ST.

MARY’S UNIVERSITY

DEPARTMENT OF ACCOUNTING AND FINANCE

Accounting Information System Group Assignment

Name of Student ID.No

1. Nurhusein Nesru EAD/1778/2012

2. Endalkachew Zergaw EAD/1757/2012

3. Gizachew Nadew EAD/2385/2012

4. Sied Mossa EAD/1732/2012

5. Mintesnot Degemu EAD/1775/2012

6. Fasika Dessalegn EAD/1710/2012

 1. Transaction Cycles and Accounting Applications
1.1. Transaction/Business Cycles
1.1.1. The Revenue Cycle: Sales and Cash Collections
Revenue cycle
It is a recurring set of business activities
It is related with the other cycles E.g.-gets finished goods from production cycle
Revenue Cycle Business Activities
i. Sales order entry: -
 It is performed by the sales order department.
 The sales order department typically reports to the VP of Marketing.

Take the Check the Check inventory Respond to

customer’s order customer’s credit availability customer inquiries

Steps in the sales order entry process

ii. Shipping
 It is the activity of filling customer orders and shipping the desired merchandise.

Picking and packing the order Shipping the order

 The warehouse department typically picks the order

 The shipping departments packs and ships the order  Updates the quantity-on-
hand field in the inventory
The clerk records online
master file
 The sales order number
 The item numbers ordered  Produces a packing slip
 The quantities shipped  Produces multiple copies
of the bill of lading
Bill of lading: - It is a legal contract that defines responsibility for goods in transit. It
identifies the carrier, the source, the destination, special shipping instructions, and who pays
for the shipping.
- The shipment is accompanied by: •
 The packing slip
Important documents up
 A copy of the bill of lading on shipment
 The freight bill

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iii. Billing: - It is an information processing activity that repackages and summarizes
information from the sales order entry and shipping activities.
 Invoicing and Updating accounts receivable are two major activities in the billing
cycle.
 Sales invoice notifies the customer the amount to be paid and where to send payment
 The accounts receivable function debits customer accounts for the amount the
customer is invoiced and credits customer accounts for the amount of customer
payments.
Methods to maintain accounts receivable
Open-Invoice Method: - Customers pay according to each invoice.
 Conducive to offering early-payment discounts and results in more uniform flow of
cash collections are the advantage of open-invoice method.
 Disadvantages of open-invoice method is it is more complex to maintain
Balance Forward Method: - Customers pay according to amount on their monthly
statement, rather than by invoice.
Advantages of balance-forward method:
 It’s more efficient and reduces costs because you don’t bill for each individual sale
 It’s more convenient for the customer to make one monthly remittance.
Cycle billing is commonly used with the balance-forward method. Monthly
statements are prepared for subsets of customers at different times.
Account Adjustments and Write-Offs
 Adjustments made for returns, allowances for damaged goods and write-offs as
uncollectible
 These adjustments are handled by the credit manager.
 If repeated attempts to collect payment fail, the credit manager may issue a credit
memo to write off an account
iv. Cash collection - The cashier, who reports to the treasurer, handles customer
remittances and deposits them in the bank. Accounts receivable personnel should not
have access to cash (including checks).
Possible approaches to collecting cash:
 Turnaround documents forwarded to accounts receivable.
 Lockbox arrangements
 Electronic lockboxes
 Electronic funds transfer and bill payment.

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  Financial electronic data interchange (FEDI).
 Accept credit cards or procurement cards from customers.
Control: Objectives, Threats, and Procedures
Control help to ensure:
 All transactions are properly authorized
 All recorded transactions are valid
 All valid and authorized transactions are recorded
 All transactions are recorded accurately
 Assets are safeguarded from loss or theft
 Business activities are performed efficiently and effectively
 The company is in compliance with all applicable laws and regulations
 All disclosures are full and fair
Threats in Sales Order Entry
 Incomplete or inaccurate customer orders
 Sales to customers with poor credit
 Orders that are not legitimate
 Stock outs, carrying costs, and markdowns
Threats in Shipping
 Shipping Errors
 Theft of Inventory
Threats in Billing
 Failure to bill customers
 Billing errors
 Errors in maintaining customer accounts
Threats in Cash Collection
 Theft of cash
Actions help to reduce threats of errors or irregularities
 Using simple, easy-to-complete documents with clear instructions (enhances accuracy
and reliability).
 Using appropriate application controls, such as validity checks and field checks
(enhances accuracy and reliability).
 Providing space on forms to record who completed and who reviewed the form
(encourages proper authorizations and accountability).

