MODULE ACCOUNTING INFORMATION SYSTEMS WITH CLOUD COMPUTING

CHAPTER 1: INTRODUCTION TO AIS

Objectives:

1. An overview of business processes

2. An overview of an accounting information system
3. The business process linkage throughout the supply chain
4. The importance of accounting information systems to accountants

OVERVIEW OF BUSINESS PROCESSES

You might wonder how the preceding example relates to accounting information systems. An
accounting information system must capture, record, and process all financial transactions. Prior
to the implementation of the experimental drive- through order systems, all in-store and drive-
through orders were processed through the cash registers at each local McDonald’s. When the
new, experimental systems were implemented, consider their effects on the system that recorded
sales. The new technology had to be configured in such a way that

1. Order details were taken accurately

2. Those details were forwarded to the correct McDonald’s
location so that the order could be handed to the customer at
the drive-through
3. The order data had to be included with McDonald’s sales and
cash received for the day
4. The correct McDonald’s location had to be properly credited
with the sale so that the franchise and managers would be
given credit for sales they generated

The point of this example is that there are many different ways that sales trans- actions
can be conducted. No matter the form of those business transactions, the accounting information
system must identify the transactions to record, capture all the important details of the transaction,
properly process the trans- action details into the correct accounts, and provide reports externally
and internally. Many types of transactions that result from business processes must be captured,
recorded, and reported.

A business process is a prescribed sequence of work steps performed in order to

produce a desired result for the organization. A business process is initiated by a particular kind
of event, has a well-defined beginning and end, and is usually completed in a relatively short
period. In the previous example, the business process is the taking and filling of a drive-through
order. Organizations have many different business processes, such as completing a sale,
purchasing raw materials, paying employees, and paying vendors. Each business process has
either a direct or an indirect effect on the financial status of the organization. For example,
completing a sale directly increases cash or other assets, while paying employees directly
reduces cash or increases liabilities. Purchasing new, efficient equipment also directly affects
assets and/or liability accounts; yet this transaction is also expected to indirectly increase sales
and assets, as it provides for increased productivity and an expanded customer base. Therefore,
we can see why, as business processes occur, the accounting information system must capture
and record the related accounting information.
In addition, organizations implement internal control processes into their work steps to
prevent errors and fraud. Internal controls are the set of procedures and policies adopted within
an organization to safeguard its assets, check the accuracy and reliability of its data, promote
operational efficiency, and encourage adherence to prescribed managerial practices. For
example, McDonald’s probably requires that at the end of every day, a manager close each cash
 MODULE ACCOUNTING INFORMATION SYSTEMS WITH CLOUD COMPUTING

register and reconcile the cash in the register to the recorded total sold at that register. This is an
internal control process to prevent and detect errors in cash amounts and to discourage
employees from stealing cash. Reconciliation of cash-to-cash register records is a business
process designed to control other processes.
OVERVIEW OF AN ACCOUNTING INFORMATION SYSTEM
The accounting information system comprises the processes, procedures, and systems that
capture accounting data from business processes; record the accounting data in the appropriate
records; process the detailed accounting data by classifying, summarizing, and consolidating; and
report the summarized accounting data to internal and external users. Many years ago,
accounting information systems were paper-based journals and ledgers that were recorded
manually by employees. Today, nearly every organization uses computer systems for maintaining
records in its accounting information system. The accounting information system has several
important components, listed next. An example from McDonald’s is used to describe each
component.

1. Work steps within a business process intended to capture

accounting data as that business process occurs. When
McDonald’s employees greet a customer at the cash register,
they have several work steps to complete a sale, some of which
are accounting related and some of which are not. Greeting the
customer with a smile may be an important step, but it has no
impact on accounting records. However, using the touch screen
at the cash register to conduct the sale does have an
accounting effect: sales amounts in the sales records should be
increased and cash amounts in cash records should be
increased.
2. The manual or computer-based records to record the
accounting data from business processes. As is true of most
companies, McDonald’s has a system of computers and
computer processes to record the appropriate data from the
sale process. These systems usually have a combination of
manual and computerized steps. For McDonald’s, the manual
process is that a person must operate the cash register. The
remainder of the McDonald’s system is computer-based, and
the computer records the sale and all related data.
3. Work steps that are internal controls within the business
process to safeguard assets and to ensure accuracy and
completeness of the data. As mentioned before, the
requirement that a manager close and reconcile the cash
register at the end of the day is an example of an internal control
within the sales processes.
4. Work steps to process, classify, summarize, and consolidate
the raw accounting data. For example, sales at each
McDonald’s franchise must be summarized and consolidated
into a single total of sales revenue to be reported on the income
statement. At McDonald’s, these steps are accomplished by the
computer system and the accounting software. In some
companies, there may be manual or handwritten accounting
records, although currently most organizations use IT systems
to conduct some or all of the accounting recording and
summarizing processes.
 MODULE ACCOUNTING INFORMATION SYSTEMS WITH CLOUD COMPUTING

