Accounting information system

CHAPTERER 2

Overview of Transaction P rocessing and Enterprise Resource Planning Systems

Objective 1:
Describe the data processing cycle used to process transactions, including
how data is input, stored, and processed and how information is output.

1] Describe the data processing cycle

* Accountants and other system users play a significant role in the data processing cycle.
How?
For example,
they interact with systems analysts to help answer questions such as these:
*What data should be entered and stored by the organization, and who should have access to
them?
*How should data be organized, updated, stored, accessed, and retrieved?
*How can scheduled and unanticipated information needs be met?

One important AIS function is to process company transactions efficiently and effectively.
In manual systems (non-computer-based), data are entered into journals and ledgers
maintained on paper.
In computer-based systems, data are entered into computers and stored in files and
databases.
The operations performed on data to generate meaningful and relevant information are
referred to collectively as the data processing cycle.

1) Data input.
2) Data storage.
3) Data processing, and
4) Information output.
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1) Data Input:
Processing inputs includes the following three steps:
The first step in processing input is to capture transaction data and enter them into the
system.
Data must be collected about three facets of each business activity:
A) Each activity of interest.
B) The resource(s) affected by each activity.
C) The people who participate in each activity.

Historically, most businesses used paper source documents to collect data about their
business activities.
They later transferred that data into the computer.
Notice that: When the data are entered using computer screens, they often retain the same
name and basic format as the paper source document it replaced.

Data are entered into the system through the following:

1) Turnaround documents:
They are company output sent to an external party, who often adds data to the document,
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and then are returned to the company as an input document.
These documents are in machine-readable form to facilitate their subsequent processing as
input records.
Example: A utility bill that is sent to the customer, returned with the customer’s payment,
and read by a special scanning device when it is returned.
2) Source data automation:
They are devices capture transaction data in machine- readable form at the time and place of
their origin.
Examples:
*ATMs used by banks.
*Point-of-sale (POS) scanners used in retail stores. And
*Bar code scanners used in warehouses.

The second step in processing input is to make sure captured data are accurate and complete.
One way to do this is to use:
Source data automation, or well - designed turnaround documents. And data entry screens.
Notice that:
*A Well-designed documents and data entry screens improve accuracy and completeness by:
providing instructions or prompts about what data to collect, and grouping logically related
pieces of information close together, and
*Using appropriate shading and borders to clearly separate data items.
Users can improve control either by:
Using pre-numbered source documents, or
having the system automatically assign a sequential number to each new transaction.
Pre-numbering simplifies verifying that:
-All transactions have been recorded, and
-None of the documents has been misplaced.
The Third step in processing input is to make sure company policies are followed, such as
approving or verifying a transaction.
For example, the company would not to:
-Sell goods to a customer who was not paying his bills. Or
-Sell an item for immediate delivery that was out of stock.
These problems are prevented by programming the system to check:
A customer’s credit limit and payment history.
Inventory status.
This must be done before confirming a customer sale.

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2) Data Storage:
A company’s data are one of its most important resources. However, the mere existence of
relevant data does not guarantee that they are useful
To function properly, an organization must have ready and easy access to its data.
Therefore, accountants need to understand the following:
-How data are organized and stored in an AIS, and how they can be accessed.

Imagine how hard it would be a company to find an invoice if all documents were randomly
dumped into file cabinets.
Therefore, information in an AIS is organized for easy and efficient access.

The basic data storage concepts and definitions will be explained as follows:
1- Ledgers.
2- Coding.
3- Chat of accounts.
4- Journals.
5- Audit trail.
6- Computer-based Storage Concepts.
1] Ledgers:
Cumulative accounting information is stored in general and subsidiary ledgers.
- Ledgers can be classified into:
A) General ledger:
It contains summary-level data for every asset, liability, equity, revenue, and expense
account.
B) Subsidiary ledger:
It contains detailed data for any general ledger account with many individual subaccounts.
For example, the general ledger has an accounts receivable account that summarizes the total
amount owed to the company by all customers.
Subsidiary ledgers are often used for accounts receivable, inventory, fixed assets, and
accounts payable.
The general ledger account corresponding to a subsidiary ledger is called a control account.
The relationship between the general ledger control account and the total of individual
subsidiary ledger account balances helps maintain the accuracy of AIS data.

