CHAPTER 2

Accounting Information
Systems: Overview of
Business Process
INTRODUCTION
• Questions to be addressed in this chapter
include:
– What are the basic business activities in which an
organization engages?
• What decisions must be made to undertake these
activities?
• What information is required to make those decisions?
– What role does the data processing cycle play in
organizing business activities and providing
information to users?
– What is the role of the information system and
enterprise resource planning in modern
organizations?
INFORMATION NEEDS AND
BUSINESS ACTIVITIES
• Businesses engage in a variety of activities,
including:
– Acquiring capital
– Buying buildings and equipment Each activity
– requires
Hiring and training employees
different types
– Purchasing inventory of decisions!
– Doing advertising and marketing
– Selling goods or services
Each decision
– Collecting payment from customers requires
– Paying employees different types
– Paying taxes of information.
– Paying vendors
INFORMATION NEEDS AND
BUSINESS ACTIVITIES
• Types of information needed for
decisions:
– Some is financial
– Some is non financial
– Some comes from internal sources
– Some comes from external sources
• An effective AIS needs to be able to
integrate information of different types
and from different sources.
INTERACTION WITH EXTERNAL AND
INTERNAL PARTIES

External
AIS Parties

• The AIS interacts with external parties,

such as customers, vendors, creditors,
and governmental agencies.
INTERACTION WITH EXTERNAL AND
INTERNAL PARTIES

Internal External
Parties AIS Parties

• The AIS also interacts with internal

parties such as employees and
management.
INTERACTION WITH EXTERNAL AND
INTERNAL PARTIES

Internal External
Parties AIS Parties

• The AIS also interacts with internal

parties such as employees and
management.
INTERACTION WITH EXTERNAL AND
INTERNAL PARTIES

Internal External
Parties AIS Parties

• The interaction is typically two-way, in

that the AIS sends information to and
receives information from these
parties.
BUSINESS CYCLES

• A transaction is:
– An agreement between two entities to
exchange goods or services; OR
– Any other event that can be measured in
economic terms by an organization.
• EXAMPLES:
– Sell goods to customers
– Depreciate equipment
BUSINESS CYCLES

• The transaction cycle is a process:

– Begins with capturing data about a
transaction
– Ends with an information output, such as
financial statements
BUSINESS CYCLES

• Many business activities are paired in

give-get exchanges
• The basic exchanges can be grouped
into five major transaction cycles.
– Revenue cycle
– Expenditure cycle
– Production cycle
– Human resources/payroll cycle
– Financing cycle
REVENUE CYCLE

• The revenue cycle involves interactions

with your customers.
• You sell goods or services and get
cash.

Give Get
Goods Cash
BUSINESS CYCLES

• Other transactions in the revenue cycle

include:
• Handle customer inquiries • Update sales and Accts
• Take customer orders Rec. for sales
• Approve credit sales • Receive customer
• Check inventory availability payments
• • Update Accts Rec. for
Initiate back orders
collections
• Pick and pack orders
• Handle sales returns,
• Ship goods discounts, & bad debts
• Bill customers • Prepare management
Note that the last activity in any reports
cycle is to send information to other• Send info to other cycles
cycles.
EXPENDITURE CYCLE

• The expenditure cycle involves

interactions with your suppliers.
• You buy goods or services and pay
cash.

Give Get
Cash Goods
BUSINESS CYCLES

• Transactions in the expenditure cycle:

MAJOR GIVE-GET: • Update accounts payable
• Give cash; get goods or for purchase
services • Approve invoices for
OTHER TRANSACTIONS payment
• Requisition goods and • Pay vendors
services • Update accounts payable
• Process purchase orders for payment
to vendors • Handle purchase returns,
• Receive goods and discounts, and allowances
services • Prepare management
• Store goods reports
• Receive vendor invoices • Send info to other cycles
PRODUCTION CYCLE

• In the production cycle, raw materials

and labor are transformed into finished
goods.

Give Raw Get

Materials & Finished
Labor Goods
BUSINESS CYCLES

• Transactions in the production cycle:

MAJOR GIVE-GET: • Store finished goods
• Give labor and raw • Accumulate costs for
materials; Get finished products
goods • Prepare management
OTHER TRANSACTIONS reports
• Design products • Send info to other cycles
• Forecast, plan, and
schedule production
• Requisition raw materials
• Manufacture products
HUMAN RESOURCES/
PAYROLL CYCLE
• The human resources cycle involves
interactions with your employees.
• Employees are hired, trained, paid,
evaluated, promoted, and terminated.