5. Work steps that generate both internal and external reports.

McDonald’s needs many types of internal reports to monitor the
performance of individual franchise locations and regions. In
addition, year-end external financial statements such as the
income statement, balance sheet, and statement of cash flows
must be prepared for external users.
Overview of an
Accounting Information Various Business
System Processes

Data Storage

Inputs Processing of Data Outputs

(recording, classifying, (checks, reports,
summarizing, consolidating) documents)

BUSINESS PROCESS LINKAGE THROUGHOUT THE SUPPLY CHAIN

The accounting information system and the reports generated by the system are intended to help
management monitor and control the organization. However, any organization operates in an
environment in which it has many interactive relationships with other organizations. For example,
McDonald’s could not operate without its relationships with the many suppliers that provide the
ingredients for its menu selections. There is an entire set of activities (business processes) that
culminate when McDonald’s sells a Big Mac® to a customer. Consider the road that leads to this
culminating sale—it stretches far back into many other organizations. To illustrate these activities,
let’s trace just a small part of that Big Mac sale back as far as we can reasonably go. In order to
sell a Big Mac, McDonald’s had to purchase and keep an inventory of hamburger meat.
McDonald’s would have purchased this meat from a meat supplier called a vendor. A vendor
provides materials or operating supplies to an organization. The terms “vendor” and “supplier” are
usually used interchangeably.
For the McDonald’s meat vendor to supply meat, that vendor had to buy cattle to process
into raw meat. Therefore, McDonald’s meat supplier must have relationships with vendors that
sell cattle. The cattle seller can be called a secondary supplier to McDonald’s. To trace back one
step farther, we could say that the cattle seller had to buy cattle from a rancher who raised cattle.
Likewise, the bun on the Big Mac can be traced back to a bakery, which had to purchase
flour from another company, and that flour producer needed wheat to produce flour. Tracing back
one step farther, we find that the wheat was sold by a wheat farmer. You might wonder what the
purpose is of tracing a Big Mac back to the rancher who raised cattle and the farmer who grew
wheat. The point is that for McDonald’s to operate efficiently, each of these interactive relation-
ships between buyer and seller must operate efficiently. For example, a labor union strike at a
bakery could interrupt the supply of buns for McDonald’s. Therefore, the top management at
McDonald’s must ensure that it properly manages, monitors, and controls the internal processes,
 MODULE ACCOUNTING INFORMATION SYSTEMS WITH CLOUD COMPUTING

as well as those processes that are linked to outside parties such as vendors. McDonald’s may
not be able to directly control all of these interrelated activities stretching back through the many
suppliers, but McDonald’s may be able to influence those activities by the suppliers they choose
and the expectations they place on those suppliers in terms of price, quality, and delivery timing.
This set of linked activ- ities is called the supply chain. The supply chain is the entities,
processes, and information flows that involve the movement of materials, funds, and related
information through the full logistics process, from the acquisition of raw mate- rials to the delivery
of finished products to the end user. The supply chain includes all vendors, service providers,
customers, and intermediaries.
The concept of monitoring and controlling the linked set of activities in the supply chain is
called supply chain management. Supply chain management is the organization and control of
all materials, funds, and related information in the logistics process, from the acquisition of raw
materials to the delivery of finished products to the end user (customer).

