ACCOUNTING INFORMATION SYSTEM

I.

OVERVIEW

ACCOUNTING

 The process of recording, summarizing, and reporting financial transactions

 Known as the language of business

INFORMATION

 Data that have been organized and processed to provide meaning and improve

the decision-making process

 Data – facts collected, recorded, stored and processed

SYSTEM

 A set of two or more interrelated components that interact to achieve a goal

BUSINESS PROCESS

 A set of related, coordinated, and structured activities and tasks that are performed by a
person, a computer, or a machine, and that help accomplish a specific organizational
goal

DEFINE TRANSACTION

 an agreement between two entities to exchange goods or services or any other event
that can be measured in economic terms by an organization

MAJOR BUSINESS PROCESSES OR TRANSACTION CYCLES

 Revenue cycle  Human resources or payroll cycle

 Expenditure cycle  Financing cycle
 Production or conversion cycle  General ledger and reporting system

DEFINE ACCOUNTING INFORMATION SYSTEM

 Focuses specifically on managing and processing financial data

 It deals with recording, storing, and reporting financial transactions, such as accounts
payable, accounts receivable, general ledger, payroll, and financial statements within a
system
 It is primarily concerned with ensuring the accuracy, integrity, and compliance of financial
data

KEY COMPONENTS OF AIS

  People
 Procedures and instructions
 Data
 Software
 Information technology infrastructure
 Internal controls and security measures

BUSINESS FUNCTIONS OF AIS COMPONENTS

 Collect and store data

 Transform data into information
 Provide adequate controls

HOW AN AIS ADDS VALUE TO AN ORGANIZATION

 Improving the quality and reducing the costs of products or services

 Improving efficiency
 Sharing knowledge
 Improving the efficiency and effectiveness of its supply chain
 Improving the internal control structure
 Improving decision making

AIS IN THE VALUE CHAIN

 Primary Activities  Secondary/Support Activities

 Inbound logistics  Firm infrastructure
 Operations  Human resources
 Outbound logistics  Technology
 Marketing and sales  Purchasing
 Service

AIS AND THE SUPPLY CHAIN

 Business organization
 Suppliers
 Customers

II.
 OVERVIEW OF BUSINESS PROCESSES

Data Processing Cycle

 Data input
 Data storage
 Data processing
 Information output

Data Input

 Source documents - Documents used to capture transaction data at its source – when
the transaction takes place
 Turnaround documents - Records of company data sent to an external party and then
returned to the system as input, are in machine-readable form to facilitate their
subsequent processing as input records

Data Storage

 General ledgers and subsidiary ledgers

 Control accounts

Coding Techniques

 Sequence codes – items are numbered consecutively

 Block codes – blocks of numbers that are reserved for specific categories of data
 Group codes – two or more subgroups of digits that are used to code an item
 Mnemonic codes - letters and numbers that are interspersed to identify an item

Chart of Accounts

 A listing of all the numbers assigned to balance sheet and income statement accounts

Journals

 General journal - used to record infrequent or nonroutine transactions, such as loan

payments and end-of-period adjusting and closing entries
 Specialized journal - used to record many repetitive transactions such as credit sales,
cash receipts, purchases, and cash disbursements.

Data Storage Elements

 Entity – something about which information is stored

 Attributes – properties, identifying numbers, and characteristics of interest of an entity
  Field – portion of a data record where the data value for a particular attribute is stored
 Record – a set of fields whose data values describe specific attributes of an entity
 Data value – actual value stored in a field
 File – set of logically related records
 Master file – a permanent file of records that stores cumulative data about an
organization
 Transaction file – a file that contains the individual business transactions that occur
during a specific period
 Database – a set of interrelated, centrally controlled data files that are stored with as
little data redundancy as possible

Data Processing

 Creating
 Reading
 Updating
 Deleting

Data Processing

 Batch processing – accumulating transaction records into groups or batches for

processing at a regular interval such as daily or weekly
 Online, real-time processing – computer system processes data immediately after
capture and provides updated information to users on a timely basis.

Information Output

 Document – a record of a transaction or other company data

 Reports – system output, organized in a meaningful fashion, that is used by employees
to control operational activities, by managers to make decisions and design strategies,
and by investors and creditors to understand a company’s business activities
 Query – a request for the database to provide the information needed to deal with a
problem or answer a question

EXAMPLES!

 Document sample
 Report sample
 Query sample

Enterprise Resource Planning (ERP) Systems

 A system that integrates all aspects of an organization’s activities—

such as accounting, finance, marketing, human resources,
manufacturing, inventory management— into one system.
ERP Modules
 Financial (general ledger and reporting system) - general ledger, accounts
receivable, accounts payable, fixed assets, budgeting, cash management, and
preparation of managerial reports and financial statements
  Human resources and payroll - human resources, payroll, employee benefits, training,
time and attendance, benefits, and government reporting
 Order to cash (revenue cycle) - sales order entry, shipping, inventory, cash receipts,
commission calculation
 Purchase to pay (disbursement cycle) - purchasing, receipt and inspection of
inventory, inventory and warehouse management, and cash disbursements
 Manufacturing (production cycle) - engineering, production scheduling, bill of
materials, work-in-process, workflow management, quality control, cost management,
and manufacturing processes and projects
 Project management - costing, billing, time and expense, performance units, activity
management
 Customer relationship management - sales and marketing, commissions, service,
customer contact, and call center support
 System tools - tools for establishing master file data, specifying flow of information,
access controls, and so on

Advantages of ERP systems

 Provides single view of the organization’s data

 Data input is captured or keyed once
 Management gains greater visibility
 The organization gains better access control
 Procedures and reports are standardized
 Customer service improves

Disadvantages of ERP systems

 Cost
 Amount of time required
 Changes to business processes
 Complexity
 Resistance

How much is implementing an ERP software?