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  Pre-numbering documents (encourages recording of valid and only valid
transactions).
 Restricting access to blank documents (reduces risk of unauthorized transaction).
1.1.2. The Expenditure Cycle: Purchasing and Cash Disbursements
The three basic activities performed in the expenditure cycle are: i. ordering goods, supplies,
and services ii. Receiving and storing these items iii. Paying for these items –
i. Ordering Goods, Supplies, and Services: - It involves identifying what, when, and
how much to purchase and from whom. One of the key factors affecting this process
is the inventory control method to be used.
 The order processing begins with a purchase request followed by the generation
of a purchase order. The need to purchase goods typically results in the creation
of a purchase requisition.
 Price, Quality and Dependability are key considerations up on purchase
requisition. Dependability is especially important in JIT systems because late or
defective deliveries can bring the whole system to a halt.
A purchase order is a document or electronic form that formally requests a supplier to sell
and deliver specified products at specified prices. It is both a contract and a promise to pay
ii. Receiving and Storing Goods:-
The two major responsibilities of the receiving department are:
 Deciding whether to accept delivery
 Verifying the quantity and quality of delivered goods
iii. Paying For Goods and Services - There are two basic sub-processes involved in
the payment process:
 Approval of vendor invoices
 Actual payment of the invoices
Control: Objectives, Threats, and Procedures - The control objectives are the same as in
the revenue cycle. Major threats in expenditure cycle include the following
 Stock outs and/or Excess Inventory
 Ordering Unnecessary Items
 Purchasing Goods at Inflated Prices
 Purchasing Goods of Inferior Quality
 Purchasing from Unauthorized Suppliers
 Kickbacks
1.1.3. The Human Resources Management / Payroll Cycle

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The HRM/Payroll cycle is a recurring set of business activities and related data processing
operations associated with effectively managing the employee workforce. Major tasks under
this cycle include:
 Recruiting and hiring new employees
 Training
 Job assignment
 Compensation (payroll)
 Performance evaluation
 Discharge of employees (voluntarily or involuntarily)
The payroll system handles compensation and comes under the purview of the controller.
There are five major sources of input to the payroll system:
 HRM department provides information about hiring, terminations, and pay-rate
changes.
 Employees provide changes in discretionary deductions (e.g., optional life insurance,
Credit & saving cont.).
 Various departments provide data about the actual hours worked by employees.
 Government agencies provide tax rates and regulatory instructions.
 Insurance companies and other organizations provide instructions for calculating and
remitting various withholdings.
Payroll Cycle Activities: Basic activities in the payroll cycle are:
i. Update payroll master file
ii. Update tax rates and deductions
iii. Validate time and attendance data
iv. Prepare payroll
v. Disburse payroll
vi. Calculate employer-paid benefits and taxes
vii. Disburse payroll taxes and miscellaneous deductions
Control: Objectives, Threats, and Procedures
Major threats to the HRM/payroll system are:
Threats in Employment Practices
 Hiring Unqualified or Larcenous Employees
 Violation of Employment Law
Threats in Payroll Processing
 Unauthorized Changes to the Payroll Master File

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  Inaccurate Time Data
 Inaccurate Processing of Payroll
 Theft or Fraudulent Distribution of Pay checks
General Threats
 Loss, Alteration, or Unauthorized Disclosure of Data
 Poor Performance
1.1.4. The Production Cycle
 It is associated with the manufacture of products.
Major activities under production cycle include the following:
i. Product design
ii. Planning and scheduling
iii. Production operations
iv. Cost accounting
1.1.5. Financial Cycle
 It involves companies interaction with Creditors and Investors (Individual and
organization)
 It gives cash to them in the form of periodic interest and principal at maturity to
creditors and periodic cash dividends and liquidated dividend at liquidation to owners
and get cash from them. Major activities in this cycle are the following:
 Forecast cash need
 Issue security to investors
 Borrow security from creditors.
 Pay dividend to investors
 Pay interest to lenders
 Prepare management reports
 Send information to other cycles.
1.1.6. General Ledger and Reporting System(GLRS)
It includes the processes in place to update general ledger accounts and prepare
reports that summarize results of the organization’s activities. The basic activities in
the GLARS are:
i. Update the general ledger
ii. Post adjusting entries
iii. Prepare financial statements
iv. Produce managerial reports

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