Chapter 1 – Accounting Information Systems: An Give-get Exchange

Overview Transactions that happen a great many times, such as

giving up cash to get inventory from a supplier and giving
System – A set of two or more interrelated components employees a pay check in exchange for their labor.
interacting to achieve a goal.
Business Processes of Transaction Cycles
Goal Conflict - Occurs when components act in their own The major give-get exchanges that occur frequently in most
interest without regard for overall goal. companies.
Goal Congruence - Occurs when components acting in their o The revenue cycle, where goods and services are
own interest contribute toward overall goal. sold for cash or a future promise to receive cash.

Data o The expenditure cycle, where companies purchase

o These are facts that are collected, recorded, stored, inventory for resale or raw materials to use in
and processed by a system. producing products in exchange for cash or a future
o Insufficient for decision making. promise to pay cash.
Information o The production or conversion cycle, where raw
o Data that have been organized and processed to
materials are transformed into finished goods.
provide meaning and improve decision-making. Too
much information however, will make it more, not o The human resources / payroll cycle, where
less, difficult to make decisions. This is known as employees are hired, trained, compensated,
Information Overload. evaluated, promoted, and terminated.
-Information Overload – Exceeding the amount of
information a human mind can absorb and process, o The financing cycle, where companies sell shares in
resulting in a decline in decision-making quality and the company to investors and borrow money, and
an increase in the cost of providing information. where investors are paid dividends and interest is
paid on loans.
Information Technology
The computers and other electronic devices used to Accounting Information Systems
store, retrieve, transmit and manipulate data. A system that collects, records, stores, and processes
data to produce information for decision makers. It includes
Value of Information people, procedures and instructions, data, software,
It is the benefit produced by the information minus information technology infrastructure, and internal controls
the cost of producing it. and security measures.
Benefits
Reduce Uncertainty 6 Components of AIS
Improve Decisions 1. The people who use the system
Improve Planning
2. The procedures and instructions used to collect,
Improve Scheduling
process, and store data
Costs
Time & Resources 3. The data about the organization and its business
-Produce Information activities
-Distribute Information
4. The software used to process the data
Characteristics of Useful Information 5. The information technology infrastructure,
Characteristics Definition including the computers, peripheral devices, and
Reduces uncertainty, improves decision- network communications devices used in the AIS
Relevant making, or confirm or corrects prior
expectations. 6. The internal controls and security measures that
Free from error or bias; accurately safeguard AIS data
Reliable represents organization events or Business Functions
activities. 1. Collect and store data about organizational activities,
Does not omit important aspects of the resources, and personnel.
Complete
events or activities it measures.
2. Transform data into information so management can
Provided in time for decision makers to
Timely plan, execute, control, and evaluate activities
make decisions.
resources, and personnel.
Presented in a useful and intelligible
Understandable 3. Provide adequate controls to safeguard the
format.
Two independent, knowledgeable people organization’s assets and data.
Verifiable
produce the same information
Available to users when they need it Well-designed AIS can add value to an organization by:
Accessible (timely) and in a format they can use 1. Improving the quality and reducing the costs of
(understandable). products or services.
2. Improving efficiency.
Business Process 3. Sharing knowledge.
It is a set of related, coordinated, and structured
activities and tasks, performed by a person, a computer, or a 4. Improving the efficiency and effectiveness of its
machine that help accomplish a specific organizational goal. supply chain.

Transaction 5. Improving the internal control structure.

