ul><ul><li>5 Division of labor in posting </li></ul></ul><ul><ul><li>One employee posts to the general ledger </li></ul></ul><ul><ul><li>Another employee posts to the subsidiary ledger </li></ul></ul>
  33. 33. <ul><li>Coding techniques </li></ul><ul><li>Coding is a method of systematically assigning numbers or </li></ul><ul><li>letters to data items to help classify and organize them. There are many types of codes including: </li></ul><ul><li>– Sequence codes </li></ul><ul><li>– Block codes </li></ul><ul><li>– Group codes </li></ul>
  34. 34. <ul><li>Chart of Accounts </li></ul><ul><li>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. </li></ul>
  35. 35. <ul><li>Journals </li></ul><ul><li>In manual systems and some accounting packages, the </li></ul><ul><li>first place that transactions are entered is the journal. </li></ul><ul><li>A journal entry is made for each transaction showing the accounts and amounts to be debited and credited. </li></ul><ul><li>General journal </li></ul><ul><li>Specialized journal </li></ul>
  36. 36. <ul><li>Journals </li></ul><ul><li>Example </li></ul>
  37. 37. <ul><li>Audit trails </li></ul><ul><li>• Provides a means to check the accuracy and validity of ledger postings. (e.g. page 38) </li></ul><ul><li>• An audit trail exists when there is sufficient documentation to allow the tracing of a transaction from beginning to end or from the end back to the beginning. </li></ul><ul><li>• The inclusion of posting references and document numbers enable the tracing of transactions through the journals and ledgers and therefore facilitate the audit trail . </li></ul>
  38. 38. <ul><li>Batch processing is the periodic updating of the data stored about resources and agents </li></ul><ul><li>On-line, real-time processing is the immediate updating as each transaction occurs </li></ul>02/10/12
  39. 39. 02/10/12
  40. 40. 02/10/12
  41. 41. <ul><li>Field </li></ul><ul><li>Record </li></ul><ul><li>Data Value </li></ul><ul><li>File </li></ul><ul><li>Database </li></ul>02/10/12
  42. 42. <ul><li>The second function of the AIS is to provide management with information useful for decision making. </li></ul><ul><li>The information an AIS provides falls into two main categories: </li></ul><ul><ul><li>Financial Statements </li></ul></ul><ul><ul><li>Managerial Reports </li></ul></ul>02/10/12
  43. 43. <ul><li>Output can serve a variety of purposes: </li></ul><ul><ul><li>Financial statements can be provided to both external and internal parties. </li></ul></ul><ul><ul><li>Some outputs are specifically for internal use: </li></ul></ul><ul><ul><ul><li>For planning purposes </li></ul></ul></ul><ul><ul><ul><li>For management of day-to-day operations </li></ul></ul></ul><ul><ul><ul><li>For control purposes </li></ul></ul></ul><ul><ul><ul><li>For evaluation purposes </li></ul></ul></ul>02/10/12
  44. 44. Management Functions 02/10/12
  45. 45. Management Functions 02/10/12
  46. 46. <ul><li>Problem Structure </li></ul><ul><li>The problem structure reflects how well the decision maker understands the problem. </li></ul><ul><li>Elements of problem structure: </li></ul><ul><ul><li>data </li></ul></ul><ul><ul><li>procedures </li></ul></ul><ul><ul><li>objectives </li></ul></ul>02/10/12
  47. 47. Problem Structure 02/10/12
  48. 48. <ul><li>Managerial reports </li></ul><ul><li>Report objectives - reports must have value or information content </li></ul><ul><li>They should: </li></ul><ul><ul><li>reduce the level of uncertainty associated with a problem facing the decision maker </li></ul></ul><ul><ul><li>influence the behavior of the decision maker in a positive way </li></ul></ul>02/10/12
  49. 49. <ul><li>Managerial reports </li></ul><ul><li>Goal congruence: </li></ul><ul><ul><li>A carefully structured management reporting system and compensation schemes help to appropriately assign authority and responsibility. </li></ul></ul><ul><ul><li>If compensation measures are not carefully designed, managers may be tempted to engage in actions not optimal for the organization in the long-run. </li></ul></ul>02/10/12
  50. 50. <ul><li>Managerial reports </li></ul><ul><li>Important to choose what to measure for your problem. </li></ul><ul><li>You get what you measure </li></ul>02/10/12