2] Coding Techniques:
Data in ledgers is organized logically using coding techniques.

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Coding , is the systematic assignment of numbers or letters to items to classify and organize
them.
There are many types of coding techniques, such as:

A) Sequence Codes
With sequence codes, items are numbered consecutively to account for all items.
Any missing items cause a gap in the numerical sequence.
Examples of sequence codes include: pre-numbered checks, sales invoices, and purchase
orders.
B) Block code
With a block code, blocks of numbers are reserved for specific categories of data.
Example: ABC Company could reserve a specific range of code for major account categories
as follows:

Account Code Account Type

001 - 100 Assets
101 - 200 Liabilities
201 - 300 Owners’ Equity
301 - 400 Revenues
401 - 500 Expenses

C) Group Codes:
With group codes:
Two or more subgroups of digits are used to code items, are often used in conjunction with
block codes.

Users can sort, summarize, and retrieve information using one or more sub codes.
This technique is often applied to general ledger account numbers.
Examples:
Example 1:
Design a group code to classify the transaction by:
1- The responsibility center controlling the transaction (9 centers).
2- The type of amount (actual / budgeted).
3- The financial statement account (block codes are used to represent each major category as
follows: 100s for assets 200s for liabilities, 300s for owners’ equity ………………..).

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Solution:
X -X- XXX
Responsibility Center Type of amount Account
Code Code Code

Example 2:
- Design a group code for a company that is using four digits chart of accounts.
- The company wants to summarize its data by the branch (5 branches), the product (550
products), the responsibility center controlling the transaction (25 centers), and the type of
amount (actual/ budgeted).
Solution:
X XXX XX -X- XXXX
Branch Product Responsibility Type of Account
Code Code Center Code amount Code Code

D) Mnemonic Codes:
- With mnemonic codes, letters and numbers are interspersed to identify an item.
- The mnemonic code is derived from the description of the item and is usually easy to
memorize.
Guidelines for designing a good coding system:
The following guidelines result in a better coding system.
The code should:
1) Be consistent with its intended use.
This requires that the code designer determines desired system outputs prior to selecting the
code.
2) Allow for growth. For example, don’t use a four-digit employee code for a fast-growing
company with 9950 employees.
3) Be as simple as possible to:
Minimize costs.
Facilitate memorization and interpretation, and
Ensure employee acceptance.
4- Be consistent with the company’s organizational structure and across the company’s
divisions.

3] Chart of Accounts:
A great example of coding is the chart of accounts, which is a list of numbers assigned to
each general ledger account.
These account numbers:
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Allow transaction data to be coded, classified, and entered , into the proper accounts.
Facilitate the preparation of financial statements and reports, because data stored in
individual accounts can easily be summed for preparation.
However, data stored in summary accounts cannot be easily analyzed and reported in more
detail.

Consequently, it is important that the chart of accounts contain sufficient

detail to meet an organization’s information needs.

Table 2-2, shows the chart of accounts for a company. Each account number is three digits
long.
For example:
The first digit represents the major account category (asset, liability………) and indicates
where appears on financial statements.
The second digit represents financial subaccounts within each category (current assets,
noncurrent assets ………………………..etc.).
The third digit identifies the specific account to which the transaction data will be posted
(cash, A/R …………etc.).

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It should be noted that:
1) A chart of accounts is tailored to the nature and purpose of an organization.
For example, the chart of accounts in (table 2-2) indicates that the company is a corporation
because it contained accounts for common stock and retained earnings.
2) In contrast, a partnership would include separate capital and drawing accounts for each
partner, instead of common stock and retained earnings.
3) A retail organization has only one type of general ledger inventory account.
4) A manufacturing company, in contrast, would have separate general ledger accounts for
raw materials, work in process, and finished goods inventories.

