CHAPTER ONE

1. ACCOUNTING INFORMATION SYSTEMS: AN OVERVIEW

Introduction

In this chapter, we will first define systems, an information and data, define an accounting
information system. It should be obvious that all information systems are systems but not all
systems are information systems.

In addition this chapter discusses why AIS is an important topic to study, describes the
differences and relationships between Accounting information systems and Management
Information systems, the evolution of information System model-business and its effects on
business process, the roles of accountant, accountant as the users, accountant as the system
designers and accountant as a system audit designers and finally Discuss about Entity
relationship diagram and data flow diagram

Learning Outcomes
After studying this chapter you are able to:
 Explain an information environment
 Explain what an accounting information system (AIS) and Management Information
System (MIS) is all about.
 Discuss the evolution of information system model.
 Explain the E-business, types of E-commerce and its effects on business process
 Describe role of accountant, accountant as the users, accountant as the system designers
and accountant as a system audit designers
 Discuss about Entity relationship diagram and
 Explain data flow diagram

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1.1 INTRODUCTION: THE INFORMATION ENVIRONMENT

For many, the term system generates mental images of computers and programming. In fact, the
term has much broader applicability. Some systems are naturally occurring, while others are
artificial. Natural systems range from the atom- a system of electrons, protons, and neutrons- to
the universe- a system of galaxies, stars, and planets. All life forms, plants and animals are
examples of natural systems. Artificial systems are man-made. These systems include everything
from clocks to submarines and social systems to information systems.

Elements of a system
Regardless of their origin, all systems possess some common elements. The following definition
specifies:
A system is a group of two or more interrelated components or subsystems that serve a
common purpose.
The general definition of a system can be analyzed to gain an understanding of how it applies to
business and information systems.

Multiple components. A system must contain more than one part. For example, a
combination of six colleges and one school of graduate studies and the infrastructures under
each college & school as well as the administrative forms a system called Jimma University.
Further example, a combination of four departments and resources under each department
forms a system called College of Business & Economics (CBE). Therefore, CBE is a system
as well as a subsystem of the largest system called Jimma University.
Relatedness. A common purpose relates the multiple parts of the system. Although each part
functions independently of the other, all parts serve a common objective. For example, even
if all colleges & the school are independent of each other, they serve for one common
objective that is to produce well qualified, competent manpower in different professions. If a
particular component does not contribute to the common goal, then it is not part of the
system

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 System versus subsystem. The distinction between the terms system and subsystem is a
matter of perspective. For our purposes, these terms are interchangeable. A system is called a
subsystem when it is viewed in relation to the larger system of which it is a part. Likewise, a
subsystem is called a system when it is the focus of attention. Animals, plants, and other life
forms are systems. They are also subsystems of the ecosystem in which they exist. From
different perspective, animals are systems composed of many smaller subsystems, such as the
circulatory subsystem and the respiratory subsystem.

Purpose. A system must serve at least one purpose, but it serves several. Whether a system
provides a measure of time, electrical power, or information serving a purpose is its
fundamental justification. When a system ceases to serve a purpose, it should be replaced.

Information system: is the set of formal procedures by which data are collected, processed into
information, and distributed to users. Information system can be decomposed into; accounting
information system (AIS) and management information system (MIS). More often, AIS and MIS
applications will be integrated to achieve operational efficiency. The distinction between AIS
and MIS subsystems centers on the concept of a transaction.

The information flows: every business day, vast quantities of information flow to decision
makers and other users to meet a variety of internal needs. In addition, information flows out of
the organization to external users, such as customers, suppliers, and stakeholders who have an
interest in the firm. The figure below presents an overview of these internal and external
information flows.

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Types of information system

For most businesses, there are varieties of requirements for information. Senior managers need
information to help with their business planning. Middle management needs more detailed
information to help them monitor and control business activities. Employees with operational
roles need information to help them carry out their duties.

As a result, businesses tend to have several "information systems" operating at the same time.

The main kinds of information systems in business are described briefly below:

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Information Description
System
Executive An Executive Support System ("ESS") is designed to help senior
Support management make strategic decisions. It gathers analyses and summarizes the
Systems key internal and external information used in the business.

A good way to think about an ESS is to imagine the senior management team
in an aircraft cockpit - with the instrument panel showing them the status of all
the key business activities. ESS typically involves lots of data analysis and
Modeling tools such as "what-if" analysis to help strategic decision-making.
Management A management information system ("MIS") is mainly concerned with
Information internal sources of information. MIS usually take data from the transaction
Systems processing systems (see below) and summaries it into a series of management
reports.

MIS reports tend to be used by middle management and operational

supervisors.
Decision- Decision-support systems ("DSS") are specifically designed to help
Support management make decisions in situations where there is uncertainty about the
Systems possible outcomes of those decisions. DSS comprise tools and techniques to
help gather relevant information and analyze the options and alternatives. DSS
often involves use of complex spreadsheet and databases to create "what-if"
Models.

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Knowledge Knowledge Management Systems ("KMS") exist to help businesses create and
Management share information. These are typically used in a business where employees
Systems create new knowledge and expertise - which can then be shared by other
people in the organization to create further commercial opportunities. Good
examples include firms of lawyers, accountants and management consultants.
KMS are built around systems which allow efficient categorization and
distribution of knowledge. For example, the knowledge itself might be
contained in word processing documents, spreadsheets, PowerPoint
presentations. Internet pages or whatever. To share the knowledge, a KMS
Would use group collaboration systems such as an intranet.
Transaction As the name implies, Transaction Processing Systems ("TPS") are designed to
Processing process routine transactions efficiently and accurately. A business will have
Systems several (sometimes many) TPS; for example:

-Billing systems to send invoices to customers

-Systems to calculate the weekly and monthly payroll and tax payments
-Production and purchasing systems to calculate raw material requirements
- Stock control systems to process all movements into, within and out of the
business
Office Office Automation Systems are systems that try to improve the productivity of
Automation employees who need to process data and information. Perhaps the best
Systems example is the wide range of software systems that exist to improve the
productivity of employees working in an office (e.g. Microsoft Office XP) or
systems that allow employees to work from home or whilst on the move.

Information Systems: A glimpse on its historical development

1950s-1960s: Data Processing
 electronic data processing systems: transaction processing, record keeping, traditional
accounting

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1960s-1970s: Management reporting
 Management Information Systems: management reports for pre-specified information to
support decision making

1970s-1980s: Decision Support

 Decision Support Systems: Interactive ad hoc support of the managerial decision process
1980s-1990s: Strategic and End User Support
 End User Computing Systems: direct productivity support
 Executive Information Systems: Critical Information
 Expert Systems: Knowledge based expert advice for end users
 Strategic Information Systems: for competitive advantage
1990s – 2000s: Global internetworking

 Internetworked information systems: for end-user, enterprise, and inter-organizational

computing, collaboration, including global operations and management on the internet

and other interconnected enterprise and global networks.

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 Information System

Operations Management
Information Information
Systems Systems

Transaction Process Office Information Decision Executive

\Figure 1.1: InternalControl
Processing & External Automation
Information Flows
Reporting Support Information
Systems Systems Systems Systems Systems Systems

Data versus Information

Data are facts that are collected, recorded, stored, and processed by an information system.
Organizations collect data about:
 Events that occur
 Resources that are affected by those events
 Agents who participate in the events

Information is different from data. Information is data that have been organized and processed to
provide meaning to a user. Usually, more information and better information translates into
better decisions. There are limits to the amount of information the human mind can effectively
absorb and process. However, when you get more information than you can effectively
assimilate, if the limits are passed, you suffer from information overload. Example: Final exams
week! When you’ve reached the overload point, the quality of decisions declines while the costs
of producing the information increases.

Data Information

• raw facts or observations • informative value

• meaningless • time dependent
• time independent • human efficient
• machine efficient • specific
• general purpose • based on previous knowledge

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Benefits versus costs of information
Information should be obtained if and only if its benefits is at least equal to the costs

Benefits of information may include:

 Reduction of uncertainty, Improved decisions, Improved ability to plan and
schedule activities

Costs may include time and resources spent:

 Collecting data, processing data, storing data, distributing information to users

Value of information (VI) is the net benefit derived from information. Hence, VI is the benefit
produced by the information minus the cost of producing it.

VI = Benefit - Cost

Costs and benefits of information are often difficult to quantify, but you need to try when you are
making decisions about whether to provide information.

Characteristics of Useful Information

Regardless of physical form or technology, useful information has the following
characteristics:
 Reliability: It is reliable if it is free from error or bias and faithfully portrays events and
activities of the organization. Related to accuracy.
 Understandability: It is presented in a manner you can comprehend and use. If it is
presented in a useful and intelligible manner
 Verifiability: A consensus notion—the nature of the information is such that different
people would tend to produce the same result. Two people would each produce the
same information.
 Accessibility: You can get to it when you need it and in a format you can use.
 Relevance: serves a purpose that is pre-supposed.

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  Timeliness: no older than the time period of the action it supports
 Completeness: all information essential to a decision or task is present
 Summarization: aggregated in accordance with the user’s needs

These characteristics of useful information are related to the three dimensions of information;
time, content and form as depicted below.

What is the meaning of system?

What is the difference between data and information?

What system concept states?

.
What is the benefit of producing information?

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1.2 ACCOUNTING INFORMATION SYSTEM VS MANAGEMENT INFORMATION
SYSTEM
An accounting information system is a collection of resources such as people and equipment

designed to transform financial data into information. The information is communicated to a

wide variety of decision makers.

AIS is a set of interrelated subsystems which collect, record, and process data to information

which is used to make quality decision.

AIS combine the study and practice of accounting with the design, implementation, and

monitoring of information systems.

AIS is a computer-based system designed to transform accounting data into information, can

also include transaction processing cycles, the use of information technology, and the

development of information system.

A General model for AIS:

This is a general model because it describes all information systems, regardless of their
technological architecture. The elements of the general model are end users, data sources, data
collection, data processing, database management, information generation, and feedback. The
figure below presents the general model for viewing AIS applications.

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Figure 1.2: The General AIS Model

AIS consist of five components:

1. The people who operate the system and perform various functions
2. The procedures, both manual and automated, involved in collecting, processing, and
storing data about the organization’s activities
3. The data about the organization’s business process
4. The software used to process the organization’s data
5. The information technology infrastructure, including computers, peripheral devices, and
network communications devices
Together, these five components enable AIS to fulfill three important functions in any
organization:
1. Collecting and storing data about the activities performed by the organization, the
resources affected by those events, and the agents who participate in the various activities
so that management, employees, and interested outsiders can review what has happened.

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 2. Transforming data into information that is useful for making decisions that enable
management to plan, execute, and control activities.
3. Providing adequate controls to safeguard the organization’s assets, including its data, to
ensure that the data are available when needed and are accurate and reliable.

Management Information System (MIS)

Management often requires information that goes beyond the capability of AIS. As organizations
grow in size and complexity, specialized functional areas emerge requiring additional
information for production planning and control, sales forecasting, inventory warehouse
planning, market research, and so on. The management information system (MIS) processes
non-financial transactions that are not normally processed by traditional AIS.

The changing role of Accounting Information

Some management decisions require information that integrates financial and non-financial data.
For example, a purchasing manager, evaluating the performance of suppliers, wants to know the
number and financial value of inventory orders placed with specific vendors during a period of
time. In addition, the manager needs to know the number of deliveries that exceed the normal
lead time, and any inventory stock out conditions that resulted from late deliveries.
Such integrated information, if it could be provided at all, would traditionally come from
separate AIS and MIS applications functioning independently. The AIS application would supply
the cost of purchases data, while the delivery time and stock out data (if available) would come
from an MIS application. The two sets of data would then need to be integrated and reported to
the manager.

To improve operational efficiency and gain competitive advantage in the market place, many
organizations have reengineered their information systems to include both AIS and MIS features.

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This has impacted the traditional role of accountants as they assume new responsibility for
providing reliable non-financial data.

Why to distinguish between AIS and MIS?

Given the changes that are occurring in accounting, is there a need to distinguish between AIS
and MIS? The answer to this question is “yes.” Publicly held organizations must provide
financial reports to interested external parties. The management, accountants, and auditors of
public firms have a legal responsibility for the design, operation, control, and audit of AIS
applications that impact the financial statements. Naturally, MIS applications are also important
to the enterprise, otherwise they should not have been implemented. However, the legal and
professional standards that characterize AIS clearly distinguish it from MIS. With the increasing
integration of financial and non-financial systems, organization’s management, systems
professionals, and accountants need a conceptual model that reflects this important distinction.
What is accounting information system?

Differentiate AIS and MIS

1.3 THE EVOLUTION OF INFORMATION SYSTEM MODEL

Being an information system, an accounting information system must have a target system. It
should be obvious that the target system must be business operations in a narrow sense. Other
non-accounting aspects of business operations are covered by information systems such as
Human Resources Information System, Management Information System, Production
Planning/Scheduling System, Strategic Planning System, and so on. The target system for an
accounting system has to do with the aspects of business operations that have to do with
accountability for the assets/liabilities of the enterprise, the determination of the results of

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operations that ultimately leads to the computation of comprehensive income, and the financial
reporting aspects of business operations.