It is an agreement between two entities to exchange 6. Improving decision making.
goods or services or any other event that can be measured in
economic terms by an organization.
AIS can help improve decision making in several ways:
Transaction Processing  It can identify situations requiring management action.
Process of capturing transaction data, processing it,
storing it for later use, and producing information output, such  It can reduce uncertainty and thereby provide a basis
as a managerial report or a financial statement. for choosing among alternative actions.
 It can store information about the results of previous
decisions, which provides valuable feedback that can be
used to improve future decisions.
 It can provide accurate information in a timely manner.
 It can analyze sales data to discover items that are
purchased together, and can use such information to
improve the layout of merchandise or to encourage
additional sales of related items.
The Role of the AIS in the Value Chain
1. Inbound logistics consists of receiving, storing, and
distributing the materials an organization uses to create
the services and products it sells.
2. Operations activities transform inputs into final
products or services. For example, assembly line
activities convert raw materials into a finished car.
3. Outbound logistics activities distribute finished
products or services to customers.
4. Marketing and sales activities help customers buy the
organization’s products or services.
5. Service activities provide post-sale support to
customers.
Support Activities
1. Firm infrastructure is the accounting, finance, legal
and general administration activities that allow an
organization to function.
2. Human resources activities include recruiting, hiring,
training, and compensating employees.
3. Technology activities improve a product or service.
4. Purchasing activities procure raw materials, supplies,
machineries, and the buildings used to carry out the
primary activities.
Chapter 2 –Overview of Transaction Processing and
Enterprise Resource Planning (ERP) System Specialized Journals – A journal used to record a large
number of repetitive transactions such as credit sales, cash
Data Processing Cycle - The four operations (data input, data receipts, purchases, and cash disbursements.
storage, data processing, and information output) performed
on data to generate meaningful and relevant information. Audit Trail – A path that allows a transaction to be traced
through a data processing system from point of origin to
Data Input output or backwards from output to point of origin. It is used
The first step in processing input is to capture transaction data to check the accuracy and validity of ledger postings and to
and enter them into the system. trace changes in general ledger accounts from their beginning
balance to their ending balance.
Data must be collected about three facets of each business
activity: Computer-Based Storage Concepts
1. Each activity of interest An entity is something about which information is stored,
2. The resource(s) affected by each activity such as employees, inventory items, and customers. Each
entity has attributes, or characteristics of interest, that are
3. The people who participate in each activity stored, such as a pay rate and address.
Source Documents –Documents used to capture transaction On the next slide shows that computers store data in a field.
data at its source – when the transaction takes place. Examples The fields containing data about entity attributes constitute a
include sales orders, purchase orders, and employee time record. Each row represents a different record, and each
cards. column represents an attribute. Each intersecting row and
column is a field within a record, the contents of which are
Turnaround documents are company output sent to an called a data value.
external party, who often adds data to the document, and then
are returned to the company as an input document. File – A set of logically related records, such as the payroll
records of all employees.
Source Data Automation – The collection of transaction data
in machine-readable form at the time and place of origin. Master File – A permanent file of records that stores
cumulative data about an organization. As transactions take
Data Processing place, individual records within a master file are updated to
The second step in processing input is to make sure captured keep them current.
data are accurate and complete.
Transaction File – A file that contains the individual business
Information Output transactions that occur during a specific fiscal period. A
The third step in processing input is to make sure company transaction file is conceptually similar to a journal in manual
policies are followed, such as approving or verifying a AIS.
transaction.
Database – A set of interrelated, centrally controlled data files
Ledgers Cumulative accounting information is stored in that are stored with as little data redundancy as possible. A
general and subsidiary ledgers. database consolidates records previously stored in separate
files into a common pool and serves a variety of users and data
General Ledger – A ledger that contains summary-level data processing applications.
for every asset, liability, equity, revenue, and expense account
of the organization. Data Processing
Once business activity data have been entered into the system,
Subsidiary Ledger – A ledger used to record detailed data for they must be processed to keep the databases current. The four
a general ledger account with many individual sub accounts, different types of data processing activities, referred to as
such as accounts receivable, inventory, and accounts payable. CRUD, are as follows:
Control Account – A title given to a general ledger account 1. Creating new data records, such as adding a newly
that summarizes the total amounts recorded in a subsidiary hired employee to the payroll database.
ledger. 2. Reading, retrieving, or viewing existing data.
Coding – The systematic assignment of numbers or letters to 3. Updating previously stored data.
items to classify and organize them.
4. Deleting data, such as purging the vendor master file
 Sequence Codes – Items are numbered consecutively of all vendors the company no longer does business
so that gaps in the sequence code indicate missing with.
items that should be investigated. Examples include
pre-numbered checks, invoices, and purchase orders. Batch Processing – When updating is done at a certain
 Block Code – Blocks of numbers that are reserved period.
for specific categories of data, thereby helping to
organize the data. An example is a chart of accounts. Documents are records of transaction or other company data.
 Group Code – Two or more subgroups of digits that
Reports are used by employees to control operational
are used to code an item. A group code is often used
activities and by managers to make decisions and to formulate
in conjunction with a block code.
business strategies.
 Mnemonic codes, letters and numbers are
interspersed to identify an item.
Query - A request for the database to provide the information
needed to deal with a problem or answer a question. The
The following guidelines result in a better coding system. The
information is retrieved, displayed or printed, and/or analyzed
code should:
as requested.
 Be consistent with its intended use, which requires
that the code designer determine desired system
Enterprise Resource Planning (ERP) System – A system
outputs prior to selecting the code.
that integrates all aspects of an organization’s activities —
 Allow for growth. For example, don’t use a three- such as accounting, finance, marketing, human resources,
digit employee code for a fast-growing company with manufacturing, inventory management — into one system.
950 employees.