4] Journals:
Transaction data are often recorded in a journal before they are entered into a ledger.
A journal entry shows the accounts and amounts to be debited and credited.
Journals can be classified into:
A) General journal: It is used to record infrequent or non -routine transactions, such as:
Loan payments, and
End-of-period adjusting and closing entries.
B) Specialized journal: It records large numbers of repetitive transactions such as: sales,
cash receipts, purchases, and cash disbursements.

5] Audit Trail:
An audit trail is a traceable path of a transaction through a data processing system from:
Point of origin to final output, or backward from final output to point of origin.
It is used to check the accuracy and validity of ledger postings.
For example, the sales journal lists the invoice numbers for each individual entry.
This provides the means for locating and examining the appropriate source documents in
order to: Verify that the transaction occurred, and it was recorded accurately.

6] Computer-based Storage Concepts:

The basic computer-based storage concepts are:
A) Entity:
An entity is something about which data are stored.
Examples of entities include:
Employees, inventory items, suppliers, and customers.
B) Attribute:
Each entity has attributes, or characteristics of interest, that are stored, such as a pay rate and
address.
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It should be noted that:
Each type of entity possesses the same set of attributes.

For example, all employees possess an employee number, pay rate, and home address.
The specific values for those attributes will differ.
For example, one employee’s pay rate limit might be L.E. 70 an hour, whereas another’s
might be L.E. 75.
C) Field:
A field is the physical space where an attribute stored.
Example: The space where the customer number stored is the customer number field.
D) Record:
The fields containing data about entity attributes constitute a record.
Example: The combination of attributes stored for a customer is the customer record.

E) Data Value:
Each intersecting row and column is a field within a record, the contents of which are called
a data value.
F) File:
A file is a group of related records.
Example: The collection of records about all customers at the organization might be called
the customer file.
G) Master File
The main characteristics of a master file are:
1) A master file, like a ledger in a manual AIS, stores cumulative information about an
organization.
For example,
The accounts receivable, inventory and equipment master files store information about
important organizational resources.
The customer, supplier, and employee master files store information about important agents
with whom the organization interacts.

2) Master files are permanent; they exist across fiscal periods.

However, individual master file records may change frequently.
For example, individual customer accounts balances are updated to reflect new sales
transactions and payments received.

3) Periodically, new records are added to or removed from a master file.

For example, when a new customer is added or a former customer deleted.

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H) Transaction File:
The main characteristics of a transaction file are:
1) A transaction file contains records of individual business transactions that occur during a
specific time.
2) It is similar to a journal in a manual AIS.
For example, a company will have a daily sales transaction file and a cash receipts file.
3- Transaction files are used to update master files.
4- Transaction files are not permanent and may not be needed beyond the current fiscal
period. However, they are usually maintained for a specified period for backup purposes.
I) Database:
A database is a set of interrelated, centrally coordinated files.
For example, the accounts receivable file might be combined with customer, sales analysis,
and other related files to form a customer database.

3] Data Processing:
Once business activity data have been entered into the system, they must be processed to
keep the databases current.
The four different types of data processing activities, referred to as CRUD, as follows:
1) Creating:
It means creating new data records, such as adding a newly customer to the customer
database.
2) Reading:
It means retrieving, or viewing existing data.
3) Updating:
It means updating previously stored data.
For example, updating accounts receivable record with sales transaction to get a new current
balance.
4) Deleting data:
It means deleting data such as purging the vendor master file of all vendors the company no
longer does business with.
It should be noted that, updating process can be done using one of three types of data
processing. They are:
1) Batch processing
Updating done periodically, such as daily, weekly, or monthly, is referred to as batch
processing.
Its main advantage is that, batch processing is cheaper and more efficient.
The main disadvantage of batch processing is that, the data are current and acc urate
immediately after processing.
For that reason, batch processing is used only for applications, such as payroll, that:
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 *Do not need frequent updating, and
*naturally occur or are processed at fixed time periods.