1.4 E-BUSINESS

Electronic commerce, commonly known as (electronic marketing) e-commerce or e-Commerce,

consists of the buying and selling of products or services over electronic systems such as the
Internet and other computer networks. The amount of trade conducted electronically has grown
extraordinarily with widespread Internet usage. The meaning of electronic commerce has
changed over the last 30 years. Originally, electronic commerce meant the facilitation of
commercial transactions electronically, using technology such as Electronic Data Interchange
(EDI) and Electronic Funds Transfer (EFT). These were both introduced in the late 1970s,
allowing businesses to send commercial documents like purchase orders or invoices
electronically. The growth and acceptance of credit cards, automated teller machines (ATM) and
telephone banking in the 1980s were also forms of electronic commerce. Another form of e-
commerce was the airline reservation system typified by Sabre in the USA and Travicom in the
UK.
Explain e-commerce

Types of E-commerce

There are a variety of different types of e-commerce and many different ways to characterize
these types. Five major types of e-commerce discussed in this unit. For most part, we distinguish
different types of e-commerce by the nature of the market relationship- who is selling to whom.
The exceptions are Peer-to-Peer (P2P) and Mobile commerce m-commerce, which are
technology-based distinctions.

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 1. B2C. The most commonly discussed type of e-commerce is Business- to- Customer (B2C)
e-commerce, in which online businesses attempt to reach individual consumers.
2. B2B. Business-to-Business (B2B) e-commerce, in which businesses focus on selling to
other businesses, is the largest form of e-commerce.
3. C2C. Consumer-to Consumer (C2C) e-commerce provides a way for consumers to sell to
each other, with the help of an online market maker such as the auction site eBay.
4. P2P. Peer-to-Peer (P2P) e-commerce technology enables Internet users to share files and
computer resources directly without having to go through a central Web server. In peer-to-
peer’s purest form, no intermediary is required.
5. M-commerce. Mobile commerce, or m-commerce, refers to the use of wireless digital
devices to enable transactions on the Web. They utilize wireless networks to connect cell
phones and handheld devices to the Web.
Mention clearly types of E-commerce
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Effect of E-commerce on Business Processes

Electronic commerce can directly or indirectly affect every step in the value chain. The most
obvious effect is on sales and marketing activities. Companies can create electronic catalogs on
their web sites to totally automate sales order entry. For example, Cisco Systems’ site helps
customers select the right components for their networking needs. Web sites designed to
automate sales and marketing can also improve the efficiency of the operations step of the value
chain. For example, Ford uses its internal data –voice-video communications network to
facilitate communications among 120 designers throughout the world.
Electronic commerce applications can also significantly improve the quality of post-sales-
customer support. For example, setting up a web page ensures that all customers receive
consistent information. Companies like AT & T and Nike use a sequence of menu-driven forms

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to electronically interview customers at their web site; only the most complex problems need to
be routed to a customer service representative.
For products that can be digitized, such as books, software, and music, even the inbound and
outbound logistics steps of the value chain can be performed electronically. This yields
tremendous cost savings to both the acquiring and selling organization. Electronic commerce
applications can also significantly improve the efficiency and effectiveness of value chain
support activities. For example, the purchasing activities benefits by being able to more easily
compare prices across a larger number of potential vendors than would be possible to consider in
a manual setting.
Indeed, the capabilities provided by networking and communication technology is an important
part of the infrastructure supporting globalization. For example, Lexmark Corporation
manufactures its computers and related products in eight different countries on four continents,
and sells those products in over 150 different countries. It believes that coordinating such
dispersed activities would be impossible without an effective communications network. Many
other companies similarly believe that an effective communications network is the key to
globalization. Thus, it is important to develop a basic understanding of the technology that
underlies such networks and supports electronic commerce.
Explain the effects of e-commerce on business process
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1.5 THE ROLE OF ACCOUNTANT

As far as information system is concerned, the role of accountant is very significant in designing,
using and implementing accounting information system. Accountants must understand the
system development process, as they are involved in it in several ways: as users helping to

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specify their needs, as members of the development team & as auditors after the system is complete.
Accountants should help keep the project on track by evaluating and measuring benefits, monitoring
costs and ensuring that the project stays on schedule.

1.5.1 ACCOUNTANTS AS THE USERS

As accounting is an information providing activity, accountants can use it after having sufficient
understanding; how the system that provides that information is designed, implemented, and
used, how financial information is reported, and how information is used to make decisions.
1.5.2 ACCOUNTANTS AS THE SYSTEM DESIGNERS

System is a mechanism by which different components are working together in order to achieve
common purpose. To make systems effective it should be well designed. As a result, accountants
are the primarily professionals involved in system design.
1.5.3 ACCOUNTANT AS THE SYSTEM AUDITORS

In order to ensure the effectiveness of system accountant need to evaluate the accuracy and
reliability of information produced by the AIS. Accountants must understand the client’s AIS
adequately to be confident that it is providing complete and accurate information for planning
and compliance work. In private industry and not-for-profit, systems work is considered the most
important activity performed by accountants. In management consulting, the design, selection,
and implementation of accounting systems is a rapid growth area.

What is the role of accountant in designing, using, and auditing AIS?

Explain the role of accountant in system audit

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1.6 INTRODUCTION TO DOCUMENTATION TOOLS AND TECHNIQUES

Documentation encompasses the narratives, flowcharts, diagrams, and other written material that
explain how the system works. This information covers the; who, what, when, where, why, and
how data entry, processing, storage, information output and system controls. One popular means
of documenting a system is to develop diagrams, flowcharts, tables, and other graphical
representations of information. These are then supplemented by a narrative description of the
system, which is a written step-by-step explanation of system components and interactions. The
two most common tools of system documentation; dataflow diagrams and flowcharts will be
discussed in this part. These tools save the organization both time and money. Depending on the
job function being performed, documentation tools are important on one or more of the
following levels:

1. At minimum, documentation is read to determine how the system works.

2. Internal control documentations are evaluated to identify control strengths and
weaknesses and to recommend improvements.
3. The greatest amount of skill is needed to prepare documentation.

An understanding of documentation tools is required regardless of the type of accounting career

chosen. For example, auditors are required to understand the client's system of internal controls
before conducting an audit.

Why documentation is important?

Documentation is important for the following reasons.

Depicting how the system works: Studying and reviewing written descriptions of the inputs,
processing steps, and outputs of the system make the job easier.

Training users: Documentation also includes the user guides, procedure manuals, and other
operating instructions that help people learn how the AIS operate.

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Designing new systems: Documentation helps system designers develop new systems in much
the same way that blueprints help architects design buildings.

Controlling system development and maintenance costs: Good documentation helps system
designers develop object-oriented SW, that is, programs that contain modular, reusable code.
This object-orientation helps programmers avoid writing duplicate programs and facilities
changes when programs must be modified later.

Standardizing communications with others: Documentation techniques such as flowcharts and

data flow diagrams are standard industry tools, and they are more likely to be interpreted the
same way by all parties viewing them.

Auditing AISs: Documentation helps auditors determine the strengths and weaknesses of a
system’s controls.

Documenting business processes: By mapping the business processes, documentation helps

managers better understand the ways in which their businesses operate.

The basic documentation tools are:

1. Data flow diagram - a graphical description of the source and destination of data that
shows data flow within an organization, the processes performed on the data and how
data are stored.
2. Document flow chart - a graphical description of the flow of documents and information
between departments or areas of responsibility within an organization.
3. System flowchart - a graphical description of the relationship among the input,
processing, and output in an information system.
4. Program flowchart - a graphical description of the sequence of logical operations that a
computer performs as it executes a program.
These tools are used extensively in the system development process. Systems development is a
complex process and these tools are used to create order from chaos and complexity. In addition,
the team members who develop information systems projects often change and these

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documentation tools help the new team members get up to speed quickly. Both DFDs and
flowcharts are easy to prepare and revise when one of the recently developed DFDs or
flowcharting software packages is used. They are easier to use than most word processors. Once
a few basic commands are mastered, users can quickly and easily prepare, store, revise, and print
presentation quality DFDs or flowcharts.

How do accountants use documentation?

1.6.1 ENTITY RELATIONSHIP DIAGRAM

An entity is anything about which the organization wishes to store data. At your college or
university, one entity would be the student. Information about the attributes of an entity (e.g., the
student’s ID number and birth date) are stored in fields. All the fields containing data about one
entity (e.g., one student) form a record.

1.6.2 DATA FLOW DIAGRAMS (DFD)

A data flow diagram (DFD) graphically describes the flow of data within an organization. It is
used to document existing systems, and plan and design new ones. There is no ideal way to
develop a DFD, because different problems call for different methods. Some general guidelines
for developing DFDs are:

1. Understand the system - involves observing the flow of information through an

organization and interviewing the individuals who use and process the data.
2. Ignore certain aspects of the system - as DFD diagrams the origin, flow, transformation,
storage and destinations of data, all control actions and processes should be ignored.
3. Determine system boundaries - is determining what to include in and exclude form the
system. All relevant data elements shall be included in the DFD because excluded items
will not be considered during systems development. When in doubt about an element's
importance, include it until a definitive decision can be made to discard it.

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 4. Develop a context diagram - a context diagram is a good way of depicting system
boundaries. The diagram's center is a circle; inside of it, displays the system of concern.
The outside entities, with which the system interacts directly, are in boxes on either side,
connected by data flows depicting the data passed between them. DFDs are prepared, in
successively more detail, to depict data flows in the system.
5. Identify data flows - all data flows shall be identified entering or leaving the system's
boundary, including where the data originate and the final destination. Any significant
movement of information is usually a data flow. All data flows come from and go to
either a transformation process, a data store (file), or a data source or destination. As each
of this is identified, it should be connected to the appropriate data flow.

6. Group data flows - a data flow consists of one or more pieces of datum. Data elements
that always flow together should be grouped together and shown as one data flow until
they are separated. If the data elements do not always flow together, then they should be
shown as two separate data flows.

7. Identify transformation processes - this is by placing a circle wherever work is required

to transform one data flow into another. All transformation processes should have one or
more incoming or outgoing data flows.
8. Group transformation processes - transformation processes that are logically related or
occur at the same time and place should be grouped together. Unrelated items shall never
be combined into a single transformation process. If data are not processed together, or
are sometimes processed differently, then, they shall be separate.
9. Identify all files or data stores - data are stored temporarily or permanently in most
systems. Each data repository, and each data flow into and out of it, should be identified.
10. Identify all data sources and destinations - all sources and destinations of data should be
identified and included on the DFD.
11. Name all DFD elements - except for data flows into or out of data stores (data store is
sufficient to identify the data flow), data elements should be given unique and descriptive

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 names representing what is known about them. This makes DFD easier to read and
understand as it provides the reader with key information. Naming data flows first forces
the developer to concentrate on the all-important data flows, rather than on the processes
or stores. Once data flows have been labeled, naming the process and data stores is
usually easy, because they typically take their names from the data inflows or outflows.
Choosing active and descriptive names such as daily inventory update and validate
transaction, rather than input data or update process. Process names should include action
verbs such as update, edit, prepare, and record.
12. Subdivide the DFD - a cluttered DFD is hard to read and understand. If there are more
than five to seven processes on a single page, then, higher level and lower level DFDs
shall be used. The context diagram shall be decomposed into high level processes, and
then exploded into successively lower level processes.
13. Give each process a sequential number - in completed DFD, each process is given a
sequential number that helps readers move back and forth between different DFD levels.
Data flows should only go from lower numbered to higher numbered processes.
14. Repeat the process - DFD developers must work through organization data flows several
times. Each subsequent pass helps refine the diagram and identify the fine points. When
refining, the DFD shall be organized to flow from top to bottom and from left to right.
15. Prepare a final copy - the final copy of the DFD shall be drawn. Data flow lines shall be
allowed to cross over each other, if necessary, a data store or destination may be repeated.
The name of the DFD, the data prepared, and the preparer shall be placed on each page.

Elements in a Data Flow Diagram

A DFD is composed of four basic elements: data sources and destinations, data flows,
transformation processes, and data stores. Each represents in a DFD by a unique symbol.

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 Process

DataStores

Source/Destination

DataFlow

Demarco & Yourdon Gane & Sarson

Symbols

These four symbols are combined to show how data are processed. For example, in the diagram
below, the input to process C is data flow B, which comes from data source A. The outputs of
process C are data flows D and E. Data flow E is sent to data destination F.

Data Flow Diagrams

Data Process
source Data flow (B) Data flow (D)
(C)
(A)
Data flow (E)
Data
destination
(F)

©2003 Prentice Hall Business Publishing, 6-15

Accounting Information Systems, 9/e, Romney/Steinbart

 A Data source or data destination symbol on the DFD represents an organization or

individual that sends or receives data that the system uses or produces. An entity can be
both a source and a destination. Data sources or destinations are represented by a square.