 Fortune 500 companies

 $50,000,000-$500,000,000
 Midsized companies
 $10,000,000-$20,000,000

III.

System Documentation Techniques

The Sarbanes-Oxley Act (SOX) of 2002 requires an internal control report in public
company annual reports that:
  states that management is responsible for establishing and maintaining an adequate
internal control structure and
 assesses the effectiveness of the company’s internal controls

Data Flow Diagram (DFD)

 graphically describes the flow of data within an organization

Definition of Terms

 Data source – the entity that  Data store – the place or medium
produces or sends the data that is where system data is stored
entered into a system
 Data destination – the entity that
receives data produced by a system
 Data flow – the movement of data
among processes, stores, sources,
and destinations
 Process – the action that transforms
data into other data or information

Context Diagram

 Highest-level DFD; a summary-level view of a system, showing the data processing

system, its input(s) and output(s), and their sources and destinations

Flowcharts

 An analytical technique that uses a standard set of symbols to describe pictorially some
aspect of an information system in a clear, concise, and logical manner

Flowchart Symbols

 Input/output symbols show input to or output from a system

 Processing symbols show data processing, either electronically or by hand
 Storage symbols show where data is stored
 Flow and miscellaneous symbols indicate the flow of data, where flowcharts begin or
end, where decisions are made, and how to add explanatory notes to flowcharts

Flowchart Types

 Document flowchart - Illustrates the flow of documents and data among areas of
responsibility within an organization
 Internal control flowchart - Used to describe, analyze, and evaluate internal controls,
including identifying system strengths, weaknesses, and inefficiencies
  System flowchart - Depicts the relationships among system input, processing, storage,
and output
 Program flowchart - Illustrates the sequence of logical operations performed by a
computer in executing a program

Business Process Diagram

 A visual way to describe the different steps or activities in a business process

IV.

RELATIONAL DATABASE

Database

 a set of interrelated, centrally coordinated data files that are stored with as little data
redundancy as possible

Database Management System (DBMS)

 The program that manages and controls the data and the interfaces between the data
and the application programs that use the data stored in the database.

Database System

 The database, the DBMS, and the application programs that access the database
through the DBMS.

Data Warehouse

 Very large databases containing detailed and summarized data for a number of years
that are used for analysis rather than transaction processing

Business Intelligence

 Analyzing large amounts of data for strategic decision-making

 Techniques:
 Online analytical processing - queries to investigate hypothesized relationships
among data
 Data mining - using sophisticated statistical analysis, including AI techniques, to
discover unhypothesized relationships

The Advantages of Database Systems

 Data integration
 Data sharing
 Minimal data redundancy and data inconsistencies
 Data independence
  Cross-functional analysis

Logical and Physical Views of Data

 Record layout - document that

shows the items stored in a file,
including the order and length of the
data fields and the type of data
stored.

 Logical view - how people

conceptually organize, view, and
understand the relationships among
data items.

 Physical view - The way data are physically arranged and stored in the computer
system.

Schema

 A description of the data elements in a database, the relationships among them, and the
logical model used to organize and describe the data.

 Conceptual-level schema – organization-wide

 External-level schema – user’s view
 Internal-level schema – low-level view of the database

Data Dictionary

 Information about the structure of the database, including a description of each data
element.

DBMS Languages

 Data definition language (DDL)

 Data manipulation language (DML)
 Data query language (DQL)

Data Model

 Abstract representation of database contents

Types of Attributes

 Primary key
 - database attribute, or combination of attributes, that uniquely identifies each row in a
table
 Foreign key
- attribute in a table that is also a primary key in another table; used to link the two
tables.

Relational Database

 A database built using the relational data model

Basic Requirements of a Relational Database

 Every column in a row must be single valued

 Primary keys cannot be null
- Entity integrity rule – ensures that every row in a table represents something
 Foreign keys, if not null, must have values that correspond to the value of a primary key
in another table.
- Referential integrity rule – link rows in one table to rows in another table must have
value
 All non-key attributes in a table must describe a characteristic of the object identified by
the primary key

Two Approaches to Database Design

• Normalization – following relational database creation rules to design a relational database

that is free from delete, insert, and update anomalies

• Semantic data modeling – using knowledge of business processes and information needs to
create a diagram that shows what to include in a fully normalized database (in 3NF).

Database and the Future of Accounting

 Potential to alter external reporting

 Ability to create ad hoc queries to provide information for decision-making
 Multiple-views of same underlying phenomenon
 Capability to integrate financial and operational data