Give Get
Cash Labor
BUSINESS CYCLES

• Transactions in the HR/payroll cycle:

MAJOR GIVE-GET: • Pay employees
• Give cash; get labor – Process timecard and
commission data
OTHER TRANSACTIONS
– Prepare and distribute
• Recruit, hire, and train payroll
employees
• Calculate and disburse tax
• Evaluate and promote and benefit payments
employees
• Prepare management
• Discharge employees reports
• Update payroll records • Send info to other cycles
FINANCING CYCLE
• The financing cycle involves interactions
with investors and creditors.
• You raise capital (through stock or debt),
repay the capital, and pay a return on it
(interest or dividends).

Give Get
Cash cash
BUSINESS CYCLES

• Transactions in the financing cycle:

MAJOR GIVE-GET: • Pay dividends to investors
• Give cash; get cash and interest to lenders
OTHER TRANSACTIONS • Retire debt
• Forecast cash needs • Prepare management
• Sell securities to investors reports
• Borrow money from • Send info to other cycles
lenders
BUSINESS CYCLES

• Transactions in the financing cycle:

MAJOR GIVE-GET: • Pay dividends to investors
• Give cash; get cash and interest to lenders
OTHER TRANSACTIONS • Retire debt
• Forecast cash needs • Prepare management
• Sell securities to investors reports
• Borrow money from • Send info to other cycles
lenders
Finished Goods

Revenue Expenditure Production

Cycle Cycle Cycle

Da
ta
Fu
General Ledger
nd
s
and Reporting • The revenue cycle
System – Gets finished
goods from the
production cycle
– Provides funds to
the financing cycle
Human Res./ Financing – Provides data to
Payroll Cycle Cycle the General Ledger
and Reporting
System
Raw
Mats.
Revenue Expenditure Production
Cycle Cycle Cycle

Data
d s
F un

General Ledger
and Reporting • The expenditure
System cycle
– Gets funds from
the financing cycle
– Provides raw
materials to the
Human Res./ Financing production cycle
Payroll Cycle Cycle – Provides data to
the General Ledger
and Reporting
System
Finished Goods

Raw
Mats.
Revenue Expenditure Production
Cycle Cycle Cycle

a ta
D

General Ledger
and Reporting • The production cycle:
r
bo
System – Gets raw materials
La

from the expenditure

cycle
– Gets labor from the
HR/payroll cycle
– Provides finished
Human Res./ Financing goods to the revenue
Payroll Cycle Cycle cycle
– Provides data to the
General Ledger and
Reporting System
Revenue Expenditure Production
Cycle Cycle Cycle

General Ledger
and Reporting • The HR/payroll
r
bo System cycle:
La

– Gets funds from

ta the financing cycle
Da
– Provides labor to
the production
Human Res./ Funds Financing cycle
Payroll Cycle Cycle – Provides data to
the General Ledger
and Reporting
System
Revenue Expenditure Production
Cycle Cycle Cycle

Fu
nd
s
Fu
General Ledger

nd
• The Financing cycle:

s
and Reporting
System – Gets funds from
the revenue cycle
– Provides funds to

Data
the expenditure
and HR/payroll
cycles
Human Res./ Funds Financing – Provides data to
Payroll Cycle Cycle the General Ledger
and Reporting
System
Revenue Expenditure Production
Cycle Cycle Cycle

Data
at ta
a Da

General Ledger Information for

Internal & External Users
and Reporting
System
ta
Da • The General Ledger

Data
and Reporting System:
– Gets data from all of
Human Res./ Financing the cycles
Payroll Cycle Cycle – Provides information
for internal and
external users
BUSINESS CYCLES

• Many accounting software packages

implement the different transaction
cycles as separate modules.
– Not every module is needed in every
organization, e.g., retail companies don’t
have a production cycle.
– Some companies may need extra modules.
– The implementation of each transaction
cycle can differ significantly across
companies.
BUSINESS CYCLES

• However the cycles are implemented, it

is critical that the AIS be able to:
– Accommodate the information needs of
managers
– Integrate financial and nonfinancial data.
TRANSACTION PROCESSING:
THE DATA PROCESSING CYCLE
• Accountants play an important role in data
processing. They answer questions such as:
– What data should be entered and stored?
– Who should be able to access the data?
– How should the data be organized, updated,
stored, accessed, and retrieved?
– How can scheduled and unanticipated information
needs be met.
• To answer these questions, they must
understand data processing concepts.
TRANSACTION PROCESSING:
THE DATA PROCESSING CYCLE
• An important function of the AIS is to
efficiently and effectively process the
data about a company’s transactions.
– In manual systems, data is entered into
paper journals and ledgers.
– In computer-based systems, the series of
operations performed on data is referred
to as the data processing cycle.
TRANSACTION PROCESSING:
THE DATA PROCESSING CYCLE
• The data processing cycle consists of
four steps:
– Data input
– Data storage
– Data processing
– Information output
DATA INPUT