 A data flow represents the flow of data between processes, data stores and data sources
and destinations. Data that passes between data stores and either a data source or a

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 24

 destination must go through some form of data processing (transformation process). Data
flow arrows are labeled to indicate the type of data being passed. A data flow can consist
of one or more pieces of datum. For example, data flow B (customer payment) in the
diagram below consists of two parts: a payment and remittance data. Process (process
payment) splits these two data elements and sends them in different directions. The
remittance data (D) flows to another process, where it is used to update accounts
receivable records, and the payment (E) is sent to the bank with a deposit slip. Because
data flows may consist of more than one data element, the designer must determine the
number of lines to show. For example; customers may send inquiries about the
processing of their payments with payments or separately.
 A transformation process represents the transformations of data. The diagram below
shows that process payment (C) takes customer payment and splits into the remittance
data and the deposit (which includes the checks and deposit slip created within process
payment). The updating receivables (F) process takes the remittance data (D) and the
accounts receivables (F) data, producing updated receivables record and sending
receivables information to the credit manager.

 A data store is a temporary or permanent repository of data. DFDs do not show the
physical storage medium such as disks, and paper, used to store data. As with other DFD
elements, data store names should be descriptive. Data stores are represented by
horizontal lines, with respective name recorded inside.
 A data dictionary contains description of all the elements, stores, and flows in a system.
Data flows and data stores are typically collections of data elements. Typically, a master
copy of the data dictionary is maintained to ensure consistency and accuracy throughout
the development process.

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 25

 Data Flow Diagrams
Accounts
receivable
Customer Remittance data (H)
payment (B) (D)
Customer Process
payment (G)
(A) (C) Receivables
information
Deposit (E) Update (I) Credit
receivables manager
(F) (K)
Bank
(J) ©2003 Prentice Hall Business Publishing, 6-18
Accounting Information Systems, 9/e, Romney/Steinbart

©2003 Prentice Hall Business Publishing, 6-17

Accounting Information Systems, 9/e, Romney/Steinbart

Subdividing the DFD

Data flow diagrams are subdivided into successively lower levels in order to provide ever-
increasing amounts of detail because few systems can be diagrammed on one sheet of paper.
Users have differing needs, so a variety of levels can better satisfy these requirements. The
highest-level DFD is referred to as a context diagram. A context diagram provides the reader
with a summary level view of the system. It depicts a data processing system and the external
entities that are the sources and destinations of the system's inputs and outputs. For example, the
following can be considered as the context diagram of payroll processing procedures for a certain
company. It shows that the payroll processing system receives time card data from different
departments and employees' data from HR department. When these data are processed, the
system produces:

1. Tax reports and payments for governmental agencies

2. Employee payments
3. A deposit in the payroll account at the bank, and
4. Payroll data for management.

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 26

 Tax reports and payments Government
Time
Departments cards Agencies

Payroll Employee Employees

paychecks
Processing Payroll Bank
check
Human
resources
Employee Management
data Payroll report

Flowcharts

A flowchart is an analytical technique used to describe some aspect of an information system in a

clear, concise, and logical manner. Flowcharts use a standard set of symbols to pictorially
describe transaction processing procedures. The following are general guidelines for preparing
flowcharts that are readable, clear, concise, consistent, and understandable.

1. Understanding a system before flowcharting it by interviewing users, developers,

auditors, and management or having them complete a questionnaire as well as by reading
through a narrative description of the system, or walking through system transactions.
2. Identifying the entities to be flowcharted such as departments, job functions, or external
parties as well as identifying documents and information flows in the system and the
activities or processes performed on the data, for instance drawing a box around the
entities, a circle around the documents and a line around the activities.
3. Dividing the flowchart into columns when several entities such as departments and
functions need to be shown on the flowchart with a label for each followed by
flowcharting the activities of each entity in its respective columns.
4. Flowcharting only the normal flow of operations, ensuring that all procedures and
processes are in proper order and identifying exception procedures by using an annotation
symbol.

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 27

 5. Designing the flowchart so that flow proceeds from top to bottom and from left to right.
6. Giving the flowchart a clear beginning and ending by designing where the document
originated and showing the final disposition of all documents so there are no loose ends
that leave the reader dangling.
7. Using the standard flowcharting symbols and drawing them with a template or a
computer
8. Clearing labeling all symbols by writing a description of the input, process, or output
inside the symbol. If description may not fit, annotation symbol shall be used.
9. Placing document numbers in the top right hand corner of the symbol when using
multiple copies of a document. The document numbers should accompany the symbols as
it moves through the system.
10. Having an input and output for each manual processing symbol. Two documents shall not
be connected directly except when moving from one column to another column.
11. Using on page connectors to avoid excess flow lines, which results in a neat looking page
as well as using off-page connectors to move from one flowchart page to another. All
connectors shall be clearly labeled to avoid confusion.
12. Using arrowheads on all flow lines and not assuming that the reader will know the
direction of the flow.
13. Clearly labeling the pages 1 of 3, 2 of 3 etc if a flowchart cannot fit into a single page.
14. Showing documents or reports first in the column in which they are created and then
moving to another column for further processing. A manual process is not needed to
show documents being flowcharted.
15. Showing all data entered into or retrieved from a computer file as passing through a
processing operation (a computer program) first.
16. Drawing a line from the document to a file to indicate that it is being filed. A manual
process is not needed to show a document entering a file.
17. Drawing a rough sketch of the flowchart as a first effort. Concern shall be with capturing
content than perfect drawing. Few systems can be flowcharted in a single draft.
18. Redesigning the flowchart to avoid clutter and a large number of crossed lines.

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 28

 19. Verifying the flowchart's accuracy by reviewing it with the people familiar with the

system. It shall be assured that all uses of flowchart conventions are consistent.

20. Drawing the final copy of the flowchart, placing the name of the flowchart, the date, and

the preparer's name on each page.

Flowchart Symbols

There are various types of symbols used to create flowcharts. Each symbol has a special meaning

that is easily conveyed by its shape. The shape indicates and describes the operation performed

and the input, processing, output, and storage media employed. The symbols are drawn by a

software program or with a flowcharting template. Flowcharting symbols can be divided into the

following four categories:

1. Input/output symbols - represent devices or media that provide input to or record

output from processing operations.

2. Processing symbols - either show what type of device is used to process data or indicate

when processing is completed manually.

3. Storage symbols - represent the device used to store data that the system is not currently

using.

4. Flow and miscellaneous symbols - indicate the flow of data and goods. They also

represent such operations as where flowcharts begin and end, where decisions are made,

and when to add explanatory notes to flowcharts.

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 29

 Flowchart Symbols:

Document
Online keying

Display

Input/output; journal/ledger

Magnetic disk

Magnetic tape

Document or processing flow

Manual operations On-page connector

Off-page connector
Computer processing
Terminal
Decision
Auxiliary operation

Document Flowcharts

A document flowchart illustrates the flow of documents and information among areas of

responsibility within an organization. They trace a document from its cradle to its grave. They

show where a document originates, its distribution, the purpose for which it is used, its ultimate

disposition, and everything that happens as it flows through the system. A document flowchart is

particularly useful in analyzing the adequacy of control procedures in a system, such as internal

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 30

checks and segregation of duties. Flowcharts that describe and evaluate internal controls are

often referred to as internal control flowcharts. The document flowchart can reveal weaknesses

or inefficiencies in a system such as inadequate communication flows, unnecessary complexity

in document flows, or procedures responsible for causing wasteful delays. They also can be

prepared as part of the system design process and should be included in the documentation of an

information system.

Following is a typical example of how a document flowchart can be designed:

Major flowchart symbols are available from EXCEL. To view the Drawing Toolbar of MS EXCEL,
select the following options from the main menu: In EXCEL, “Insert/Toolbar/Drawing” or you can
also click directly on the Drawing icon in the Standard Toolbar. After the Drawing Toolbar appears,
select “Auto shapes/Flowchart”. You can observe approximately 28 symbols.

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 31

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 32
System Flowcharts

System flowcharts depict the relationship among the input, processing, and output of AIS. A
system flowchart begins by identifying both the inputs that enter the system and their origins.
The input is followed by the processing portion of the flowchart. The input is followed by
processing portion of the flowchart that is the steps performed on the data. The logic the
computer uses to perform the processing task is shown on a program flowchart. The resulting
new information is the output component, which can be stored for later use, displayed on a
screen, or printed on paper. In many instances, the output from one process is an input to
another. System flowcharts are an important systems analysis, design, and evaluation tool. They
are universally employed in systems work and provide an immediate form of communication
among workers. The system flowchart is an excellent vehicle for describing information flows
and procedures within AIS.

An illustration of how a system flowchart works is shown below:

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 33

Program Flowcharts

A program flowchart illustrates the sequence of logical operations performed by a computer in

executing a program. It describes the specific logic to perform a process shown on a systems
flowchart. A flow line connects the symbols and indicates the sequence of operations. The
processing symbol represents a data movement or arithmetic calculation. Once designed and
approved, the program flowchart serves as the blueprint for coding the computer program.

Enter
Start
Input
Reject
No
Approved
Storage Yes
Process Back-
No
Inventory
Yes

Output Fill order

Stop

 The input/output symbol represents either reading of input or writing of output.

 The decision symbol represents a comparison of one or more variables and the transfer of
flow to alternative logic paths.
 All points where the flow begins or ends are represented by the terminal symbol.

Following is another example of a program flowchart for master file updating process.

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 34

Differences between DFDs and Flowcharts

- DFDs emphasize the flow of data and what is happening in a system, whereas a
flowchart emphasizes the flow of documents or records containing data.
- A DFD represents the logical flow of data, whereas a flowchart represents the
physical flow of data.
- Flowcharts are used primarily to document existing systems. DFDs, in contrast,
are primarily used in the design of new systems and do not concern themselves
with the physical devices used to process, store, and transform data.

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 35

 - DFDs make use of only four symbols. Flowcharts use many symbols and thus
can show more detail.

Why do accountants need to understand documentation?

What are the basic elements of a data flow diagram and Flow chart?

What are the basic symbols used in data flow diagrams Flow Chart?

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 36

 Model Exam Questions
Multiple choices; choose the best answer from the given alternatives.
1. A set of two or more interrelated components that interact to achieve a goal is:
A) A system B) An accounting information system
C) Data D) Mandatory information
2. This results when a subsystem achieves its goals while contributing to the organization's
overall goal.
A) Goal conflict B) Goal congruence
C) Value of information D) Systems congruence

3. Facts that are collected, recorded, stored and processed by an information system:
A) Information B) Data
C) Systems D) Mandatory information

4. Information is:
A) Basically the same as data.
B) Raw facts about transactions.
C) Potentially useful facts when processed in a timely manner.
D) Data that has been organized and processed so that it's meaningful.
5. The graphic description of the flow of data within an organization is called a

A) Systems flowchart B) Data flow diagram.

B) Context diagram. C) Document flowchart.

6. In a DFD, a circle represents:

A) Data sources and destinations B) the direction of data flows
C) Transformation processes D) data stores.
7. In a DFD, lines that are horizontal and parallel to each other represent:
A) Data sources and destinations B) data flows
C) Transformation processes D) data stores

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 37

 CHAPTER TWO
2. INTRODUCTION TO TRANSACTION CYCLE AND BUSINESS
PROCESSES
Learning Objectives
After studying this chapter you are able to:
 Explain Business Process
 Understand Interaction with internal and external users
 Explain Transaction processing systems of Expenditure cycle , Revenue cycle
and Conversion/production cycle
 Understand The fixed asset system
 Explain The general ledger and the financial reporting system
 Understand Management reporting system (MRS)

2.1. INTRODUCTION

This chapter describes how data about business activity is collected processed and transformed
into useful information for management; then, it will introduce the concept of internal controls.
In other words, this chapter provides an overview of how AIS can perform its three basic
functions:
 To collect and store data about the organization’s business activities and transactions
efficiently and effectively
 To provide information useful for decision making
 To provide adequate controls to ensure that data are recorded and processed accurately
It will examine:
- Basic types of business activities in which an organization engages
- Key decisions that must be considered when managing those activities
- Information needed to make those decisions.
2.2 AN OVERVIEW OF BUSINESS PROCESS
Businesses engage in a variety of activities, including: Acquiring capital, Buying buildings and
equipment, Hiring and training employees, Purchasing inventory, Doing advertising and
marketing, Selling goods or services, Collecting payment from customers, Paying employees,

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 38

Paying taxes, Paying vendors. Each activity requires different types of decisions. Each decision
requires different types of information
Basic exchanges that are made by business organizations involve what historically have been
called transaction cycles. These are:

1. The revenue cycle includes the sales and cash receipt events
2. The expenditure cycle includes purchases and cash disbursement events
3. The human resources (payroll) cycle includes events of hiring and paying employees.
4. The production cycle includes the events of transforming raw materials and labor into
finished products
5. The financial cycle includes the events of obtaining funds from investors and creditors
and repaying them.
Note: A transaction is an agreement between two entities to exchange goods or services; or any
other event that can be measured in economic terms by an organization.

