Overview of Business Processes Chapter 2 Edited Hull, Hayes, and El-Masry © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

The Three Basic Functions Performed by an AIS (Pg. 7) 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. Page 22 © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

The Three Basic Functions Performed by an AIS 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 © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

Comparison of financial Statements and Management Reports Management Reports Financial Statements 1. Internally focus 2. No mandatory rules 3. Financial and nonfinancial information; subjective information possible 4. Emphasis on the future 5. Internal evaluation and decisions based on very detailed information 1. Externally focus 2. Must follow externally imposed rules 3. Objective financial information 4. Historical orientation 5. Information about the firm as a whole © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

The Three Basic Functions Performed by an AIS 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. © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

Basic Subsystems in the AIS Financing Cycle Expenditure Cycle Human Resources General Ledger & Reporting System From Ch 2, page 23 Production Cycle Revenue Cycle

Cycle Give – Get Transactions Financing cycle get cash, give cash Expenditure cycle – give cash, get goods Human resources cycle – give cash, get labor Production cycle – give labor, give raw materials, get finished goods Revenue cycle – give goods, get cash Figure 2-1, p 25 © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

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. P 27, Note Table 2-2; page 27 – 28; Source documents generally help improve accuracy in transactin processing because (a) they specify which information to collect due to their structure; (B) standard information is preprinted on the document; and © they provide directins and steps for completing the form. © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

Turnaround Documents are records of company data sent to an external party and then returned to the system as an input. Page 28 © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

Source Documents and Functions for the Revenue Cycle Source Document Function Sales order Record customer order. Delivery ticket Record delivery to customer. Sales invoice Bill customer for sales on account Remittance advice Receive cash. Deposit slip Record amounts deposited. Credit memo Support adjustments to customer accounts. © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

Source Documents and and Functions for the Expenditure Cycle Source Document Function Purchase requisition Request that purchasing department order goods. Purchase order Request goods from vendors. Receiving report Record receipt of merchandise. Check Pay for items. © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

Source Documents and Functions for the Human Resource Cycle Source Document Function W4 forms Collect employee withholding data. Time cards Record time worked by employees. Job time tickets Record time spent on specific jobs. (Job Costing System) © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

Source Documents and Functions for the General Ledger & Reporting System Source Document Function Journal voucher Record entry posted to general ledger. (JV) May come from various journals. © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

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. © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

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? © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

Record Transaction Data in Journals Credit sales Cash receipts Purchases on account Cash disbursements © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

Record Transaction Data in Journals Page 5 Sales Journal Invoice Account Account Post Date Number Debited Number Ref. Amount Dec. 1 201 Lee Co. 120-122 3 800.00 Dec. 1 202 May Co. 120-033 3 700.00 Dec. 1 203 DLK Co. 120-111 3 900.00 TOTAL: 2,400.00 120/502

Post Transactions to Ledgers The general ledger contains summary-level data for every asset, liability, equity, revenue, and expense account of an organization. A subsidiary ledger records all the detailed data for any general ledger account that has many individual subaccounts. Commonly used subsidiary ledgers…. accounts receivable inventory accounts payable © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

Post Transactions to Ledgers Sales Journal Page 5 Invoice Account Account Post Date Number Debited Number Ref. Amount Dec. 1 203 DLK Co. 120-111 3 900.00 TOTAL 2,400.00 120/502 General Ledger Account: Accounts Receivable Account Number: 120 Date Description Post Ref Debit Credit Balance Dec. 1 Sales SJ5 2,400 2,400

Post Transactions to Ledgers Sales Journal Page 5 Invoice Account Account Post Date Number Debited Number Ref. Amount Dec. 1 203 DLK Co. 120-111 3 900.00 TOTAL 2,400.00 120/502 General Ledger Account: Credit Sales Account Number: 502 Date Description Post Ref Debit Credit Balance Dec. 1 Sales SJ5 2,400 2,400

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. © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

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. © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

Chart of Accounts Long-Term Liabilities (220-239) 222 Mortgage Payable OWNERS’ EQUITY (300-399) 301 Capital Stock 330 Retained Earnings SALES (400-499) 400 Sales Revenue EXPENSES (500-599) 500 Cost of Goods Sold 523 Rent Expense 528 Advertising Expense 573 Utility Expense ASSETS (100-199) Current Assets (100-150) 101 Cash 105 Accounts Receivable 107 Inventory Long-Term Assets (151-199) 151 Land 152 Building LIABILITIES (200-299) Current Liabilities (200-219) 201 Notes Payable 202 Accounts Payable © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart 37

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. © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

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. © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

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 © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

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 © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

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. © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

Managerial Reports 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) © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

Internal Control Considerations The third function of an AIS is to provide adequate internal controls to accomplish three basic objectives: Ensure that the information is reliable. Ensure that business activities are performed efficiently. Safeguard organizational assets. Page 36 © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

Internal Control Considerations What are two important methods for accomplishing these objectives? Provide for adequate documentation of all business activities. Design the AIS for effective segregation of duties, including: a-authorizing transactions b-recording transactions c-custody of assets © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart

Enterprise Resource Planning (ERP) ERP systems are designed to integrate all aspects of a company’s operations (including both financial and non-financial information) with the traditional functions of an AIS. Major ERP systems include ORACLE and SAP. Refer to SQL Oracle Handouts (DDL, DML, and DQL). © Prentice Hall Business Publishing, Accounting Information Systems, Romney/Steinbart