2) Online, Real-Time Processing

Most companies update each transaction as it occurs. This process is referred to as online,
real-time processing.
The main advantages of online processing are:
The stored information is always current, thereby increasing its decision-making usefulness.
It is more accurate because data input errors can be corrected in real time or refused.
It also provides significant competitive advantages.
3) Online batch processing
A combination of the two approaches (batch, and online, real-time) is referred to as online
batch processing, where: transaction data are entered and edited as they occur, and stored for
later processing.
(See Figure 2-5 NEXT PAGE, to understand how each type of data processing approach
updates master file using transaction data).

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4] Information Output:
The final step in the data processing cycle is information output. Information output can be
in the form of:
A) Soft copy:
When output displayed on a monitor (screen), it is referred to as “soft copy”.
B) Hard copy:
When output printed on paper, it is referred to as “hard copy”.
- Information is usually presented in one of three forms: a document, a report, or a query
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response.
1- Documents:
- Documents are records of transaction or other company data.
- Some documents, such as checks and sales invoices, are transmitted to external parties.
- Others, such as receiving reports and purchase requisitions are used internally.
Documents can be: Printed out, or stored as electronic image in a computer.

2- Reports:
Reports are used by internal users such as:
Employees to control operational activities. And Managers to make decisions and to
formulate business strategies.
Reports are used by external users to:
Evaluate company profitability,
Judge creditworthiness. Or comply with regulatory requirements.
Reports can be produced on:
(a) A regular basis such as financial statements and sales analyses reports.
(b) An exception basis to call attention to unusual conditions.
For example, a company could have its system produce a report to indicate when product
returns exceed a certain percentage of sales.
(c) On demand
- Reports can also be produced on demand.
For example, the system could produce a report to identify the salesperson who sold the most
items during a specific promotional period.
The need for reports should be periodically assessed, because they are often prepared long
after they are needed, wasting time, money, and resources.
For example, NCR Corporation reduced the number of reports from 1,200 to just over 100.

3- Query Response:
A database query is used to provide the information to deal with problems and questions that
need rapid actions or answers.
A user enters a request for a specific piece of information; it is retrieved, displayed, or
analyzed as requested.
Query response can be classified into:
Repetitive queries: They are often developed by information systems specialists.
One-time queries: They are often developed by users.
Some companies, allow suppliers to access their databases to help them better serve their
needs.

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Objective 2:
Describe how Organizations Use Enterprise Resource Planning (ERP) Systems to Process
Transactions and Provide Information.

To understand enterprise resource planning systems the following aspects should be

considered:
1) the need for ERP systems.
2) ERP components.
3) Advantages of ERP systems.
4) Disadvantages of ERP systems.
5) How to reap the potential benefits of ERP systems and mitigate their disadvantages.

1] The need for ERP systems:

Traditionally, the AIS has been referred to as a transaction processing system (TPS) because:
Its only concern was financial data and accounting transactions.
For example,
When a sale took place, the AIS would record a journal entry showing only the date of the
sale, a debit to either cash or accounts receivable, and a credit to sale.

Other potentially useful nonfinancial information about the sale, such as the time of day that
it occurred, would traditionally be collected and processed outside the AIS.
Consequently, many organizations developed additional information systems to collect,
store, process and report information not contained in the AIS.

Notice that: The existence of multiple systems creates numerous problems and inefficiencies.
For example, the same data must be captured and stored by more than one system, which
results in:
Data redundancy across systems, data discrepancies if data are changed in one system but
not in others, and Difficulty to integrate data from the various systems.
Therefore , Enterprise Resource Planning (ERP) systems overcome these problems as they:
Integrate all aspects of a company’s operations with a traditional AIS.
Coordinate and manage data, business processes, and resources.
Collect, store, and process data and provide the information managers and external parties
need to assess the company.