• EXAMPLES:
– Sell goods to customers
– Depreciate equipment
 The transaction cycle is a process: Begins with capturing data about a transaction and
ends with an information output, such as financial statements.
 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 management
and external parties.
 In many accounting software packages, the various transaction cycles are implemented
as separate modules because a certain company need not apply all the modules.

The table below shows overview of business process, key decisions and information needs

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 39

Business process key decisions Information needs
Acquiring capital How much? Cash flow projections Pro-
forma financial
Find investor or borrow
projections
funds?
Loan amortization schedule
If borrow best terms?

Buying buildings and Size of buildings? Capacity needs

equipment Amount of equipment?
Building and equipment prices
Rent or buy?
Market study
Location?
Tax table and depreciation
How to depreciate?
regulations

Hiring and training employees Experience requirements? Job description

How to assess integrity and
Applicant job history and skill
competence of applicants?
How to train employees?

Purchasing inventory What model to carry? Market analysis inventory

How much to purchase? status reports
How to manage inventory? vendor performance

Advertising and marketing Which media? Cost analysis

Content? Market coverage

Selling goods or services Markup percentage? Pro-forma income statement
(Small merchandise) Offer-in-house credit? Credit card costs
Which credit cards to accept? Customer credit status
Collecting payment from If offer credit what items? How Customer account status AR
customers to handle cash receipts? aging report
AR records

Paying employees Amount to pay? Sales (for commissions)

Deduction and withholdings? Cost of external payroll

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 40

 service
Paying taxes Payroll tax requirements Government regulations
Sales tax requirements Total wage expense
Total sales
Paying vendors Whom to pay? Vendor invoices
When to pay? AP records
How much to pay? Payment terms

An effective AIS needs to be able to integrate information of different types and from different
sources.

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JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 42
What is business process?

Mention different activities which are performed in business processes.

2.3 THE TRANSACTION PROCESS SYSTEM

A data processing cycle consists of four steps:
1. Data input
2. Data storage
3. Data processing and

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 43

 4. Information output

The trigger of data input is usually the performance of some business activity. Data must be
collected about three facets of each business activity:

1. The events of interest

2. The resources affected by each event
3. The agents who participate in each event
Each transaction cycle typically processes a large number of individual events, or transactions.
Most of these however, can be categorized into a relatively small number of distinct types.

1. Data Input
Historically, most businesses 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. Control is improved either by purchasing
pre-numbered source documents or by having the system automatically assign a sequential
number to each new transaction. Accuracy is improved by providing instructions or prompts
about what data to collect, grouping logically related pieces of information close together, using
check-off boxes or pull down menus to present the available options, and using appropriate
shading and boarders to clearly separate data items.

If paper documents are still to be exchanged with customers or suppliers, data input efficiency
and accuracy can be further improved by using turnaround documents, which are records of
company data sent to an external party and then returned to the company system as input.
Turnaround documents are prepared in machine-readable form to facilitate their subsequent
processing as input records.

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 44

Source data automation is yet another means to improve the accuracy and efficiency of data
input. Source data automation devices capture transaction data in machine-readable form at the
time and place of origin. Examples are ATMs used by banks, Point of Sale (POS) scanners in
retail stores, and bar code scanners used in warehouses.

2. Data Processing

Once data about a business activity has been collected, the next step usually involves updating
previously stored information about the resources affected by that event and the agents who
participated in that activity.

 Example, data about a sales transaction results in updating the information about
inventory to reduce the quantity on hand of items sold, as well as the customer’s account
balance. Either this updating can be done periodically or immediately as each transaction
occurs.
 Periodic updating of the data stored about resources and agents is referred to as batch
processing.
 Immediate updating as each transaction occurs is referred to as on line, real time
processing.
 Batch processing is to be used for some applications that occur at fixed time intervals.
Most companies are shifting to OLRT processing because:
1. Online entry is more accurate than batch entry because the system can refuse incomplete
or erroneous entries, and

2. Real-time processing ensures that stored information is always current, thereby

increasing its usefulness for making decisions
Indeed, it offers companies competitive advantage over other similar companies.

3. Data Storage

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Information in AIS can be organized for easy and efficient access. The basic data storage
concepts and definitions are seen below:

 An entity is something about which information is stored. Examples of entities include

employees, inventory items, and customers.
 Each entity has attributes or characteristics of interest, which need to be stored. An
employees pay rate and a customer’s address are examples.

Generally, each type of entity possesses the same set of attributes. The specific data values for
those attributes, however, will differ among entities.

 Data values are stored in a physical space called field.

 The set of fields that contain data about various attributes of the same entity forms a
record.
 Related records are grouped to form a file. For example, all customer receivable records
are stored in an account receivable file.
 A set of interrelated, centrally coordinated files is referred to as a database. For example,
the accounts receivable file might be combined with customer, sales analysis, and related
files to form a customer database.
 In AIS, the files used to store cumulative information about resources and agents are
called ledgers.

Providing Information for Decision Making

 A second function of the AIS is to provide management with information useful for
decision-making.
 Whether presented in the form of paper reports or displayed on a computer screen, the
information that AIS provides falls into two main categories:
a. Financial statements and
b. Managerial reports.

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 46

Internal Control Considerations
The third function of AIS is to provide adequate internal controls to accomplish three basic
objectives:

1. Ensure that the information produced by the system is reliable.

2. Ensure that business activities are performed efficiently and in accordance with
management’s objectives while also conforming to any applicable regulatory policies
3. Safeguard organizational assets, including data

Two important methods of accomplishing these objectives are providing adequate documentation
of all business activities and ensuring effective segregation of duties.

Adequate Documentation
 Adequate documentation of all business transactions is key to accountability.
 Documentation allows management to verify that assigned responsibilities were
completed correctly.
 Well-designed documents and records can help organizations quickly identify potential
problems.
 Adequate documents and records can also ensure that the organization doesn’t make
commitments it cannot keep.
 Adequately written descriptions of task procedures are also important.

Segregation of Duties

 Segregation of duties refers to dividing responsibility for different portions of a

transaction among several people.
 The objective is to prevent one person from having total control over all aspects of a
business transaction.
 Specially, different people should perform the functions of authorizing transactions,
recording transactions, and maintaining custody of assets.

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 47

  Segregation of these three duties helps to safeguard assets and improve accuracy because
each person can look at and thereby limit the other’s actions.
 Effective segregation of duties should make it difficult for an individual employee to
steal cash or other assets successfully.
 Segregation of duties is especially important in business activities that involve the receipt
or disbursement of cash because cash can be stolen so easily.
 In small organizations that do not have sufficient staff to segregate duties effectively,
effective control may be achieved through close supervision and owner performance of
some key business activities such as writing checks on the company’s account.

2.3.1 REVENUE CYCLE

o The revenue cycle involves interactions with your customers.

o You sell goods or services and get cash.

2.3.2 EXPENDITURE CYCLE

o The expenditure cycle involves interactions with your suppliers.

o You buy goods or services and pay cash.

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 48

2.3.3 PRODUCTION CYCLE
In the production cycle, raw materials and labor are transformed into finished goods.

Every transaction cycle:

– Relates to other cycles

– Interfaces with the general ledger and reporting system, which generates

information for management and external parties.

• Many accounting software packages implement the different transaction cycles as

separate modules.

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 49

 - Not every module is needed in every organization, e.g., retail companies don’t

have a production cycle.

- Some companies may need extra modules.

- The implementation of each transaction cycle can differ significantly across

companies.

• However the cycles are implemented, it is critical that the AIS be able to:

- Accommodate the information needs of managers

- Integrate financial and nonfinancial data.

Mention the five major transaction cycles

2.4 THE FIXED ASSET SYSTEM

Although, AIS can be utilized by using different system, fixed asset sys is one among other.
Here, as an alternative means companies can adopt fixed asset system to establish AIS.

2.5 THE GENERAL LEDGER AND THE FINANCIAL REPORTING SYSTEM

Basically, the information must be organized to meet the needs of internal and external users.
The system must be designed to produce regular periodic reports and to support real-time
inquiries. The basic activities in the GLARS are:
1. Update the general ledger
2. Post adjusting entries
3. Prepare financial statements
4. Produce managerial reports
The first three represent the basic steps in the accounting cycle.

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 50

 2.5.1 UPDATE THE GENERAL LEDGER

Updating the general ledger consists of posting journal entries from two sources:
 Summary journal entries of routine transactions from the accounting subsystems.
 Individual journal entries for non-routine transactions from the treasurer
2.5.2 POST ADJUSTING ENTRIES

 Adjusting entries originate in the controller’s office at the end of each accounting period
(month, quarter, year, etc.) and after the initial trial balance has been prepared.
 The trial balance lists the balances for all of the GL accounts.
 If properly recorded, the total of all debit balances equal the total of all credit balances.

There are five types of adjusting entries:

1. Accruals
 An accrual involves an event that has occurred for which the related cash flow has not yet
taken place.
Accrued revenue—The Company has delivered a product or service to a customer
but has not yet been paid.
Accrued expense—The Company has used up a good or service but not yet paid for
it.
2. Deferrals
• A deferral involves a situation where the cash flow takes place before the related revenue
is earned or the expense is incurred.
– Deferred revenue—The Company received payment for a product or service that
was not yet been completely delivered to the customer (aka, “unearned revenue”).
– Deferred expense—The Company paid for a good or service which they had not
yet completely used up (aka, “prepaid expense”).
3. Estimates

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 Estimates are used to recognize expenses that cannot be directly attributed to a related
revenue and must be allocated in a more subjective or systematic manner.
Examples: Depreciation expense.
Bad debt expense
4. Re-evaluations
Re-evaluations result from:
Reconciling actual and recorded values of assets.
Example: Making a lower-of-cost-or-market adjustment to inventory.
Recording an asset impairment.
Recording changes in accounting principles.

5. Error corrections
Error corrections involve correction of errors previously made in the general ledger.
What are the five types of adjusting entries?

2.5.3 PREPARE FINANCIAL STATEMENT

Activities in the preparation of financial statements are as follows:

- Prepare an income statement
- Prepare a statement of stockholders’ equity
- Prepare balance sheet
- Prepare a statement of cash flows
2.5.4 PRODUCE MANAGERIAL REPORTS

The final step is prepare of reports for internal purposes, including:

 Reports to verify the accuracy of the posting process.
Examples:
- Lists of journal vouchers by numerical sequence, account number, or date.

JIGDAN COLLEG DISTANCE EDUCATION PROGRAM MIS MODULE 52

 - Lists of general ledger account balances.
 Budgets for planning and evaluating performance:
- Operating budget: Depicts planned revenues and expenses for each unit.
- Capital expenditure budget: Shows planned cash inflows and outflows for each project.

- Cash flow budget: Shows anticipated cash inflows and outflows for use in determining
borrowing needs.

2.6 Management reporting system (MRS)

A management information system is made up of five major components namely people,

business processes, data, hardware, and software. All of these components must work together
to achieve business objects

2.6.1 Factors that influence the MRS

A management information system is made up of five major components namely people,

business processes, data, hardware, and software. All of these components must work together
to achieve business objects. Your program should begin with accurate, healthy data and metrics
to support core business strategies and initiatives to specific stakeholders. Data should support
both the long- and short-term vision for the company, and should be trustworthy and from a
reliable source. Management reports contain performance data and analysis. This is
so management can make decisions and advise other senior executives. O

often these reports include proprietary information and are for internal use only. They do not
follow GAAP or IFRS. Some of the internal reports that are commonly used are!
Period report about profit and loss account and financial position, statement of cash flow,
changes in working capital, report about cost of production, production trends and utilization of
capacity. Management reports aim at informing managers of different aspects of the business,
in order to help them make better-informed decisions. They collect data from various
departments of the company tracking key performance indicators (KPIs) and present them in an
understandable way.

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MODEL EXAM QUESTIONS
Multiple Choices: CHOOOSE THE BEST ANSWER FROM THE GIVEN
ALTERNATIVES.
1. An agreement between two entities to exchange goods or services or any other event that
can be measured in economic terms by an organization is:

A) give-get exchange B) transaction

C) Revenue D) processing cycle
2. Groups of related business activities such as the acquisition of merchandise and payment of
vendors are called:
A) Transaction cycles B) economic cycles
C) Business events D) transactions
3. The basic "give and take" functions of a business have been grouped into transaction cycles.
The cycle that includes the events of hiring employees and paying them is known as the

A) Revenue cycle B) expenditure cycle

C) Human resources cycle D) financing cycle

4. Which of the following is not a transaction cycle?

A) Revenue B) expenditure
C) Human resources D) general ledger and reporting
5. Transaction cycles can be summarized on a high level as "give-get" transactions. An example
of “give-get" in the expenditure cycle would be:
A) Give cash, get cash. B) Give cash, get goods.
C) Give cash, get labor. D) Give goods, get cash
6. Transaction cycles can be summarized on a high level as "give-get" transactions. An example
of “give-get" in the revenue cycle would be:
A) Give cash, get goods. B) Give goods, get cash.
C) Give cash, get labor D) Give cash, get cash

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 CHAPTER THREE
3 DATA MODELING AND DATA BASE DESIGN

Learning Objectives
 Understand what Data base mean
 Explain The data dictionary and DBMS languages
 discuss DBMS operations and Relational Data Bases
 Explain Data Base Design and The REA Data Model
 Explain Entity-relationship diagrams
 discuss Developing an REA diagram
 Explain Implementing an REA diagram in a relational data base
 understand Database systems and the future of accounting

3.1 INRODUCTION

This chapter explains what a database is and how it differs from a file-oriented system. It also
describes the structure of a relational database system. The chapter concludes by discussing the
basic steps involved in designing a database and explaining the double entry accounting system
in a relational database.