Suppliers Restaurants Customers

Suppliers

Flour Mill

Bakery Franchise #1

Milk Seller

Regional
Franchise #2

Franchise #3

IT ENABLEMENT OF BUSINESS PROCESSES

Generally, information technology (IT) comprises all forms of technology used to create, store,
exchange, and utilize information in its various forms, including business data, conversations, still
images, motion pictures, and multimedia presentations. For the purposes of this book,
information technology is defined as the computers, ancillary equipment, software, services,
and related resources as applied to support business processes. IT usage to support business
processes accomplishes one or more of the following objectives:
1. Increased efficiency of business processes

2. Reduced cost of business processes

3. Increased accuracy of the data related to business processes

Any of the processes within an organization, including the linkages within the supply chain, are
processes that may benefit by IT enablement. The touch-screen cash register at a McDonald’s is
an example of IT that increases the efficiency of the sales process. Another popular example of
IT enablement of processes is e-commerce sales such those in place at Amazon.com, Inc.
 MODULE ACCOUNTING INFORMATION SYSTEMS WITH CLOUD COMPUTING

Amazon.com uses complex IT systems to present a sales model that allows customers to place
orders on its website.
These two examples only scratch the surface of the types of processes that can be IT
enabled. Any business process has the potential to be improved by IT enablement. In many
cases, using IT to enable processes leads to a completely different approach to those processes.
For example, the remote order-taking system described at the beginning of this chapter is a
completely different order- taking process from the usual drive-through system. Using more
complex IT such as voice over IP and digital photos, McDonald’s is experimenting with improving
the efficiency of drive-through order taking. Applying IT to business processes is an opportunity
to “think outside the box” and consider completely different methods for business processes. This
concept of revising processes as IT enabling occurs is called business process reengineering.
Business process reengineering (BPR) is the purposeful and organized changing of
business processes to make them more efficient. BPR not only aligns business processes with
the IT systems used to record processes, it also improves efficiency and effectiveness of these
processes. Thus, the use of these sophisticated IT systems usually leads to two kinds of efficiency
improvements. First, the underlying processes are reengineered to be con- ducted more
efficiently. Second, the IT systems improve the efficiency of the underlying processes. Through
rethinking and redesigning a process, the organization may be able to improve, and thereby
enhance, the process. This rethinking and redesign is especially aided by the use of IT. When
technology or computers are introduced into processes, the processes can be radically
redesigned to take advantage of the speed and efficiency of computers to improve processing
efficiency. IT and BPR have a mutually enhancing relationship. IT capabilities should support the
business processes, and any business process should be designed to match the capabilities that
the IT system can provide. BPR should leverage the capabilities of IT to improve the efficiency of
processes. This is exactly what McDonald’s has done in the remote drive-through example; it has
taken advantage of the capabilities offered by technology to improve the process and match it to
the capability of the IT system.

BASIC COMPUTER AND IT CONCEPTS

Nearly all accounting information systems rely on computer hardware and soft- ware to track
business processes and to record accounting data. Therefore, it is important for you to have some
understanding of basic computer terminology and concepts. Many details about IT systems are
described in later chapters of this book, but some of the basic concepts are included in this
chapter.

BASIC COMPUTER DATA STRUCTURES

Accounting data are stored in computer files, and an accountant should have some understanding
of data structures in IT systems. Data are organized in a data hierarchy in computer systems, as
follows:
1. Bit, or binary digit

2. Byte
3. Field

4. Record
5. File

6. Database
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A bit is a shortened reference to binary digit. The bit is the smallest unit of information in a
computer system. A bit can have only one of two values: zero or one. All data in a computer
system are reduced to a set of bits, or zeros and ones. A byte is a unit of storage that represents
one character. In most computer systems, a byte is made up of eight bits. For example, the
character “A” would be represented in a computer system by a set of eight bits. Every character,
including letters, numbers, and symbols, are represented by a byte.
A field is one item within a record. For example, last name is a field in a pay- roll record,
and description is a field in an inventory record. A record is a set of related fields for the same
entity. All fields for a given employee form a payroll record. Such fields would be employee
number, last name, first name, Social Security number, pay rate, and year-to-date gross pay. The
entire set of related records form a file. The set of all employee records forms a payroll file. Thus,
the data structure hierarchy is as follows: Eight bits are a byte, a col- lection of related bytes is a
field, a set of related fields is a record, and a set of related records is a file. The entire collection
of files is called a database. A database is a collection of data stored on the computer in a form
that allows the data to be easily accessed, retrieved, manipulated, and stored. The term database
usually implies a shared database within the organization. Rather than each computer application
having its own files, a database implies a single set of files that is shared by each application that
uses the data. A relational data- base stores data in several small two-dimensional tables that
can be joined together in many varying ways to represent many different kinds of relation- ships
among the data. An example of a relationship in data is a single customer having more than one
order. A relational database is intended to allow flexibility in queries. This means that managers
or users can query the database for information or reports as needed.
The computer files of traditional accounting software systems use master files and
transaction files. The master files are the relatively permanent files that maintain the detailed
data for each major process. For example, a payroll master file contains a record of each
employee’s relatively permanent information necessary to process payroll transactions such as
name, address, pay rate, and year-to-date amounts. Thus, the master file is much like a subsidiary
ledger. The transaction file is the set of relatively temporary records that will be processed to
update the master file. A payroll transaction file would contain the set of hours worked by each
employee for a particular pay period. The transaction file is processed against the master file, and
employee year-to-date balances are updated in the master file.
Not all modern IT systems and accounting software implemented within the last decade
use master files and transaction files. Some systems use a database approach to processing and
storing accounting data, storing the many details of financial transactions in huge databases.
These systems do not necessarily maintain computerized ledgers and journals. Because all
transaction data are stored in databases, when needed, the transactions can be organized or
summarized by the important dimension requested. For example, the sales transactions that meet
certain criteria can be extracted from the database—it is not necessary to construct or review a
sales ledger.