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- As shown in Figure 2-6, ERP system uses a centralized database to share information
across business processes and coordinate activities.
This is important because an activity that is part of one business process often triggers a
complex series of activities throughout many different parts of the organization.
For example, a customer order may necessitate:
Scheduling additional production to meet the increased demand.
This may trigger an order to purchase more raw materials.
It may also be necessary to schedule overtime or hire temporary help.
Note: Well-designed ERP systems provide management with easy access to up-to-date
information about all of these activities in order to plan, control, and evaluate the
organization’s business processes more effectively.
2] ERP components:
ERP systems are modular, with each module using best business practices to automate a
standard business process.
This modular design allows businesses to add or delete modules as needed.
Typical ERP modules include:
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1- Financial module (general ledger and reporting system).
It includes the following sub-modules:
General ledger,
Accounts receivable.
Accounts payable.
Fixed assets.
Budgeting.
Cash management, and
Preparation of managerial reports and financial statements.

2- Human resources and payroll.

3- Order to cash (revenue cycle).
4- Purchase to pay (disbursement or expenditure cycle).
5- Manufacturing (production cycle).
6- Project management.
7- Customer relationship management.
8- System tools.

3] Advantages of ERP systems:

An ERP system, with its centralized database, provides the following significant advantages:
1- An ERP system provides an integrated, enterprise-wide, single view of the organization’s
data and financial situation. Why?
- Because storing all corporate information in a single database breaks down barriers
between departments and streamlines the flow of information.
2- Data input is captured or keyed once, rather than multiple times, as it is entered into
different systems.
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3- Management gains greater visibility into every area of the enterprise and greater
monitoring capabilities.

4- The organization gains better access control. How?

- An ERP can consolidate multiple permissions and security models into a single data access
structure.
5- Procedures and reports are standardized across business units.
6- Customer service improves because employees can quickly access:
Orders, available inventory, shipping information, and past customer transaction details.
7- Manufacturing plants receive new orders in real time, and the automation of
manufacturing processes leads to increased productivity.

4] Disadvantages of ERP systems

- ERP systems also have the following significant disadvantages:
1- Cost
For example;
ERP hardware, software, and consulting costs for large companies range from $ 50 to $ 500
million and upgrades can cost $ 50 million to $ 100 million.
- Midsized companies spend between $10 and $20 million.

2- Amount of time required It can take years to select and fully implement an ERP system
depending on: Business size, Number of modules to be implemented, Degree of
customization, and The scope of the change.
As a result, ERP implementations have a very high risk of project failure.

3- Changes to business processes

- Unless a company wants to spend time and money customizing modules, they must adapt
to standardized business processes as opposed to adapting the ERP package to existing
company processes.
Notice that: The failure to map current business processes to existing ERP software is a main
cause of ERP project failures.
4- Complexity
Complexity comes from integrating many different business activities and systems, each
having different:
Processes, business rules, data semantics, authorization hierarchies, and
decision centers.
5- Resistance
Organizations that have multiple departments with separate resources, missions, profit and
loss, and chains of commands may believe that a single system has few benefits.
It also takes considerable training and experience to use ERP system effectively.
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Notice that: Employee resistance is a major reason why many ERP implementation do not
success.

5] How to reap the potential benefits of ERP systems and mitigate their disadvantages
- Reaping the potential benefits of ERP and mitigating their disadvantages requires:
*Continues effort, involvement and support by top management for the necessary changes
increase the chances of success.

*Take great care to ensure that the ERP system has a module for every company process and
that you are not paying for software modules you do not need it.

*Select a package designed for your industry.

- Although cost is a huge concern, buying too cheaply can cost more in the long run if the
system does not meet your needs, because modification costs can be quite high.

*Hire an ERP vendor or consulting company to implement ERP software because it is too
difficult to do this by most companies.

*Proper configuration is essential because many processes automatically trigger additional

actions in other modules.
- This requires a sound understanding of all major business processes and their interactions
so they can be defined.

*Data entry controls and access controls are essential. Because the integrated nature of ERP
system means that unless every data item is validated and checked for accuracy at the time of
initial entry, errors will automatically propagate through the system.

ENE OF CHAPTER TWO

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