3.2 DATA BASE

To have a clear picture of the power of databases, it is crucial to understand the basic principles
of how data are stored in computer systems. Information about the attributes of an entity, such as
suppliers name and address, are stored in the fields. All the fields containing data about one
entity (e.g. one supplier) form a record. A set of related records, such as all supplier records,
forms a file (e.g. the supplier file). A set of interrelated, centrally coordinated file forms a
database.
What is data base?

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3.2.1 THE DATA DICTIONARY

A key component of a DBMS is the data dictionary. The data dictionary contains information
about the structure of the database. For each data element stored in the database, such as the
customer number, there is a corresponding record in the data dictionary describing it. The data
dictionary is often one of the first applications of a newly implemented database system.
 What are some inputs to the data dictionary?
– Records of any new or deleted data elements
– Changes in names, descriptions, or uses of existing data elements
 What are some outputs of the data dictionary?
– Reports useful to programmers, database designers, and users of the information
system
 What are some sample reports?

– Lists of programs in which a data item is used

– Lists of all synonyms for the data elements in a particular file.

Accountants should participate in the development of the data dictionary because, they have a
good understanding of the data elements in a business organization, as well as where those
elements originate and how they are used.

3.2.2 DBMS LANGUAGES

Every DBMS must provide a means of performing the three basic functions of:
1. Creating a database
2. Changing a database
3. Querying a database
1. Creating a database:

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The set of commands used to create the database is known as data definition language (DDL).
DDL is used to:
• Build the data dictionary
• Initialize or create the database
• Describe the logical views for each individual user or programmer
• Specify any limitations or constraints on security imposed on database records or
fields
2. Changing a database
The set of commands used to change the database is known as data manipulation language
(DML). DML is used for maintaining the data including:
• Updating data
• Inserting data
• Deleting portions of the database
3. Querying a database
The set of commands used to query the database is known as data query language (DQL). DQL
is used to interrogate the database, including:
• Retrieving records
• Sorting/arranging records
• Ordering records
• Presenting subsets of the database
The DQL usually contains easy-to-use, powerful commands that enable users to satisfy their own
information needs.
What is a data dictionary?

Explain he functions DBMS languages

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 3.3 RELATIONAL DATABASES

A relational database is a database that conforms to the relational model, and refers to a
database's data and schema (the database's structure of how that data is arranged). Common
usage of the term "Relational Database Management System" technically refers to the software
used to create a relational database, but sometimes mistakenly refers to a relational database.

A Relational Database Management System (RDBMS) is a system that manages data using the
relational model. Frequently, the term "RDBMS" is inaccurately used as a generic label for the
relational database concept. Ironically, most RDBMS software packages are not technically
considered "relational" because they do not fully conform to the relational model.
What is a relational database?

Discuss the concept of a relational database management system.

3.4 DATA BASE DESIGN

A database is a set of inter-related, centrally coordinated files. For organizations, the

performance of file management is highly in line with how data bases are managed. Actually, the
effectiveness of organizations data base is also relates to the data base design. In order to achieve
his objective strong data base design should be maintained.

Database Design Process

There are six basic steps in database design:

1. Planning Sage- involves the initial planning to determine the need for and feasibility of
developing the new system. This includes preliminary judgments about the proposals
technological and economic feasibility.

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 2. Requirements Analysis Stage- involves identifying user information needs, defining the
scope of the proposed new system, and using information about the expected number of
users and transaction volumes to make preliminary decisions about hardware and
software requirements.
3. Design Stage- involves developing the different schemas for the new system, at the
conceptual, external, and internal levels. The requirements analysis and design stages are
the stages of data modeling.
4. Coding- involves translating the internal level schema into the actual database structures
that will be implemented in the new system. This is also the stage when new applications
are developed.
5. Implementation- this stage includes all activities associated with transferring data from
existing systems to the new database AIS, testing the new system, and training employees
how to use it.
6. Operation and Maintenance- involves using and maintaining the system including
carefully monitoring system performance and user satisfaction to determine the need for
making system enhancements and modifications. Eventually, changes in business
strategies and practices or significant new developments in information technology
initiate investigation into the feasibility of developing a new system and the entire
process starts again.
Accountants can and should participate in all stages of the database design process, although the
level of their participation in each stage is likely to vary.

 In the planning stage, accountants both provide some of the information used to
evaluate the feasibility of the proposed project and participate in making that decision.
 In the requirements analysis and design stages, accountants participate in identifying
user information needs, developing the logical schemas, designing the data dictionary,
and specifying controls.
 During the implementation stage, accountants can also help test the accuracy of the
new database and the application programs that will use that data.

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  Finally, accountants use the database system to process transactions, and sometimes
they even help manage it.
Accountants may provide the greatest value to their organizations by taking responsibility for
data modeling.

Data Modeling in the database Design Process

Operation and
Planning
maintenance

Requirements
Data Implementation
modeling analysis
occurs
here
Design Coding
©2003 Prentice Hall Business Publishing, 5-13
Accounting Information Systems, 9/e, Romney/Steinbart

Data modeling in the database design process

3.5 THE REA DATA MODEL

Data modeling is the process of defining a database so that it faithfully represents all aspects
of the organization, including its transactions with the external environment.

Specifically used for AIS database design, the REA data model is conceptual modeling tool that
focuses on the business semantics underlying an organization's value chain activities. The REA
data model provides guidance for database design by identifying what entities should be included
in the AIS database and by prescribing how to structure relationships among the entities in that
database.

Types of Entities

The REA model classifies entities into three distinct categories:

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1. The resources that the organization acquires to use,

2. The events (business activities) in which the organization engages, and

3. The agents participating in the events.

Recently, some researchers proposed a fourth type of entity-locations such as stores, warehouses,
etc. However, they may be considered as resources, or attributes of the event entity.

Resources- are those things that have economic value to the organization. These include cash,
inventories, equipment and machinery, supplies, warehouses, factories, and land.

Events- are the various business activities about which management wants to collect information
for planning or control purposes. The REA data model helps people design databases that
support the management of an organization's value chain activities. Therefore, most of the events
in an REA data model fall into one of the two categories: economic exchanges or commitments.

- Economic exchanges- are the value chain activities that directly affect the quantity
of resources. For example, the sales event decreases the quantity of inventory and
the cash receipts event increases the amount of cash.
- Commitments- represent promises to engage in future economic exchanges. For
example, customer orders are commitments that lead to future sales. Often such
commitments are necessary precursors to the subsequent economic exchanges.
Moreover, management needs to track commitments for planning purposes. For
example, manufacturing firms often use information from customer orders to plan
production.
Agents- are the people and organizations that participate in the events and about whom
information is desired for planning, control, and evaluation purposes. Examples include
employees, customers, vendors etc.

Basic REA Template

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The REA data model prescribes a basic pattern for how the three types of entities should relate
to one another. Each event entity is linked to a resource entity. Events such as the sale of
merchandise that change the quantity of a resource are linked to that resource in what is called a
stock flow relationship. Other events such as taking a customer order that represent future
commitments are linked to resources in what are called reserve relationships. Each event entity
is also linked to two agent entities. The internal agent is the employee who is responsible for the
resource affected by the event; the external agent is the outside party to the transaction. Each
economic exchange event is linked in a give to get duality relationship with another economic
exchange event. These economic duality relationships reflect the basic business principle that
organizations typically engage in activities that use up resources only in hopes of acquiring some
other resource in exchange. For example, the sales event, which requires giving up (decreasing)
inventory is related to the cash receipts event which requires getting (increasing) the amount of
cash.

Basic REA template

Resource A GET
Inflow Participant Internal Agent
Resource A

Participant External Agent

Economic
Duality

Participant External Agent

GIVE
Resource B Outflow Participant Internal Agent
Resource B

©2003 Prentice Hall Business Publishing, 5-21

Accounting Information Systems, 9/e, Romney/Steinbart

Developing an REA Diagram for One Transaction Cycle

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Developing an REA diagram for a specific transaction cycle consists of the following four steps:

1. Identify the pair of economic exchange events

2. Identify the resources affected by each economic exchange event and the agents who
participate.
3. Analyze each economic exchange event
4. Determine the cardinalities of each relationship.

Step 1 Identify Economic Exchange Events

The basic REA template consists of a pair of events, one that increases some resource and one
that decreases some resource. The events are drawn as rectangles and the economic duality
relationship between them as a diamond. In drawing REA model, the paper is divided into three
columns-one for each type of entity:

 The left column is used for resources, The center column for events, and The right
column for agents.
Readability is further enhanced if the events entities are drawn from top to bottom corresponding
to the sequence in which they occur.

Step 2: Identify Resources and Agents

Once the events of interest have been specified, the resources that are affected by those events
need to be identified. For example, the sales event is translated to giving inventory to customers
and the cash receipts event is translated to receiving cash from customers. Hence, the inventory
and cash entities are added in the resource column and the stock flow relationship is drawn
between those entities and the events that affected them. What about A/R? Accounts receivable
is not modeled as a separate entity because it is not an independent object but simply represents a
timing difference between two events: sales and cash receipts. That is, accounts receivable
simply represents sales for which customer payments have not yet been received. Consequently,
if data about both sales and cash collections are already stored in the database, all the

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information needed to calculate A/R can be derived from the information stored about those two
events. How to extract this information will be discussed later.

After specifying the resources affected by each event, it is necessary to identify the agents who
participate in those events. There will always be at least one internal agent (an employee) and in
most cases an external agent (the customer or vendor) who participate in each event. For
example, customers and salespersons participate in the sale event and customers and cashiers
participate in the cash collection event. Hence, in the REA diagram, these three agent entities
shall be added: salespersons, customers, and cashiers. Relationships shall be included to indicate
which agent participated in which events. It is important to understand that the agents in the REA
data model represent functions, not specific people. For example, the salesperson and the cashier
are shown as separate entities but the same person may take both roles. The REA data model
requires that each event be linked to at least one resource and at least two agents. This
information needs to be supplemented by interviews with management to identify other possible
relationships of interest. For example, if the organization assigns customers to specific
salespeople to provide customized service, then a direct relationship between the two agent
entities (salesperson and customer) would be added to the diagram.

Sample REA diagram

Inventory Stock-flow Sales Participant Salesperson

Participant

Economic
Customer
Duality

Participant

Cash
Cash Stock-flow Participant Cashier
Receipts

©2003 Prentice Hall Business Publishing, 5-22

Accounting Information Systems, 9/e, Romney/Steinbart

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Step 3: Include Commitment Events

This step is analyzing each economic exchange event to determine whether it can be decomposed
into a combination of one or more commitment and exchange events. It is important for
management to get up to date information about various orders to reorder various inventory
items. It is also important to know which orders have been shipped and when. Then, the single
economic exchange event labeled sales may be replaced with a combination of a commitment
event which is labeled customer orders and the economic exchange event that was labeled sales.
The cash receipts economic exchange event will not be decomposed because whether payment is
received immediately or later by mail, what shall be tracked is actual receipts from customers.
Billing as an event is not modeled because it is neither an economic exchange nor a commitment.
Printing an invoice and mailing it to the customer doesn't increase or decrease the amount of any
resource. It is simply an information processing event that merely retrieves information from the
database about previous customer orders and sales events. Organizations build databases to
collect, process, and store information about their value chain activities. Printing documents and
reports or querying the database are just different ways of retrieving information about those
activities for use in making decisions. Such information processing activities do not change the
contents of the database and are not modeled as events in an REA diagram.

Step 4: Determine Cardinalities of Relationships

This is a step to add information about the nature of relationships between the various entities.
Cardinalities indicate how many instances of one entity can be linked to one specific instance
another entity. For example, cardinalities indicate how many sales transactions can be linked to
each individual customer and, conversely, how many customers can be linked to each individual
sales transaction. In a relational database, each entity is a table and each instance is a row in that
table. Therefore, in relational databases, cardinalities indicate how many rows in one table can
be linked to each row in another table. Cardinalities are represented as pairs of numbers next to
each entity. The first number is the minimum cardinality. It indicates whether a row in this table

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must be linked to at least one row in the table on the opposite side of that relationship. A
minimum cardinality of 0 means that a new row can be added to that table without being linked
to any specific rows in the table on the other side of the relationship. The second number in each
cardinality pair is the maximum cardinality. It indicates whether one row in that table can be
linked to more than one row in the other table. A maximum cardinality of 1 means that each row
in that table can be linked to at most only one row in another table.

