ACCOUNTING INFORMATION SYSTEMS Core Concepts of ACCOUNTING INFORMATION SYSTEMS Moscove, Simkin & Bagranoff Developed by: S. Bhattacharya, Ph.D. Florida Atlantic University John Wiley & Sons, Inc.

Chapter 4 Accounting Information Systems and Business Processes: Part I Introduction Business Process Fundamentals Collecting and Reporting Accounting Information Core Business Processes 2

Introduction AISs depend on the flow of data through various organizational subsystems. Effective processing systems ensure capture of appropriate data and accurate information reporting. Transaction processing cycles organize transactions related to an organization’s business processes.

Business Process Fundamentals The accounting cycle begins when accounting personnel analyze a transaction from a source document. A source document is a piece of paper or electronic form that records a business activity such as the purchase or sale of goods.

Journals Accounting personnel record transactions in a journal. The journal is a chronological record of business events by account. A journal may be a general journal or a special journal. A general journal allows any type of accounting transaction to be recorded. A special journal captures specific types of transactions.

Ledgers A ledger may be a general ledger or a subsidiary ledger. A general ledger is a collection of detailed monetary information about an organization’s assets, liabilities, revenues, and expenses. A subsidiary ledger contains detailed records pertaining to a particular account in the general ledger.

Trial Balances Once an AIS records journal entries and posts them to the general ledger, the system can create a trial balance. Three end of period trial balances are needed: A preadjusting trial balance after all entries have been posted; An adjusted trial balance after adjustments have been recorded and posted; A postclosing trial balance after temporary accounts have closing entries have been recorded and posted.

Financial Statements Financial statements are the primary output of a financial accounting system. These statements include: Income Statement Statement of Owners Equity Balance Sheet Statement of Cash Flows

Coding Systems AISs depend on coding to record, store, classify and retrieve financial data. Computer systems most often use numeric or alphanumeric codes for processing accounting transactions. Purposes of coding: Uniquely identify transactions and accounts Compress data Aid in classification process Convey special meanings

Types of Codes Mnemonic Codes give visible clues concerning the objects they represent. Sequence Codes assign numbers or letters in consecutive order. Block Codes are sequential codes in which specific blocks of numbers are reserved for particular uses. Group Codes reveal two or more dimensions or facets pertaining to an object.

Design Considerations in Coding Codes should serve some useful purpose. Codes should be consistent. Codes should be standardized throughout the organization. Codes should plan for future expansion.

Collecting and Reporting Accounting Information Design of an effective AIS begins by considering outputs from the system. Outputs of an AIS include: reports to management reports to investors and creditors files that retain transaction data files that retain current data about accounts

Considerations in Report Design Reports that only list exceptional conditions are exception reports. Reports should be useful to managerial decision-making without creating information overload. Format should be convenient, contain fundamental identification, and be consistent.

Core Business Processes An AIS collects and reports data related to an organization’s business processes. An economic event is an economic activity that involves an increase and/or decrease in dollar amounts in the financial statements. Since economic events impact financial statements, they are often called accounting transactions. A business event is one that does not impact financial statements, but is nevertheless important to the business.

The Sales Process The sales process begins with a customer order for goods or services and ends with the collection of cash from the customer. The primary objective is to achieve timely and efficient revenue collection. An organization that generates revenues, but fails to collect these revenues on a timely basis, may find itself in a position where it cannot pay its bills.

Objectives of the Sales Process Tracking sales of goods and/or services to customers. Filling customer orders. Billing customers for goods and services Collecting payment for goods and services. Forecasting sales and cash receipts.

Inputs to the Sales Process Sales Order - prenumbered and usually prepared in multiple copies; used to prepare sales invoice Sales Invoice - prepared after shipment of goods or providing of a service Remittance Advice - serve as source document for credits to accounts receivable Shipping Notice - warehouse prepares after goods are released for shipment Debit/Credit memo - issued for sales returns and allowances; debit memos increase amount customer owes

Outputs of the Sales Process Financial Statement Information Customer Billing Statement - includes customer account activity such as sales, returns, and cash receipts Accounts Receivable Aging Report - contains data concerning the status of open balances of all active credit customers arranging the overdue amounts by time periods

Outputs of the Sales Process Bad Debt Report - customer accounts written off. Cash Receipts Forecast - all data gathered from source documents in revenue transactions are inputs to this forecast. Customer Listing - shows customer codes, contacts, shipping and billing addresses, credit limits, and billing terms. Sales Analysis Reports - captures detailed data about each sale in order to monitor sales activities and plan production and marketing efforts.

The Purchasing Process The purchasing process begins with a request for goods or services and ends with the payment of cash to the vendor. Purchase may be for either goods or services and for cash or on credit.

Objectives of the Purchasing Process Tracking purchases of goods and/or services from vendors Tracking amounts owed Maintaining vendor records Controlling inventory Making timely and accurate vendor payments Forecasting purchases and cash outflows

Inputs to the Purchasing Process Purchase Requisition - shows items requested by stores and may indicate the name of the vendor Purchase Order - based on purchase requisition but also includes vendor information and payment terms Vendor Invoice - includes items shipped by vendors, prices, shipping terms and discounts provided Receiving Report - reflects the count and condition of received goods Bill of lading – accompanies the goods sent Packing slip – included in the merchandise package Debit/Credit Memoranda - debits or credits accounts payable

Outputs of the Purchasing Process Financial Statement Information Vendor Checks - should be supported by a voucher and signed by a person designated by management Check Register - lists all checks issued for a particular period Discrepancy Reports - used to identify any differences among quantities on the purchase order, receiving report, and vendor invoice Cash Requirements Forecast - predicts future payments and payment dates by reference to outstanding purchase order, unbilled receiving reports and vendor invoices

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