Chapter Two

Overview of business process: Introduction

Businesses engage in a variety of processes, including: Acquiring capital, buying buildings and
equipment (fixed assets), hiring and training employees, purchasing inventory, doing advertising
and marketing, selling goods or services, collecting payment from customers, paying employees,
paying taxes and paying vendors. Each of these activities requires different types of decision; In
turn, each decision requires variety of information. Types of information needed for decisions
can be financial and nonfinancial which can be accessed from internal and external sources. An
effective AIS needs to be able to integrate information of different types (financial Vs
nonfinancial) and from different sources (internal Vs external).

Business activities and Information needs

The above activities (exchanges) can be summarized in to the following categories which are
historically called as transaction cycles; Most of business transactions are a give to get
exchanges. The basic events in each transaction cycle can be depicted as follows;

1. The revenue cycle which includes the sales and cash receipt events
2. The expenditure cycle which includes purchase and cash disbursement events
3. The human resource (payroll) cycle which includes events of hiring and paying of employees.
4. The production cycle includes the event of transforming raw material and labor into finished product
5. The financial cycle includes the events of obtaining funds from investors and creditors and
repaying them.

These various transaction cycles relate to one another and interface with the general ledger and
reporting system, which is used to generate information for both internal and external users. In
many accounting software packages, the various transaction cycles are implemented as separate
modules because a certain company need not apply all the modules.

An important function of the AIS is to efficiently and effectively process the data about a
company’s transactions. The data processing system could be either manual or computer based
system.

 In manual systems, data is entered into paper journals and ledgers.

 In computer-based systems, the series of operations performed on data is referred to
as the data processing cycle.

Accountants play an important role in data processing. They should decide on what data to store,
who should to access the data, the way the data to be organized, updated, stored, accessed, and
retrieved. To complete these activities an accountant must understand data processing concepts.

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The data processing cycle consists of four steps:

I. Data input
II. Data storage
III. Data processing
IV. Information output
1. Data input (capture)

The first step in data processing is to capture the data. Data must be collected in every business
activity about:

 The events of interest

 The resources affected by the event and
 The agents who participated in each event

Historically, most business used paper source documents to initially collect data about their
business activities and then transferred that data into the computer. Today, however, most data
about business activities are recorded directly through computer data entry screens. Usually the
data entry screen retains the same name as the paper source document it replaced.Well-designed
source documents and data entry screens improve both internal control and accuracy of capturing
data about business activities.

The accuracy and efficiency of data input can be improved through the following actions;

 Source data automation; Capture data with minimal human intervention

 Well-designed source documents and data entry screens
 Using pre-numbered documents or having the system automatically assign sequential
numbers to transactions and verify transactions
2. Data storage

An important function of the AIS is to efficiently and effectively process the data about a
company’s transactions; before process data should be stored. Data storage could be either
manual or computer based data storage and processing system. In manual systems, data is
entered into paper journals and ledgers. In computer-based systems, the series of operations
performed on data is referred to as the data processing cycle.

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Manual data storage

Under manual system when transaction data is captured on a source document, the next step is to
record the data in a journal.

A journal is a record of a chronological entry. At some point in the transaction process, when
all relevant facts about the transaction are known, the event is recorded in a journal in
chronological order. Documents are the primary source of data for journals. A journal entry
is made for each transaction showing the accounts and amounts to be credited. There are
general and special journals which intended to record summary result and detail information
about events occurred, agents participated and resources affected respectively.
A ledger is a book of accounts that reflects the financial effects of the firm’s transactions
after they are posted from the various journals. A ledger is a file used to store cumulative
information about resources and agents. We typically use the word ledger to describe the set
of t-accounts. The t-account is where we keep track of the beginning balance, increases,
decreases, and ending balance for each asset, liability, owners’ equity, revenue, expense,
gain, loss, and dividend account. When routine transactions occur, they are recorded in
special journals and when non-routine transactions occur, they are recorded in the general
journal.
Periodically, the transactions in the special journal are totaled, and a summary entry is made
in the general journal, the individual line items in the special journal are posted to the
subsidiary ledger accounts. The items in the general journal are posted to the general ledger.
Periodically, the balances in the general ledger control accounts are compared to the sums of
the balances in the related subsidiary accounts.

Computer based data storage

An entity is something about which information is stored. Mostly entities can be classified into
events, resources and agents. Attributes could be the data elements

that define an entity and it is the characteristics of interest with respect to those entities which
can be represented by column. Field is the physical space where an attribute is stored. Group of
attributes recorded about an entity is called record; in other words record is the set of attributes
stored for a particular instance of an entity which is represented by a single row. Data value is
the intersection of the row and column.

Types of Files

When we come to file it is a group of related records. The collections of records about all
members of an entity (event, resource and agent) are called a file. Accounting records in
computer-based systems are represented by four different types of magnetic files: master files,
transaction files, reference files, and archive files

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Master file is a file that stores cumulative information about an organization’s entities (agents
and resources). Master file is conceptually similar to a general and special ledger in manual AIS
in that: Master file is permanent from one accounting period to another which means they exists
across fiscal periods. Changes are made to the master file from transaction files to reflect the
effects of new transactions.

Transaction file is a file that contains records of individual transactions (events) that occur
during a fiscal period. It is conceptually similar to a general and special journal in manual AIS in
that: The files are temporary which means they are usually maintained for one fiscal period.

Reference file: This file stores data that are used as standards for processing transactions. For
example, the payroll program may refer to a tax table to calculate the proper amount of
withholding taxes for payroll transactions. Other reference files include price lists used for
preparing customer invoices, lists of authorized suppliers, employee rosters, and customer credit
files for approving credit sales.

Archive file: This file contains records of past transactions that are retained for future reference.
These transactions form an important part of the audit trail. Archive files include journals, prior-
period payroll information, lists of former employees, records of accounts written off, and prior-
period ledgers.

 Finally database is a set of interrelated, centrally-coordinated files.

3. Data processing

Once data about a business activity has been collected and entered into a system, it must be
processed. The file processing activity can be classified into updating data (record the occurrence
of an event, the resources affected by the event, and the agents who participatedr), changing data,
adding data, and deleting data.

Data updating can be done through several approaches which are batch processing, online batch
processing and online real-time processing.

Batch processing:

Source documents are grouped into batches, and control totals are calculated. And then
periodically, the batches are entered into the computer system, edited, sorted, and stored in a
temporary file. The temporary transaction file is run against the master file to update the master
file. Finally the output is printed or displayed, along with error reports, transaction reports, and
control totals.

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Online batch processing:

Transactions are entered into a computer system as they occur and stored in a temporary file.
And then periodically, the temporary transaction file is run against the master file to update the
master file. Finally the output is printed or displayed.

Online real-time processing

Transactions are entered into a computer system as they occur which will be followed by
immediate updating the master files from the transaction. Finally output is printed or displayed.

4. Information output

The final step in the information process is information output. This output can be in the form of:
Documents, reports and queries.

 Documents are records of transactions or other company data.

 Reports are used by employees to control operational activities and by managers to make
decisions and design strategies. They may be produced on a regular basis, exception basis
and demand. Organizations should periodically reassess whether each report is needed.
 Queries are user requests for specific pieces of information. They may be requested
periodically or one time and they can be soft copy or hard copy queries.

Output can serve a variety of purposes. Financial statements can be provided to both external and
internal parties.

Some outputs are specifically for internal use:

 For planning purposes: Budgets and Sales forecasts

 For management of day-to-day operations: Delivery schedules
 For control purposes: Compare Standards or expected with actual results
 For evaluation purposes: Employee error rate

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