Documentation of
Business Practices

 The zero minimum for the sales event indicates

that credit sales are made
 The N maximum for the sales event means that
customers may make installment payments

Cash Sales-
(1, N) Cash Receipts (0, N)
Sales
Receipts
©2003 Prentice Hall Business Publishing, 5-56
Accounting Information Systems, 9/e, Romney/Steinbart

Documentation of
Business Practices

 The one minimum for the cash receipts event

indicates that cash is not received prior to
delivering the merchandise
 The N maximum for the cash receipts event
means that customers may pay for several
sales with one check

Cash Sales-
(1, N) Cash Receipts (0, N) Sales
Receipts
©2003 Prentice Hall Business Publishing, 5-57
Accounting Information Systems, 9/e, Romney/Steinbart

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 REA diagram for a sample revenue cycle

Customer
Inventory- (1,N) (1,1) Participant (0,N) Customer
Orders
Orders

(0,N)
(1,1)

(0,1) Participant

(0,N)
Inventory- Leads to
Inventory (0,N) Salesperson
Sales (0,N)

(0,1)
(1,N)
Participant

(1,1)
Sales

Customer
(1,1) Participant (0,N)

©2003 Prentice Hall Business Publishing, 5-28

Accounting Information Systems, 9/e, Romney/Steinbart

Three basic types of relationships between entities are possible depending on the maximum
cardinality associated with each entity.

1. A one to one (1:1) relationship exists when the maximum cardinality for each entity in
that relationship is one.
2. A one to many (1:N) relationship exists when the maximum cardinality of one entity in
that relationship is 1 and the maximum cardinality of the other entity in that relationship
is N
3. Many to many (M:N) relationship exists when a maximum cardinality for both entities
in the relationship is N.
Do not confuse the notation used for minimum and maximum cardinalities (a pair of numbers
separated by a comma) with the notation used to describe the cardinality of a relationship
between two entities (a pair of numbers separated by a colon).

Rules for Specifying Cardinalities

The database designer doesn't arbitrarily choose cardinalities. Instead, cardinalities reflect facts
about the organization being modeled and its business practices. This information is obtained

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during the requirements definition stage of the database design process. Certain general
principles can provide a starting point for developing an REA data model for any organization.

Cardinality Rules for Agent-Event Relationship

Almost always, the minimum and maximum cardinalities associated with the event entity in
every agent-event relationship will be both 1.

- The minimum cardinality associated with the event is 1 because there must be some
agent who participates in that event.
- The maximum cardinality is 1 because the organization wants to be able to hold
some specific agent responsible for that event.
There is also a general principle concerning cardinalities associated with the agent entity in the
agent-event relationship. The cardinalities associated with each agent entity in the agent-event
relationship all have zero minimums and N maximums. The maximum cardinality associated
with internal agent entities is almost always N, because organizations expect their employees
will participate in numerous events. It is also usually N for external agents, because
organizations often engage in repeat transactions with the same suppliers and customers. There
are two reasons why the minimum cardinality associated with agent entities in the agent-event
relationship is usually zero:

 Organizations want to be able to add information about potential customers and suppliers
even though those agents may not have participated yet in the business transactions
 Event entities are analogous to transaction files, whereas agent entities are analogous to
master files. At the end of the fiscal year, the contents of events tables are archived and
the new fiscal year begins with no rows in various event tables. In contrast, information
about agents is permanent in nature and is carried over from one fiscal period to the next.
Therefore, at the beginning of a new fiscal year customers may not be linked to any
current sales.
Cardinality Rules for Resource-Event Relationships

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The minimum and maximum cardinalities associated with each resource in resource-event
relationship are zero and N, respectively. This is by the same reasoning as the case for
cardinalities associated with agents in agent-event relationship. One exception to this rule is that
the maximum cardinality associated with the inventory resource is sometimes one. This is when
organizations track specific physical inventory items such as original artwork, vehicles, or
houses that are identified by a primary key which is some type of serial number. In such cases, a
given row in inventory table could be associated with at most one sales transaction and would
have maximum cardinality of 1 instead of N.The minimum cardinality associated with event
entities in resource-event relationship is usually 1. For example, each sale event must include at
least one row in the inventory table and each payment received from a customer must be
deposited into some cash account.

The only exception to this general rule arises if an event potentially can be linked to more than
one resource entity. For example, consider a household appliance repair business. Some services
may not require parts whereas others may include labor plus parts. Thus, the sale event for such
repair business could be linked with inventory entity, or to repair service entity or both types of
resources. Consequently, the minimum cardinality for the sales event would be zero in both of
those relationships. In rare situations, an event might be linked to one of several unique agent
entities. In such cases, the minimum cardinality associated with the event entity again will be 0
instead of the normal 1.However, there is no general principle concerning the maximum
cardinality associated with event entities in resource event relationship. Instead, the maximum
cardinality depends on the nature of the resources affected by that event and by the organizations
policies. For example, customers may by and are encouraged to buy as many as products of a
company. Hence, customer order and sales events can be linked to many rows in inventory table.

Cardinality Rules for Event-Event Relationships

Almost any kind of cardinality pair is possible for each event entity in event-event relationships.
The organization's business practices and policies must be understood to decide which possibility
is correct. For example, collections from customers may be at once (1:1) or in installments (1:

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N). The only general modeling principle that applies to event-event relationships is that for two
temporally ordered events, the minimum cardinality for the first event is 0, because at the time it
occurs, the other event has not yet happened. Often, but not always, the minimum cardinality for
the event that occurs second is 1, indicating that the first event had already occurred.

Implementing an REA Diagram in a Relational Database

Once the REA diagram has been developed, it can be used to design a well structured relational
database. Implementing an REA diagram in a relational database is a three-step process:

1. Create a table for each distinct entity and for each many to many relationships
2. Assign attributes to appropriate tables
3. Use foreign keys to implement one to one and one to many relationships.

Step 1: Create Tables for Each Entity and M:N Relationships

A properly designed relational database has a table for each distinct entity and for each many to
many relationships in an REA diagram. Some of the distinct entities include: cash, inventory,
customer orders, sales, cash receipts, employees, and customers. The expected many to many
relationships include customer order-inventory, sales inventory, and sales-cash receipts. It is
good practice to give each table the same name as the entity that it represents. Tables
representing M:N relationships, however, are often titled by hyphenating the names of the two
entities that are linked. For example, Sales-Inventory line table.

Step 2: Assign Attributes to Each Table

During the data modeling process, users and management will have identified facts that they
want to collect. For example, for inventory items the attributes may include item number,
description, cost and selling price.

Assign primary keys- every table in a relational database must have a primary key, consisting
of attributes or a combination of attributes. Companies often create numeric identifiers for

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specific resources, events and agents. These numeric identifiers are good candidates for primary
keys. Usually, the primary key of a table representing an entity is a single attribute. The primary
key for M:N relationship tables, however, always consists of two attributes that represent the
primary keys of each entity linked in that relationship. For example, the primary key of a sales-
inventory table consists of both the invoice number (primary key of the sales entity) and item
number (primary key of the inventory entity). Such multiple-attribute primary keys are called
concatenated keys.

Assign other attributes to appropriate tables- additional attributes besides the primary key are
included in each table to satisfy transaction processing requirements and management's
information needs. Some of the attributes such as the date and amount of each sale are necessary
for complete and accurate transaction processing and the production of financial statements and
managerial reports. Other attributes are stored because they facilitate the effective management
of an organization's resources, events and agents.

Non-key attributes in M:N relationship tables- attributes that help keep the table flat and that
can't be stored in separate tables are listed as attributes in M:N relationship tables. For example,
quantity sold can't be an attribute in the sales table because a single invoice may have several
values. In addition, a single item may be sold in many different sales transactions. Hence, it may
not be an attribute in inventory table. Hence, as it applies to a specific item included in a specific
sales transaction, it belongs in the M:N relationship table that links these two entities.

 Price data- may be stored in both the inventory and sales-inventory tables. The inventory
table lists suggested selling price that remains constant. But the sales inventory table
stores actual sales price which varies during the year in relation to promotions.
 Cumulative data- includes such information as quantity on hand (in inventory table) and
account balance (in the customer table). Theoretically, it is unnecessary to store such
information separately in the database because the system can readily compute them
when necessary. Explicitly storing cumulative totals and balances, however, may
improve response time to queries.

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Step 3: Use Foreign Keys to Implement 1:1 and 1: N Relationships

M: N relationships must be implemented as separate tables to have a well-structured relational

database. Although 1:1 and 1: N relationships can be implemented as separate tables, it is usually
more efficient to implement them by means of foreign keys.

One to one Relationships- in a relational database, one to one relationships between entities can
be implemented by including the primary key of one entity as a foreign key in the table
representing the other entity. The choice is arbitrary. Careful analysis of the minimum
cardinalities of the relationship may suggest which approach is likely to be more efficient. For
example, in the 1:1 relationship between sales and customer payments,

- the minimum cardinality for the sales event is 0 indicating the existence of credit
sales
- the minimum cardinality for the cash receipt event is 1 indicating that customer
payments only occur after a sale has been made (assuming no advance collections are
made)
In this case including invoice number as foreign key in cash receipts event may be more efficient
because then only that one table would have to be accessed and updated to process data about
each customer payment. When events are sequential, including the primary key of the event that
occurs first as a foreign key in the event that occurs second may improve internal control.

One to many relationships- As with 1:1 relationships, 1:N relationships also can be implemented
in relational databases with foreign keys. To do this, place the primary key of the entity with the
maximum cardinality of N as a foreign key in the entity that has maximum cardinality of 1. For
example, the primary keys of the salesperson and customer tables are included as foreign keys in
the sales table.

A potential exception to this general rule for implementing 1: N relationships may occur if the
relationship includes two sequential event entities, and the event that occurs first is also the one

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that participates many times in that relationship. In that case, implementing the relationship as a
separate table might improve internal control.

REA Diagram for Documenting Business Processes

REA diagrams are especially useful for documenting advanced AIS built using databases,
because the cardinalities in REA diagrams provide information about the organization's business
practices and the nature of its economic exchanges. Correctly interpreting what the cardinalities
in an REA diagram mean requires understanding exactly what the occurrence of each entity
represents. This is usually easy for both agent and event entities. Understanding what each
occurrence of resource entity represents may be difficult. Consider inventory, for example. An
individual occurrence of this entity might represent either a specific physical object or a class of
objects depending on the nature of the inventory. In such cases, examining the attributes
associated with that entity may indicate what it represents. For example, if there is a column
entitled ''quantity on hand'', each row refers to a specific kind of inventory, not an individual
object. In the case of sales-inventory relationship, such column will not exist because items may
be identified by serial number and there could only be one of each item.

Every organization will have its own unique REA diagram at least because business practices
and relationship cardinalities differ across companies. Differences in business practices also
result in differences in entities being modeled. The cardinalities in REA diagram also provide
information about business controls. For instance, each row in the cash entity represents a
specific account. One may be checking account, another payroll account, another money market
investment account etc. Cash-cash receipts relationship being modeled as 1:N reflects a sound
control practice of depositing all cash collections from customers into the company's checking
account.

An entity is anything about which the organization wishes to store data. At your college or
university, one entity would be the student. Consider the following table.

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 STUDENTS
Student ID Last Name First Name Phone Number Birth Date
333-33- Simpson Alice 333-3333 10/11/84
3333
111-11- Sanders Ned 444-4444 11/24/86
1111
123-45- Moore Artie 555-5555 04/20/85
6789

Information about the attributes of an entity (e.g., the student’s ID number and birth date) are
stored in fields. Consider the following table.

fields STUDENTS
Student ID Last Name First Name Phone Number Birth Date
333-33- Simpson Alice 333-3333 10/11/84
3333
111-11- Sanders Ned 444-4444 11/24/86
1111
123-45- Moore Artie 555-5555 04/20/85
6789

A set of all related records forms a file (e.g., the student file). If this university only had three
students and five fields for each student, then the entire file would be depicted below.

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STUDENTS
Student ID Last Name First Name Phone Number Birth Date
333-33- Simpson Alice 333-3333 10/11/84
3333
111-11- Sanders Ned 444-4444 11/24/86
1111
123-45- Moore Artie 555-5555 04/20/85
6789

Extracting Information from the AIS

A completed REA diagram also serves as a useful guide for querying an AIS database. Elements
such as journals, ledgers and information about receivables as well as payables may seem
missing in a database. Nevertheless, they are present though stored in a different format.