  51. 51. <ul><li>Example: </li></ul><ul><li>An instructor wants to improve student performance </li></ul><ul><li>He decides to encourage better attendance by grading students on attendance (i.e., measuring it). </li></ul><ul><li>What is the result? </li></ul>02/10/12
  52. 52. <ul><li>Example: </li></ul><ul><li>Result: </li></ul><ul><li>Better student attendance </li></ul><ul><li>The improved attendance may or may not improve learning outcomes. </li></ul>02/10/12
  53. 53. <ul><li>Example: </li></ul><ul><li>Result: </li></ul><ul><li>Students may be getting better grades when attendance is measured, but not learning more. </li></ul><ul><li>Some students may in fact reduce their studying because they believe they can use the attendance score to boost their grade. This behavior would be a dysfunctional result of the measurement. </li></ul><ul><li>What would be a better method? </li></ul>02/10/12
  54. 54. <ul><li>Other inappropriate performance measure examples: </li></ul><ul><ul><li>The use of price variance to evaluate a purchasing agent can affect the quality of the items purchased. </li></ul></ul><ul><ul><li>The use of quotas (such as units produced) to evaluate a supervisor can affect quality control, material usage efficiency, labor relations, and plant maintenance. </li></ul></ul>02/10/12
  55. 55. <ul><li>The AIS must also be able to provide managers with detailed operational information about the organization’s performance. </li></ul><ul><li>Two important types of managerial reports are </li></ul><ul><ul><li>budget </li></ul></ul><ul><ul><li>performance reports </li></ul></ul>02/10/12
  56. 56. <ul><li>What is a budget? </li></ul><ul><li>A budget is the formal expression of goals in financial terms. </li></ul><ul><li>One of the most common types of budget is a cash budget . </li></ul>02/10/12
  57. 57. <ul><li>What is a performance report? </li></ul><ul><li>A performance report lists the budgeted and actual amounts of revenues and expenses and also shows the variances, or differences, between these two amounts. </li></ul>02/10/12
  58. 58. <ul><li> Magic Co. Monthly Performance Report Budget Actual Variance </li></ul><ul><li>Sales $32,400 $31,500 ($900) </li></ul><ul><li>Cost of Goods 12,000 14,000 (2,000) </li></ul><ul><li>Gross Margin $20,400 $17,500 ($2,900) </li></ul><ul><li>Other Expenses 9,000 7,000 2,000 </li></ul><ul><li>Operating Income $11,400 $10,500 ($900) </li></ul>02/10/12
  59. 59. <ul><li>Be careful using budget reports </li></ul><ul><li>Budgets can cause dysfunctional behavior. </li></ul><ul><li>Example: </li></ul><ul><ul><li>In order to stay within budget, the IT Department did not buy a security package for its system. </li></ul></ul><ul><ul><li>A hacker broke in and devastated some of their data files. </li></ul></ul><ul><ul><li>Critical security measures were foregone in order to meet budgetary goals. </li></ul></ul><ul><ul><li>The resulting costs far outweighed the savings. </li></ul></ul>02/10/12
  60. 60. <ul><li>Other problems with budget: </li></ul><ul><li>Budgeting can also be dysfunctional in that the focus can be redirected to creating acceptable numbers instead of achieving organizational objectives. </li></ul><ul><li>Does this mean organizations shouldn’t </li></ul><ul><li>budget? </li></ul>02/10/12
  61. 61. <ul><li>Some people say that accountants should focus on producing financial statements (e.g. balance sheet) and leave the design and production of managerial reports (e.g. performance reports) to information systems specialists. </li></ul><ul><li>What are the advantages and disadvantages of following this advice? </li></ul>02/10/12
  62. 62. <ul><li>What are some of the problems that might occur when management focuses only on profit measure based reports? (what areas of the business might suffer as a result?) </li></ul>02/10/12
  63. 63. <ul><li>The third function of an AIS is to provide adequate internal controls to accomplish three basic objectives: </li></ul><ul><li>Ensure that the information is reliable. </li></ul><ul><li>Ensure that business activities are performed efficiently. </li></ul><ul><li>Safeguard organizational assets. </li></ul>02/10/12
