1. Accounting Information Systems 9 th Edition Marshall B. Romney Paul John Steinbart

2. Overview of Business Processes Chapter 2

3. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-3 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.

4. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-4 Learning Objectives 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.

5. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-5 Introduction: S&S, Inc. The grand opening of S&S is two weeks away. Scott and Susan recognize that they need qualified accounting help and have hired a full-time accountant, Ashton Fleming. Ashton is responsible for creating an accounting information system (AIS).

6. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-6 Introduction: S&S, Inc. What types of questions run through Ashton’s head? How am I going to organize things? Where do I start? What information does S&S need in order to operate effectively? How can that information be provided?

7. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-7 Introduction: S&S, Inc. How am I going to collect and process data about all the types of transactions that S&S will engage in? How do I organize all the data that will be collected? How should I design the AIS so that the information provided is reliable and accurate?

8. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-8 Learning Objective 1 Explain the three basic functions performed by an accounting information system (AIS).

9. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-9 Introduction This chapter addresses the three basic functions performed by an AIS. 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

10. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-10 Introduction The chapter provides an overview of how an AIS fulfills the three basic functions performed by an AIS. It describes the documents and procedures that are needed to capture and process data about the typical business activities engaged by an organization. It also discusses the types of information reports that can be produced by the AIS.

11. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-11 The Three Basic Functions Performed by an AIS 1 The efficient and effective processing of data about a company’s transactions: 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.

12. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-12 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

13. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-13 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.

14. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-14 Learning Objective 2 Describe the documents and procedures used in an AIS to collect and process transaction data.

15. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-15 Capture Transaction Data on Source Documents The first basic function of the AIS is the efficient and effective processing of data about a company’s transactions. Source documents are special forms used to capture transaction data on source documents.

16. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-16 Capture Transaction Data on Source Documents Control over data collection is improved by prenumbering each source document. Accuracy and efficiency in recording transaction data can be further improved if source documents are properly designed.

17. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-17 Credit memoSupport adjustments to customer accounts. Common Source Documents and Functions Revenue Cycle Source Document Function Sales orderRecord customer order. Delivery ticketRecord delivery to customer. Deposit slipRecord amounts deposited. Remittance adviceReceive cash.

18. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-18 CheckPay for items. Common Source Documents and Functions Expenditure Cycle Source Document Function Purchase order Request goods from vendors. Purchase requisitionRequest that purchasing department order goods. Receiving reportRecord receipt of merchandise.

19. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-19 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 Document Function

20. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-20 Common Source Documents and Functions General Ledger & Reporting System Source Document Function Journal voucherRecord entry posted to general ledger.

21. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-21 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.

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

23. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-23 Record Transaction Data in Journals 1 Credit sales 2 Cash receipts 3 Purchases on account 4 Cash disbursements

24. Record Transaction Data in Journals Sales Journal InvoiceAccountAccount Post Date NumberDebitedNumberRef. Amount Dec. 1201Lee Co.120-122 3 800.00 Dec. 1202May Co.120-033 3 700.00 Dec. 1203DLK Co.120-111 3 900.00 TOTAL: 2,400.00 120/502 Page 5

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

26. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-26 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

27. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-27 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.

28. Post Transactions to Ledgers Sales Journal Page 5 InvoiceAccountAccountPost DateNumberDebitedNumberRef. Amount Dec. 1203DLK Co.120-111 3 900.00 TOTAL 2,400.00 120/502 General Ledger Account: Accounts Receivable Account Number: 120 DateDescriptionPost RefDebit Credit Balance Dec. 1SalesSJ52,400 2,400

29. Post Transactions to Ledgers Sales Journal Page 5 InvoiceAccountAccountPost DateNumberDebitedNumberRef. Amount Dec. 1203DLK Co.120-111 3 900.00 TOTAL 2,400.00 120/502 General Ledger Account: Credit SalesAccount Number: 502 DateDescriptionPost RefDebit Credit Balance Dec. 1SalesSJ5 2,400 2,400

30. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-30 What is an Audit Trail? An audit trail provides a means to check the accuracy and validity of ledger postings. Observe that the posting reference for $2,400 credit to the sales account in the general ledger, SJ5, refers back to page 5 of the sales journal.

31. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-31 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.

32. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-32 Learning Objective 3 Discuss the types of information that can be provided by an AIS.

33. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-33 Financial Statements The second function of the AIS is to provide management with information useful for decision making. The preparation of financial statements consists of a sequence of activities. What are these activities?

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

35. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-35 Managerial Reports The AIS must also be able to provide managers with detailed operational information about the organization’s performance. What reports does management need? – inventory status – budgets – performance reports

36. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-36 Managerial Reports What is a budget? A budget is the formal expression of goals in financial terms. What are some types of budgets? – cash – operating – capital

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

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

39. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-39 Learning Objective 4 Describe the basic internal control objectives of an AIS and explain how they are accomplished.

40. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-40 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.

41. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-41 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.

42. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-42 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

43. ©2003 Prentice Hall Business Publishing, Accounting Information Systems, 9/e, Romney/Steinbart 2-43 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

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