Producing journals and ledgers-

 Queries can be used to generate journals and ledgers from a relational database built on
the REA model. The information normally found in a journal is stored in the tables used
to record data about events. For example, a sales journal can be produced by writing a
query that displays the appropriate entries in the sales table for a given period. A query
can be written to display every entry in a sales table, to produce a list of all sales events,
both cash and credit sales. Traditionally, sales journals are used to record all credit sales.
Therefore, the query to produce a credit sales journal would have to include both the
sales and cash receipts tables. The logic on the query would include restricting the output
to display only those sales that are not linked to a corresponding customer payment event
that occurred on the same day as a sale. The information traditionally contained in
ledgers is often stored in a relational database in a combination of resources and events
tables. For example, accounts receivable doesn't appear as a table. Instead, it is derived

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 by calculating the total amount of sales for which customer payments have not been
received.
Providing other financial statement information-

 An REA diagram can guide the writing of queries to produce other information that
would be included in financial statements. Querying a single table can derive many
financial statement items. For example, summing the amount column of the sales table
would yield sales for the current period.
Preparing managerial reports-

 A major advantage of the REA data model is that it integrates nonfinancial and financial
data in the AIS and makes both types of data easily accessible to management. For
example, information such as time of sale, returns and allowances etc can be included as
attributes in the sales table. New attributes such as credit rating could be added easily.

The REA data model can be used to build a database that allows the AIS to change in response to
management's changing information requirements. The REA data model shows that accounting
need not be limited to the traditional double entry model with its journals, ledgers, and chart of
accounts. Instead, the REA data model supports the view that accounting a process or system of
collecting and disseminating information about an organization's business transactions. Although
the mechanics of accounting may change, the need for the results (managerial reports and
financial statements) of accounting remains.

The relational data model represents everything in the database as being stored in the form of
tables. A relation is defined as a set of tuples that all have the same attributes. This is usually
represented by a table, which is data organized in rows and columns. In a relational database, all
of the data stored in a column should be in the same domain (i.e. data type). In the relational
model, the tuples should not have any ordering. This means both that there should be no order to
the tuples, and that the tuples should not impose an order of the attributes. Put differently, neither
the rows nor the columns should have an order to them.

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While this is the desired result, it is not universally achieved. The SQL standard requires
columns to have a defined order. All data stored in a computer has to have an order, as the
memory of a computer is linear. Also, when the data is returned, there must be an order in which
the data is returned (because all transfer protocols are linear, and coincidentally enough, humans
read in a linear fashion). The point here is that this order must never make a logical difference in
the system. Frequently orders are imposed which impact performance, but they should never
change the result of a query on the database. In practice, several of the DBMSs that are
considered "relational" impose an order that makes a logical difference.

3.5.1 ENTITY-RELATIONSHIP DIAGRAMS

An entity relationship (E-R) diagram is a graphical technique for portraying a database schema.
It is called an ER diagram because it shows the various entities being modeled and the
important relationships among them. In an ER diagram, entities appear as rectangles and
relationships between entities are represented as diamonds. An ER diagram not only depicts the
contents of a database but also graphically models an organization. Thus, the ER diagrams can
be used not only to design databases but also to document and understand existing databases and
to reengineer business processes. An important step in database design is deciding which entities
need to be modeled. The REA data model is useful for making that decision.

Differentiae entity, field, and file?

3.6 DATABASE SYSTEMS AND THE FUTURE OF ACCOUNTING

Database systems may profoundly affect the fundamental nature of accounting:

May lead to rejection of double-entry accounting, because the redundancy of the double entry is
not necessary in computer data processing. May also alter the nature of external reporting.

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Example: External users could have access to the company’s database and manipulate the data
to meet their own reporting needs.

The use of accounting information in decision making will be enhanced by:

– Powerful querying capabilities that accompany database packages.
– The ability to accommodate multiple views of the same underlying phenomenon.
– The ability to integrate financial and operational data.
• Accountants must become knowledgeable about databases so they can participate in
developing the AIS of the future.
• They must help ensure that adequate controls are included to safeguard the data and
assure its reliability.
Explain database systems and the future of accounting

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MODEL EXAM QUESTIONS

Multiple Choice Items: CHOOSE THE BEST ANSWER FROM THE GIVEN
ALTERNATIVES

1. In a relational database, each table is a collection of records and each record is a collection of
A. Fields C. Rows
B. Names D. Formula
2. In an Entity-Relationship diagram Rectangles represents
A. Entity types C. Attribute types
B. Database D. Table
3. serves as the interface between the database and the various application programs.
A. Database system C. Data modeling
B. Database design D. Database Management System

4. Database technology provides the following benefits, except:

A. Data sharing C. Data integration
B. Data redundancy and inconsistencies D. Reporting flexibility
5. The relationship among the input, processing and output of Accounting Information System
can be depicted by:
A. Program Flowcharts C. System Flowcharts
B. Document Flowcharts D. None

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 CHAPTER FOUR
4. THE SYSTEMS DEVELOPMENT PROCESSES AND SYSTEMS ANALYSIS

Learning objectives
– Understand Methodologies for systems development
– Explain The systems development life cycle (SDLC)
– Discuss Planning systems development
– Understands Feasibility study
– Discuss the Behavioral aspects of change
– Explain the overall System analysis
– Understands Conceptual system design
– Discuss Systems implementations and conversion

4.1 INTRODUCTION

Because we live in highly competitive and ever changing world organization continually face the
need for new, faster and more reliable ways of obtaining information. To meet this need, an
information system must continually undergo changes, ranging from minor adjustments to major
overhauls. Occasionally, the needed changes are so drastic that the old system is scrapped and
replaced by an entirely new one. Change is so constant and frequent that at any given time most
organizations are involved in some system improvement and change. Companies usually change
their systems for one of the following reasons:

Changes in user or business needs: Increased competition, business growth or consolidation,

mergers and divestitures, new regulations or changes in regional and global relationships can
alter the organization structure and purpose. To remain responsive to company needs, the system
must change as well.

Technological changes: As technology advances and becomes less costly, an organization can
use of the new capabilities or existing ones that were previously too expensive.

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Improved business processes: Many companies have, inefficient business processes that need
updating.

Competitive advantage: Increased quality, quantity and speed of information can result in an
improved product or service and may help to lower costs.

Productivity gains: computers automate clerical and repetitive tasks and significantly decrease
the performance time of other tasks.

Downsizing: Companies often move from centralized mainframes to networked PCs or to

internet based systems to take advantage of their Price/Performance ratio.
Explain why Companies usually changes their systems

4.2 METHODOLOGIES FOR SYSTEMS DEVELOPMENT

For a systems development, companies can use different methods. These methods are explained
in the next sections of the module.

4.3 SYSTEMS DEVELOPMENT LIFE CYCLE

Whether systems changes are major or minor, most companies go through a systems
development life cycle. The systems development life cycle (SDLC) is a conceptual model used
in project management that describes the stages involved in an information system development
project, from an initial feasibility study through maintenance of the completed application. It is a
logical process by which systems analysts, software engineers, programmers and end-users build
information systems and computer applications to solve business problems and needs. Systems
development methodology can be used as a synonym for the life cycle. Systems development
methodology is a very formal and precise system development process that defines a set of
activities, methods, best practices, deliverables, and automated tools that system developers and
project managers are to use to develop and maintain information systems and software.

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Frequently, several models are combined into some sort of hybrid methodology. Documentation
is crucial regardless of the type of model chosen or devised for any application, and is usually
done in parallel with the development process. Some methods work better for specific types of
projects, but in the final analysis, the most important factor for the success of a project may be
how closely the particular plan was followed. In general, an SDLC methodology follows the
following steps:

1. The existing system is evaluated - deficiencies are identified. This can be done by
interviewing users of the system and consulting with support personnel.
2. The new system requirements are defined - in particular, the deficiencies in the existing
system must be addressed with specific proposals for improvement.
3. The proposed system is designed - plans are laid out concerning the physical
construction, hardware, operating systems, and programming, communications, and
security issues.
4. The new system is developed - the new components and programs must be obtained and
installed. Users of the system must be trained in its use, and all aspects of performance
must be tested. If necessary, adjustments must be made at this stage.
5. The system is put into use - this can be done in various ways. The new system can
phased in, according to application or location, and the old system gradually replaced. In
some cases, it may be more cost-effective to shut down the old system and implement the
new system all at once.
6. Once the new system is up and running for a while, it should be exhaustively evaluated.
Maintenance must be kept up rigorously at all times. Users of the system should be kept
up-to-date concerning the latest modifications and procedures.

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 Romney and Steinhart identified the following five as the components of SDLC.

1. Systems analysis 4. Implementation and conversion

2. Conceptual design 5. Operations and maintenance
3. Physical design

Systems analysis is the first step in SDLC where in-depth understanding about a system starts. At
this stage, the information needed to purchase or develop a new system is gathered. Since
analysis is too costly (in terms of time, effort, money, etc), it is mostly started after the project is
approved and green light is obtained from the management. When a new or improved system is
needed, a written request for systems development is prepared. The request describes the current
system’s problems, why the change is needed, and the proposed system’s goals and objectives. It
also describes the anticipated benefits and costs.
System analysis is the stage of:

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 - Studying the current business system
- Understanding how the existing system works
- Determining the weakness and strength of the existing system
- Defining the business needs and requirements (user requirement determination and
system requirement determination independent of technology issues), et

There are five steps in the analysis phase:

 Initial investigation - is conducted to screen projects. At this stage, the following are
essential:
 Gaining a clear picture of the problem or need
 Determining the project's viability and expected costs and payoffs
 Evaluating the project's scope and the nature of the new AIS, and
 Recommending whether the development project should be initiated as
proposed, modified or abandoned.
At this stage the exact nature of the problems under review must be determined. If a project is
approved, a proposal to conduct system analysis is prepared. It is assigned a priority and added to
the master plan, and the development team begins the survey of the existing AIS.

 Systems survey - at this stage, an extensive study of the current AIS is undertaken. It may
take weeks or months depending on the complexity and the scope of the system. The
objectives of a system survey include:
– Gain a thorough understanding of the company operations, policies, and procedures; data and
information flows; AIS strengths and weaknesses; and available hardware, software, and
personnel.
– Make preliminary assessment of current and future processing needs, and determine the
extent and nature of the changes needed.
– Develop working relationships with users and build support for the AIS
– Collect data that identify user needs, conduct a feasibility analysis and make
recommendations to management.

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Finally, the findings are documented, the existing system is modeled and analyzed and a survey
report is prepared.

Feasibility study - a more thorough feasibility analysis is conducted to determine the project's
viability. Especially important is economic feasibility. The feasibility analysis is updated as the
project proceeds and costs and benefits become clearer.

Information needs and systems requirements - once a project is deemed to be feasible, the
company identifies the information needs of the AIS users and documents system requirements.
the strategies for determining requirements include the following:

 Ask users what they need; Analyze existing system; Examine existing system
use; & Create a prototype
Systems analysis report - is the conclusion of the system analysis phase. It is used to summarize
and document the analysis activities and serve as a repository of data from which system
designers can draw. A go-no-go decision is generally made three times during system analysis:

 During the initial investigation - to determine whether to conduct a feasibility

survey
 At the end of the feasibility study - whether to proceed to the information
requirements phase
 At the completions of the analysis phase - to decide whether to proceed to the
next phase.

Requirements determination tries to collect information on what system should do from

many sources like users, reports, forms, etc. Characteristics for gathering requirements are:

1. Impertinence—question everything
2. Impartiality—finds the best organizational solution and don’t try to justify the
importance of your suggestions at any cost.
3. Relaxation of constraints--assume that anything is possible
4. Attention to detail—due consideration should be given to facts (information)

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 5. Reframing—analysis is a creative process. Try to address situations in a new way.
Don’t jump to conclusions thinking you have done the same thing before

System Design: System design is the evaluation of alternative solutions and the specification
and construction of a detailed computer based solution. It is also called physical design as it
deals with implementation issues. Systems analysis depends more on the logical aspect,
implementation-independent aspects of a system /the requirements. Systems design
concentrates on the physical or implementation-dependent aspects of a system (the systems
technical specifications).

Conceptual design: In the conceptual systems design phase, a general framework is

developed for implementing user requirements and solving problems identified in the
analysis phase. What are the three steps in conceptual design?

1. Evaluate design alternatives

2. Prepare design specifications

3. Prepare conceptual systems design report.

The Systems Development Life Cycle:

Conceptual Design

Conceptual Design
Identify and evaluate
design alternatives
Develop design specifications Physical
Design
Deliver conceptual design
requirements

©2003 Prentice Hall Business Publishing, 16-13

Accounting Information Systems, 9/e, Romney/Steinbart

The system analysis phase is related to the conceptual design phase based on the diagram shown below:

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 Conceptual Systems Design

Systems
analysis

Prepare
Evaluate Prepare
conceptual
design design
systems
alternatives specifications
design report
©2003 Prentice Hall Business Publishing, 18-10
Accounting Information Systems, 9/e, Romney/Steinbart

Evaluate design alternatives:

 The design team should identify and evaluate design alternatives using the following
criteria:
1. How well it meets organizational and system objectives
2. How well it meets users’ needs
3. Whether it is economically feasible
4. Its advantages and disadvantages
Prepare design specifications:
 Once a design alternative has been selected, the team develops the conceptual design
specifications for the following elements: Input, Data storage, Processing procedures
and operations, and Outputs.
Prepare conceptual systems design report:
 At the end of the conceptual design a conceptual systems design report is developed
and submitted.
1. To guide physical systems design activities
2. To communicate how management and user information needs will be met
3. To help assess systems’ feasibility

Physical design

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 The Systems Development
Life Cycle: Physical Design
Physical Design
Design output
Design database
Implementation
Design input and Conversion
Develop programs
Develop procedures
Design controls
Deliver developed system
©2003 Prentice Hall Business Publishing, 16-14
Accounting Information Systems, 9/e, Romney/Steinbart

The above activities will come as a series of steps as shown by the diagram below:

Physical Systems Design

Output Program
design design

File and data Procedures

base design design

Input Controls
design design
©2003 Prentice Hall Business Publishing,
18-16
Accounting Inform ation System s, 9/e, Rom ney/Steinbart

Physical Systems Design: Output Design

 The objective of output design is to determine the characteristics of reports, documents, and
screen displays.