  64. 64. <ul><li>What are two important methods for accomplishing these objectives? </li></ul><ul><li>Provide for adequate documentation of all business activities. </li></ul><ul><li>Design the AIS for effective segregation of duties. </li></ul>02/10/12
  65. 65. <ul><li>Documentation allows management to verify that assigned responsibilities were completed correctly. </li></ul><ul><li>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? </li></ul><ul><ul><li>failure to bill for repair work </li></ul></ul>02/10/12
  66. 66. <ul><li>Segregation of duties refers to dividing responsibility for different portions of a transaction among several people. </li></ul><ul><li>What functions should be performed by different people? </li></ul><ul><ul><li>authorizing transactions </li></ul></ul><ul><ul><li>recording transactions </li></ul></ul><ul><ul><li>maintaining custody of assets </li></ul></ul>02/10/12
  67. 67. <ul><li>Improperly prepared journal entries </li></ul><ul><li>Unposted journal entries </li></ul><ul><li>Debits not equal to credits </li></ul><ul><li>Subsidiary not equal to general ledger control accounts </li></ul><ul><li>Inappropriate access to the general ledger </li></ul><ul><li>Poor audit trail </li></ul><ul><li>Lost or damaged data </li></ul><ul><li>Account balances that are wrong because of unauthorized or incorrect journal vouchers </li></ul>02/10/12
  68. 68. 02/10/12
  69. 69. <ul><li>Pre-numbered and well-designed journal vouchers </li></ul><ul><li>Validating data on journal vouchers </li></ul><ul><li>Correcting detected errors before the data are posted to the general ledger </li></ul><ul><li>Compiling standardized adjusted journal entries </li></ul><ul><li>Pre-computing batch control totals </li></ul>02/10/12
  70. 70. <ul><li>Posting journal entries to the general ledger accounts with a variety of program checks performed before and after posting </li></ul><ul><li>Summing the amounts posted to the general ledger accounts and then comparing the posted totals to the pre-computed batch control totals </li></ul><ul><li>Establishing and maintaining an adequate audit trail </li></ul>02/10/12
  71. 71. <ul><li>Preparing frequent trial balances, with any differences between total debits and credits being investigated </li></ul><ul><li>Maintaining a log or file of journal vouchers by number and periodically checking to make certain that the sequence of numbers is complete </li></ul><ul><li>Printing period-end listings and change reports for review by accountants before the financial statements are prepared </li></ul><ul><li>Reviewing financial reports and other outputs for correctness and reasonableness </li></ul>02/10/12
  72. 72. <ul><li>Enterprise resource planning (ERP) systems are designed to integrate all aspects of a company’s operations (including both financial and non-financial information) with the traditional functions of an AIS. </li></ul>02/10/12
  73. 73. <ul><li>Objectives of the software </li></ul><ul><li>To ensure full security by introducing adequate controls, checks and balances and also by maintaining audit Trails. </li></ul><ul><li>To minimize data redundancy by eliminating duplicate entries. </li></ul><ul><li>To enable the organizations to provide its customers a more value added service. </li></ul><ul><li>To create a flexible system so that future needs and changes in the business flow can be easily incorporated </li></ul>02/10/12
  74. 74. <ul><li>Advantages </li></ul><ul><li>Security and control features </li></ul><ul><li>Allows instant communication with all sub-systems of an organization </li></ul>02/10/12
  75. 75. <ul><li>Disadvantages </li></ul><ul><li>Customization of the ERP software is limited. </li></ul><ul><li>Once a system is established, switching costs are very high </li></ul><ul><li>Resistance in sharing sensitive internal information between departments can reduce the effectiveness of the software. </li></ul><ul><li>ERP Systems centralize the data in one place, example customer , financial data. This can increase the risk of loss of sensitive info, if there is any security breach </li></ul>02/10/12

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