Chart of Accounts is a list of the numbers assigned to each

general ledger account.
This modular design allows businesses to add or delete
modules as needed. Typical ERP modules include:
 Financial (general ledger and reporting system) —
general ledger, accounts receivable, accounts
payable, fixed assets, budgeting, cash management,
and preparation of managerial reports and financial
statements
 Human resources and payroll — human resources,
payroll, employee benefits, training, time and
attendance, benefits, and government reporting
 Order to cash (revenue cycle) — sales order entry,
shipping, inventory, cash receipts, commission
calculation
 Purchase to pay (disbursement cycle) — purchasing,
receipt and inspection of inventory, inventory and
warehouse management, and cash disbursements
 Manufacturing (production cycle) — engineering,
production scheduling, bill of materials, work-in-
process, work flow management, quality control, cost
management, and manufacturing processes and
projects
 Project management —costing, billing, time and
expense, performance units, activity management
 Customer relationship management — sales and
marketing, commissions, service, customer contact,
and call center support
 System tools — tools for establishing master file
data, specifying flow of information, access controls,
and so on

An ERP system, with its centralized database, provides

significant advantages:
 An ERP provides an integrated, enterprise-wide,
single view of the organization’s data and financial
situation.
 Data input is captured or keyed once, rather than
multiple times, as it is entered into different systems.
 Management gains greater visibility into every area
of the enterprise and greater monitoring capabilities.
 The organization gains better access control.
 Procedures and reports are standardized across
business units.
 Customer service improves because employees can
quickly access orders, available inventory, shipping
information, and past customer transaction details.
 Manufacturing plants receive new orders in realtime,
and the automation of manufacturing processes leads
to increased productivity.

ERP systems also have significant disadvantages:

 Cost.
 Amount of time required.
 Changes to business processes.
 Complexity.
 Resistance.

Attributes - The properties, identifying numbers, and

characteristics of interest of an entity that is stored in a
database. Examples are employee number,
pay rate, name, and address.

Field – The portion of a data record where the data value for a
particular attribute is stored. For example, in a spreadsheet
each row might represent a customer and each column is an
attribute of the customer. Each cell in a spreadsheet is a field.

Record – A set of fields whose data values describe specific

attributes of an entity, such as all payroll data relating to a
single employee. An example is a row in a spreadsheet.

Data Value – The actual value stored in a field. It describes a

particular attribute of an entity. For example, the customer
name field would contain “ZYX Company” if that company
was a customer.