EXAMPLES OF IT ENABLEMENT
As described earlier, computers and IT can be used to enable business processes, and applying
IT to business processes offers companies the opportunity to do business process reengineering.
The manner in which companies complete their processes can be changed to take advantage of
the efficiency, effectiveness, or cost savings inherent in IT systems. The examples that follow are
systems applied by companies today that use IT-enabled business processes.
 MODULE ACCOUNTING INFORMATION SYSTEMS WITH CLOUD COMPUTING

E-BUSINESS
E-business is the use of electronic means to enhance business processes. E-business
encompasses all forms of online electronic trading—consumer- based e-commerce and
business-to-business transactions, as well as the use of IT for process integration inside
organizations. E-business is therefore a very broad concept that includes not only electronic
trading with customers, but also servicing customers and vendors, swapping information with
customers and vendors, and electronic recording and control of internal processes. IT systems,
Internet and websites, as well as wireless networks, are the common means of enabling e-
business to occur. E-commerce is the type of e-business that we are familiar with as consumers.
Buying a book at Amazon.com and clothes at LandsEnd.com are examples of engaging in e-
commerce. E-business has so many other forms that it is difficult to explain its entire breadth.
Chapter 14 describes e-business in more detail.

ELECTRONIC DATA INTERCHANG

Electronic data interchange (EDI) is the intercompany, computer-to-computer transfer of
business documents in a standard business format. Three parts of this definition highlight the
important characteristics of EDI: (1) “Intercompany” refers to two or more companies conducting
business electronically. For example, a buyer of parts may use EDI to purchase parts from its
supplier.
(2) The computer-to-computer aspect of the definition indicates that each company’s
computers are connected via a network. (3) A standard business format is necessary so
that various companies, vendors, and sellers can interact and trade electronically by
means of EDI software. EDI is used to transmit purchase orders, invoices, and payments
electronically between trading partners.

POINT OF SALE SYSTEM

A point-of-sale system (POS) is a system of hardware and software that captures retail sales
transactions by standard bar coding. Nearly all large retail and grocery stores use POS systems
that are integrated into the cash register. As a customer checks out through the cash register, the
bar codes are scanned on the items purchased, prices are determined by access to inventory and
price list data, sales revenue is recorded, and inventory values are updated. All of these processes
occur in real time, and through POS-captured data the store can pro- vide to its managers or
home office daily summaries of sales by cash register or by product. Many companies adopt POS
systems because they enhance customer satisfaction by enabling faster and more accurate sales
processing.

AUTOMATED MATCHING
Automated matching is a computer hardware and software system in which the software
matches an invoice to its related purchase order and receiving report. Traditional systems rely on
a person to do this matching, whereas an automated matching system does not. To institute an
automated matching system, all of the relevant files must be online and constantly ready for
processing; the purchase order and receiving files and records must be in online files or
databases. When an invoice is received from a vendor, an employee enters the details into the
accounting system by completing the fields in the invoice entry screen, including the purchase
order number that usually appears on the invoice. The system can then access the online
purchase order and receiving files and verify that the items, quantities, and prices match. The
system will not approve an invoice for payment unless the items and quantities match with the
 MODULE ACCOUNTING INFORMATION SYSTEMS WITH CLOUD COMPUTING

packing slip and the prices match the purchase order prices. This ensures that the vendor has
billed for the correct items, quantities, and prices. Automated matching reduces the time and cost
of processing vendor payments. The real-world example of Ford Motor Company described
earlier illustrated an automated matching system.

