ACCOUNTING INFORMATION SYSTEMS Core Concepts of ACCOUNTING INFORMATION SYSTEMS Moscove, Simkin & Bagranoff Developed by: Marianne Bradford, Ph.D. Bryant College John Wiley & Sons, Inc.

Chapter 4 Transaction Processing: Fundamentals and Major Processing Cycles Introduction Transaction Processing Fundamentals Collecting and Reporting Accounting Information Transaction Processing Cycles 2

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

Transaction Processing 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.

Transaction Processing Cycles An AIS consists of one or more transaction processing cycles or applications. These cycles group transactions related to an organization’s business processes. The objective of grouping like transactions is to simplify information processing.

The Revenue Cycle The revenue cycle 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 Revenue Cycle 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 Revenue Cycle 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 Revenue Cycle 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 Revenue Cycle 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 Cycle The purchasing cycle 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 Cycle 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 Cycle 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 Cycle 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

The Resource Management Cycle Organizations use resources to produce goods or services sold to generate revenues. Two other resources besides inventory requiring attention by an AIS are human resources and fixed assets.

Human Resource Management An organization’s human resource management activity includes the personnel function and the payroll function. The personnel function is responsible for hiring employees and maintaining personnel records. The payroll function is responsible for maintaining the accounting records related to employee remuneration.

Objectives of Human Resource Management Hiring, training, and employing workers Maintaining employee earnings records Complying with regulatory reporting requirements Reporting on payroll deductions Making timely and accurate payments to employees Providing an interface for personnel and payroll activities

Inputs to Human Resource Management Personnel Action Forms - document the hiring of new employees or changes in employee status Time Sheets - used to track hours worked Payroll Deduction Forms - authorize the payroll system to deduct amounts from gross pay for items such as retirement, insurance, or union dues Tax Withholding Forms - authorize payroll to reduce gross pay by the appropriate withholding tax.

Outputs of Human Resource Management Financial Statement Information Employee Listings - shows current employees and may contain address and other demographic information Paychecks - the final documents in the process; subject to strict internal controls Check Registers - used to make journal entries for salary and payroll tax expenses

Outputs of Human Resource Management Deduction Reports - contain summaries of deductions for employees as a group Tax (Regulatory) Reports - reports the government requires for income tax, social security tax, and unemployment tax information Payroll Summaries - used by management in analyzing expenses

Fixed Asset Management Fixed assets are assets with usable lives of more than one year. The objective of a fixed-asset management system is to manage the purchase, maintenance, valuation and disposal of an organization’s fixed assets.

Objectives of Fixed Asset Management Tracking purchases of fixed assets Recording fixed asset maintenance Valuing fixed assets Allocating fixed asset costs (recording depreciation) Tracking fixed asset disposals

Inputs to Fixed Asset Management Purchase Requisition Receiving Reports Supplier Invoices Construction Work Orders - if the company builds the asset Repairs and Maintenance Reports - notifies a company’s AIS to update expense or asset accounts for repairs and maintenance Fixed Asset Change Forms - used as the basis for transferring fixed assets from one location to another, retiring, selling or trading-in fixed assets

Outputs of Fixed Asset Management Financial Statement Information Fixed Asset Register - lists identification numbers for each fixed asset and each assets location Depreciation Register - shows depreciation expense and accumulated depreciation for each fixed asset Repair and Maintenance Reports - show the current period’s repair and maintenance expenses as well as each fixed asset’s repair and maintenance history Retired Assets Report - shows all assets disposed of during the accounting period

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