• The first step in data processing is to

capture the data.
• Usually triggered by a business
activity.
• Data is captured about:
– The event that occurred
– The resources affected by the event
– The agents who participated
DATA STORAGE

• Data needs to be organized for easy

and efficient access.
• Let’s start with some vocabulary terms
with respect to data storage.
Ledger
General Ledger
Subsidiary Ledger
Coding Techniques
DATA STORAGE

• Now that we’ve learned some storage

terminology, let’s return to the data
storage process.
• When transaction data is captured on a
source document, 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 credited.
DATA STORAGE
• Prepare the end-of-period adjusting entries.
– Record in journal
– Post to ledger
• Make an adjusted trial balance.
• Using the numbers in the adjusted trial
balance, prepare an income statement.
• Prepare closing entries.
• Prepare:
– Statement of stockholders’ equity
– Balance sheet
– Statement of cash flows
DATA PROCESSING

• Once data about a business activity

has been collected and entered into a
system, it must be processed.
DATA PROCESSING

• There are four different types of file

processing:
– Updating data to record the occurrence of
an event, the resources affected by the
event, and the agents who participated,
e.g., recording a sale to a customer.
– Changing data, e.g., a customer address
– Adding data, e.g., a new customer.
– Deleting data, e.g., removing an old
customer that has not purchased anything
in 5 years.
INFORMATION OUTPUT

• The final step in the information

process is information output.
• This output can be in the form of:
• Documents are records of
– Documents transactions or other company data.
• EXAMPLE: Employee paychecks or
purchase orders for merchandise
• Documents generated at the end of
the transaction processing activities
are known as operational documents
(as opposed to source documents).
• They can be printed or stored as
electronic images.
INFORMATION OUTPUT

• The final step in the information

process is information output.
• Reports are used by employees to
• This output can be in operational
control the form of: and by
activities
managers to make decisions and
– Documents design strategies.
– Reports • They may be produced:
– On a regular basis
– On an exception basis
– On demand
• Organizations should periodically
reassess whether each report is
needed.
INFORMATION OUTPUT

• The final step in the information

process is information output.
• This output can be in the form of:
– Documents • Queries are user requests for specific
pieces of information.
– Reports • They may be requested:
– Queries – Periodically
– One time
• They can be displayed:
– On the monitor, called soft copy
– On the screen, called hard copy
INFORMATION OUTPUT

• Output can serve a variety of purposes:

– Financial statements can be provided to
both external and internal parties.
– Some outputs are specifically for internal
use:
• For planning purposes
• Examples of outputs for planning
purposes include:
– Budgets
• Budgets are an entity’s formal expression of
goals in financial terms
– Sales forecasts
INFORMATION OUTPUT

• Output can serve a variety of purposes:

– Financial statements can be provided to
both external and internal parties.
– Some outputs are specifically for internal
use:
• For planning purposes
• For management of day-to-day operations
• Example: delivery schedules
INFORMATION OUTPUT
• Performance reports are outputs that are
used for control purposes.
• Output can serve
• These a variety
reports compare of an
purposes:
organization’s
standard or expected
– Financial statements performance
can be provided to with
its actual outcomes.
both external and internal parties.
• Management by exception is an
– Some outputs are specifically
approach for internal
to utilizing performance
use: reports that focuses on investigating and
acting on only those variances that are
• For planning purposes
significant.
• For management of day-to-day operations
• For control purposes
INFORMATION OUTPUT

• Output can serve a variety of purposes:

– Financial statements can be provided to both
external and internal parties.
– Some outputs are specifically for internal use:
• For planning purposes
• For management of day-to-day operations
• For control purposes
• For evaluation purposes
• These outputs might include:
– Surveys of customer satisfaction
– Reports on employee error rates
INFORMATION OUTPUT

• Behavioral implications of managerial

reports:
– YOU GET WHAT YOU MEASURE!
INFORMATION OUTPUT

• Budgeting can also be dysfunctional in

that the focus can be redirected to
creating acceptable numbers instead of
achieving organizational objectives.
• Does this mean organizations shouldn’t
budget?
SUMMARY
ROLE OF THE AIS
•• We’ve learned about
The traditional AIS the basic business
captured financialactivities
data.
in which an organization engages, the decisions
– Non-financial data was captured in other,
that need to be made, and the information required
sometimes-redundant systems
to make those decisions.
•• Enterprise resource planning (ERP) systems
We’ve reviewed the data processing cycle and its
are
role designed to integrate
in organizing all aspects
business activities and of a
company’s operations
providing information (including both
to users.
• financial andtouched
Finally, we’ve non-financial information)
on the role of the with
the traditional
information functions
systems of an
in modern AIS.
organizations and
introduced the notion of enterprise resource
planning systems.