EVALUATED RECEIPT SETTLEMENT

Evaluated receipt settlement (ERS) is an invoice-less system in which computer hardware and
software complete an invoice-less match comparing the purchase order with the goods received.
If the online purchase order matches the goods, payment is made to the vendor. This eliminates
the need for the vendor to send an invoice, since payment is approved as soon as goods are
received (when they match a purchase order). The name ERS signifies that the receipt of goods
is carefully evaluated and, if it matches the purchase order, settlement of the obligation occurs
through this system. This IT-enabled system reduces the time and cost of processing vendor
payments.

E-PAYABLES AND ELECTRONIC INVOICE PRESENTMENT AND PAYMENT

E-payables and electronic invoice presentment and payment (EIPP) are both terms that refer
to Web-enabled receipt and payment of vendor invoices. EIPP enables a vendor to present an
invoice to its trading partner via the Internet, eliminating the paper, printing, and postage costs of
traditional paper invoicing.

ENTERPRISE RESOURCE PLANNING SYSTEMS

Enterprise resource planning (ERP) is a multi-module software system designed to manage all
aspects of an enterprise. ERP systems are usually bro- ken down into modules such as financials,
sales, purchasing, inventory management, manufacturing, and human resources. The modules
are designed to work seamlessly with the rest of the system and to provide a consistent user inter-
face between modules. These systems usually have extensive set-up options that allow some
flexibility in the customizing of functionality to specific business needs. ERP systems are based
on a relational database system.
An ERP software system is much more comprehensive and encompassing than traditional
accounting software. ERP systems include modules to handle accounting functions, but, as
previously mentioned, they also incorporate modules for manufacturing, marketing, logistics, and
human resources. Before ERP, these types of modules usually were in separate software
systems and were not well integrated with accounting software. This caused the need for some
data requests to be answered by the accessing of data or reports from several different systems.
If a customer asked whether a particular product was in stock, the accounting system could be
accessed to answer that request. If it was not in stock, the customer might ask when it is
scheduled to be manufactured. To answer that request, a completely separate software system,
the production planning and control system, would need to be accessed. Under this kind of
operation, with separate and non- integrated software systems, a single employee usually did not
have access to the separate systems to answer such requests. Customers might have been
bounced from department to department to get answers to questions that should be answered by
one person. The integration of all modules and business processes into a single ERP system is
intended to be a solution to these types of problems.
 MODULE ACCOUNTING INFORMATION SYSTEMS WITH CLOUD COMPUTING

THE IMPORTANCE OF ACCOUNTING INFORMATION SYSTEMS TO ACCOUNTANTS

Anyone pursuing an accounting career must study and understand accounting information
systems (AIS) and the related concepts. No matter which particular career path is chosen within
accounting, it will in some manner involve the use of an accounting information system.
Accountants have several possible roles related to accounting information systems: They may be
users of the AIS, part of the design or implementation team of an AIS, and/or auditors of an AIS.

USERS OF THE AIS

Accountants within any organization must use the accounting information system to accomplish
the functions of accounting, generating accounting reports, and using accounting reports. For
example, a controller in an organization must oversee a staff of accountants who record all
accounting transactions, do the monthly closing of the accounting records, and generate the
reports needed by management and external users. The accounting information system is the
mechanism that allows the accounting staff to accomplish those functions. Accountants must
there- fore understand AIS concepts in order to perform these accounting jobs.

DESIGN OR IMPLEMENTATION TEAM

Accountants are usually part of a multiple-discipline team that designs and/or implements
accounting information systems. When an organization considers a change to its AIS,
accountants must be involved in decisions related to such matters as evaluating which software
to purchase, how to design software or systems, and the implementation of software or systems.

AN AUDITOR OF THE AIS

Auditors conduct assurance services such as a financial audit. To conduct an audit, the auditor
must collect evidence and make judgments regarding the completeness and accuracy of
accounting information. The auditor cannot make informed decisions necessary to complete the
audit without an understanding of the accounting information system. The auditor cannot judge
the reliability of accounting data without understanding how the data are entered, processed, and
reported in the accounting information system.

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