2-1 ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart Overview of Business Processes Chapter 2

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-2 Learning Objectives 1 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.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-3 Learning Objective 1 Explain the three basic functions an accounting information system (AIS) performs.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-4 Introduction This chapter provides an overview of how an AIS can perform its three basic functions : 1. To collect and store data about the organization’s business activities and transactions efficiently and effectively 2 To provide information useful for decision making 3 To provide adequate controls to ensure that data are recorded and processed accurately

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-5 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

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-6 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

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-7 The Three Basic Functions Performed by an AIS 1 To collect and store data about the organization’s business activities and transactions 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.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-8 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

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-9 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 management’s objectives. Safeguard organizational assets.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-10 Basic Subsystems in the AIS 1. The revenue cycle: involves activities of selling goods or services and collecting payment for those sales. 2. The expenditure cycle: involves activities of buying and paying for goods or services used by the organization. 3. The human resources/payroll cycle: involves activities of hiring and paying employees.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-11 Basic Subsystems in the AIS 4. The production cycle: involves activities converting raw materials and labor into finished goods. 5. The financing cycle: involves activities of obtaining necessary funds to run the organization, repay creditors, and distribute profits to investors.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-12 Basic Subsystems in the AIS Expenditure Cycle Human Resources Production Cycle Revenue Cycle Financing Cycle General Ledger & Reporting System

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-13 Learning Objective 2 Describe the documents and procedures used in an AIS to collect and process transaction data.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-14 The Data Processing Cycle The data processing cycle consists of four steps: 1. Data input 2. Data storage 3. Data processing 4. Information Output

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-15 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

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-16 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.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-17 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

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-18 Common Source Documents and Functions Source DocumentFunction Sales orderTake customer order. Delivery ticketDeliver or ship order Remittance adviceReceive cash. Deposit slipDeposit cash receipts. Credit memoAdjust customer accounts REVENUE CYCLE

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-19 CheckPay for items. Common Source Documents and Functions Source Document Function Purchase order Order items. Purchase requisitionRequest items. Receiving reportReceive items. EXPENDITURE CYCLE

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-20 Common Source Documents and Functions HUMAN RESOURCES CYCLE W4 formsCollect employee withholding data. Time cardsRecord time worked by employees. Job time ticketsRecord time spent on specific jobs. Source DocumentFunction

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-21 Common Source Documents and Functions GENERAL LEDGER AND REPORTING SYSTEM Journal voucherRecord entry posted to general ledger. Source DocumentFunction

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-22 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

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-23 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.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-24 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.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-25 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?

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-26 Record Transaction Data in Journals 1 Credit sales 2 Cash receipts 3 Purchases on account 4 Cash disbursements

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-27 Record Transaction Data in Journals Sales Journal InvoiceAccountAccount Post Date NumberDebitedNumber Ref. Amount Dec. 1201Lee Co Dec. 1202May Co Dec. 1203DLK Co TOTAL: 2, /502 Page 5

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-28 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.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-29 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

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-30 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.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-31 Post Transactions to Ledgers Sales Journal Page 5 DateInvoice Number Account Debited Account Number Post Ref. Amount Dec 1203DLK Co Total 120/502 2, General Ledger Account: Accounts Receivable Account Number: 120 DateDescriptionPost Ref.DebitCreditBalance Dec 1SalesSJ52,400

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-32 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.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-33 Learning Objective 3 Discuss the types of information that an AIS can provide.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-34 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

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-35 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.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-36 Managerial Reports The AIS must also be able to provide managers with detailed operational information about the organization’s performance. Two important types of managerial reports are – budget – performance reports

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-37 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.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-38 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.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-39 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) Managerial Reports

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-40 Learning Objective 4 Describe the basic internal control objectives of an AIS and explain how they are accomplished.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-41 Internal Control Considerations The third function of an AIS is to provide adequate internal controls to accomplish three basic objectives: 1 Ensure that the information is reliable. 2 Ensure that business activities are performed efficiently. 3 Safeguard organizational assets.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-42 Internal Control Considerations What are two important methods for accomplishing these objectives? 1 Provide for adequate documentation of all business activities. 2 Design the AIS for effective segregation of duties.

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-43 Adequate Documentation Documentation allows management to verify that assigned responsibilities were completed correctly. 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? – failure to bill for repair work

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-44 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

©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-45 End of Chapter 2