Physical Systems Design

 Physical design translates the broad,

user-oriented AIS requirements of
conceptual design into detailed
specifications that are used to code
and test the computer program.

Conceptual Physical
systems design systems design

©2003 Prentice Hall Business Publishing, 18-15

Accounting Information Systems, 9/e, Romney/Steinbart

Physical Systems Design: File and Database Design, Input Design, Procedures Design, and Control
Design

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 What are some control design considerations?

 Validity  Authorization Audit Control

 Accuracy  Security
 Numerical Control  Availability
 Maintainability  Integrity

Physical Systems Design Report

 At the end of physical design phase the team prepares a physical systems design report.
 This report becomes the basis for management’s decision whether to proceed to the
implementation phase.

Implementation and conversion: Systems implementation is the process of installing hardware and
software and getting the AIS up and running. It includes the following activities.

The Systems Development

Life Cycle: Implementation and
Conversion
Implementation and Conversion
Develop plan
Install hardware and software
Train personnel, test the system
Complete documentation Operation
and
Convert from old to new system Maintenance
Fine-tune and review
Deliver operational system

©2003 Prentice Hall Business Publishing, 16-15

Accounting Information Systems, 9/e, Romney/Steinbart

The relationship of the items in this phase and the conversion process (next phase) will be as shown
below in a series of activities.

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 Systems Implementation
Implementation planning

Develop and Prepare site; Select

test software install and and train
programs test hardware personnel

Complete
documentation Test system

Conversion
©2003 Prentice Hall Business Publishing, 18-27
Accounting Information Systems, 9/e, Romney/Steinbart

Systems Implementation: Implementation Planning

 An implementation plan consists of implementation tasks, expected completion dates,

cost estimates, and the person or persons responsible for each task.
 Planning should include adjustments to the company’s organizational structure.
Systems Implementation: Develop and test software programs

 Systems Implementation: Site Preparation

 Systems Implementation: Select and train personnel
 Systems Implementation: Complete Documentation
 Systems Implementation: Test the System

Systems Implementation: Conversion

 There are four conversion approaches.

1. Direct conversion 3. Parallel conversion
2. Phase-in conversion 4. Pilot conversion

Conversion is the process of changing from the old AIS to the new. Many
elements must be converted: hardware, software, data files and procedures. The
system conversion process is complete when the new AIS has become a routine,
ongoing part of the system.

Conversion approaches
Four conversion approaches are used to change from an old to a new system.

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 1. Direct conversion: This is an immediate discontinuance of the old AIS when
the new one is introduced.
Direct conversion is appropriate when the old AIS has no value or the new one
is so different that comparisons between the two are meaningless. The
approach is inexpensive, but it provides no backup AIS. Unless a system has
been carefully developed and tested, direct conversion carries a high risk of
failure.
2. Parallel conversion: In parallel conversion the old and the new system
operate simultaneously for a period of time. Parallel processing protects
companies from errors, but it is costly and stressful for employees to process
all transactions twice. However, because companies often
Experience problems during conversion, parallel processing has gained widespread popularity.
3. Phase-in conversion: Under such system the new AIS gradually replace
elements in the old AIS. For example, a company could go like this: first
implement inventory system, then disbursements, followed by sales collection
and so forth until the whole system is functional.
These gradual changes mean that data processing resources can be acquired
overtime. The disadvantages are the cost of creating the temporary interfaces
between the old and new AIS and the time required to make the gradual
changeover.
4. Pilot conversion: This implements a system in just one part of the
organization such as a branch/location. When problems with the system are
resolved, the new system could be implemented at the remaining locations.
This approach localizes conversion problems and allows training in a live environment. The
disadvantages are the long conversion time and the need for interface between the old and the new
system, which coexist until all locations have been converted
Direct

Old system
New sy stem
Parallel

Old system New system

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Phase-in
Old system
New system

Pilot
1 2 3 1 2 3 1 2 3
old old old old old New old New New

1 2 3
New New New

Operations and maintenance

The Systems Development

Life Cycle: Operation and
Maintenance
Feasibility analysis
Operation and Maintenance and decision points:
Operate system Economic
Modify system Feasibility

Do ongoing maintenance Technical Feasibility

Deliver improved system Legal Feasibility

Scheduling
Feasibility
Systems
Operational
Analysis Feasibility

©2003 Prentice Hall Business Publishing, 16-16

Accounting Information Systems, 9/e, Romney/Steinbart

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 Operation and Maintenance

 The final step in the SDLC is to

operate and maintain the new system.
 A postimplementation review should
be conducted on a newly installed
system.

Implementation Operation and

and conversion maintenance

©2003 Prentice Hall Business Publishing, 18-41

Accounting Information Systems, 9/e, Romney/Steinbart

Explain he systems development life cycle

4.4 PLANNING SYSTEM DEVELOPMENT

One activity performed in SDLC is planning system development. In connection with, thus, the
organization must have a long-range plan, each system development project requires a plan and
each phase of each development plan must also be planned. In SDLC two type of system
development plans are needed: individual project plans prepared by project teams and a master
plan developed by the information system steering committee.

The project development plan contains a cost benefit analysis, developmental and operational
requirements, including human resources, hardware, software and financial resource
requirements; and a schedule of the activities required to develop and operate the new
application. The master plan is a long-range planning document that specifies what the system
will consist of, how it will be developed, who will develop it, how needed resources will be
acquired and where the AIS is headed.

The master plan also should provide the status of the project in process, prioritize planned
projects, describe the criterion used for prioritization and provide timetable for development. The
project with the highest priority should be the first to be developed. A planning horizon of

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Approximately five year is reasonable for any master plan. The plan should be up dated at least
once each year.

4.5 FEASIBILITY STUDY

At major decision points shown in SDLC, the steering committee uses the feasibility study
whether to terminate a project, proceed unconditionally or proceed if specific problems are
resolved. Although projects can be terminated at any time, the early go-no-go decisions are
particularly important, as each sub segment SDLC steps require more time & monetary
commitment. Although uncommon systems have been scrapped after implementation because
they did not work or failed to meet an organization needs.

The five important aspects to be considered during a feasibility study are:

Technical feasibility: Can the planned system be developed and implemented using existing
technology?
Operational feasibility: Does the organization have access to people who can design,
implement and operate the proposed system? Can people use the system and will they use it?
Legal feasibility: Does the system comply with all applicable federal, state laws, administrative
agency regulations, and the company’s contractual obligations?
Scheduling feasibility: Can the system be developed and implemented in the time allotted? If
not it will be modified, postponed or replaced by an alternative selection.
Economic feasibility: Will system benefit justify the time, money and other resources required
to implement it?
What is feasibility study?

Mention factors to be considered during feasibility study

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4.6 BEHAVIORAL ASPECTS OF CHANGE

The behavioral aspects of change are crucial because the best systems will fail without the
support of the people it serves. Organizations must be sensitive to and consider the feelings and
reactions of persons affected by change.
Why behavioral problems occur?
When something new is introduced there is a natural tendency that people will resist the change.
Resistance to change occurs because of the following factors:

Personal characteristics & background: Generally speaking, the younger and more highly
educated people are more likely to accept the change. Likewise, the more comfortable people are
with technology, the less likely they are to oppose changes in AIS.
Manner in which the change is introduced: The rationale used to sell the system to top
management may not be appropriate for lower level employees. The elimination of boring tasks
and the ability to advance & grow are more important to users than increasing profits and
reduced costs.

Experience with prior changes: Employees who had a bad experience with prior changes are
more reluctant to cooperate when future changes occur.

Top management support: Employees who sense a lack of top management support for change
wonder why they themselves should endorse it.

Communication: Employees are unlikely to support a change unless the reason behind it is
explained.

Bias and natural resistance to change: People with emotional attachment to their duties or co-
workers may not want to change if those elements are affected.
Disruptive nature of change process: Request for information & interviews are distracting and
place additional burden on people. These disturbances can create negative feelings towards the
change that is promoted them to occur.

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Fear: Many people fear the unknown and the uncertainty accompanying the change. They also
fear losing their jobs, losing respect & status, failure, technology, automation.

Preventing behavioral problems

The following are some strategies to prevent resistance to change:
Meet user needs: This is the foremost strategy to be adopted. Since a system is built for the
benefit of people it should meet the interest of those for whom the system is built.
Keep communication lines open: Managers & users should be told what changes are being
made & why & they should be shown how the new system will benefit them. Open
communication also helps prevent damaging & inaccurate rumors & misunderstandings.
Employees should be told who they can contact if they have questions or concerns.
Obtain management support
Allay fears:
The organization should provide assurance to the extent possible that no major job losses or
responsibility shifts occur. These goals can be achieved through relocation, attrition and early
retirement. If employees are terminated, severance pay and outplacement services should be
provided.
Solicit user participation:
Those who will use or be affected by the system should participate in its development by
providing the data, making suggestions and helping make decisions. Users who participate in
development are more knowledgeable, better trained, and more committed to using the system.
Avoid complex systems that cause radical changes,
Even if nowadays radical changes are preferred than fixing the problem of an existing system by
automation.
Mention major strategies to be used for prevent resistance to change?

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4.7 SYSTEMS ANALYSIS

As organizations grow and change, they may need more or better information. Systems analysis
is the first step. It includes:
a. Initial investigation
Involves gathering the information needed to buy or develop a new system and determining
whether it is a priority.
b. Systems survey
If the system is a priority, survey the existing system to define the nature and scope of the project
and identify the strengths and weaknesses of the system.
c. Feasibility study
Involves an in-depth study of the proposed system to determine whether it’s feasible.
d. Determination of information needs and system requirements:
Involves finding out and documenting what users and management need. This is the most
important aspect of systems analysis.
e. Delivery of systems requirements
Involves preparation of a report summarizing the systems analysis work. This report is submitted
to the information systems steering committee.
What is systems analysis?

------------------------------------------------------------------------------------------------------------

4.8 CONCEPTUAL DESIGN

In the conceptual systems design phase, a general framework is developed for implementing user
requirements and solving problems identified in the analysis phase. What are the three steps in
conceptual design?

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1. Evaluate design alternatives

2. Prepare design specifications

3. Prepare conceptual systems design report.

The Systems Development Life Cycle:

Conceptual Design

Conceptual Design
Identify and evaluate
design alternatives
Develop design specifications Physical
Design
Deliver conceptual design
requirements

©2003 Prentice Hall Business Publishing, 16-13

Accounting Information Systems, 9/e, Romney/Steinbart

The system analysis phase is related to the conceptual design phase based on the diagram shown below:

Conceptual Systems Design

Systems
analysis

Prepare
Evaluate Prepare
conceptual
design design
systems
alternatives specifications
design report
©2003 Prentice Hall Business Publishing, 18-10
Accounting Information Systems, 9/e, Romney/Steinbart

Evaluate design alternatives:

 The design team should identify and evaluate design alternatives using the following
criteria:
1. How well it meets organizational and system objectives
2. How well it meets users’ needs

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 3. Whether it is economically feasible
4. Its advantages and disadvantages
Prepare design specifications:
 Once a design alternative has been selected, the team develops the conceptual design
specifications for the following elements: Input, Data storage, Processing procedures and
operations, and Outputs.
Prepare conceptual systems design report:
 At the end of the conceptual design a conceptual systems design report is developed and
submitted.
1. To guide physical systems design activities
2. To communicate how management and user information needs will be met
3. To help assess systems’ feasibility
These requirements will be forwarded to the information systems steering committee.
4.9 IMPLEMENTATION AND CONVERSION
This is the capstone phase during which everything comes together. Tasks include:
 Develop an implementation and conversion plan
 Needed because of the complexity and importance of this phase
 Install any new hardware and software
 Train personnel
 Test the system and make any needed modifications.
 Complete the documentation.
 Convert from the old to the new system.
 Deliver operational system.
 Send he final report to the IS steering committee.

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 Systems Implementation
Implementation planning

Develop and Prepare site; Select

test software install and and train
programs test hardware personnel

Complete
documentation Test system

Conversion
©2003 Prentice Hall Business Publishing, 18-27
Accounting Information Systems, 9/e, Romney/Steinbart

Explain tasks to be performed in system implementation and conversion

Model Exam Questions

Multiple Choice Items
1. In which phase of the systems development life cycle are the broad needs of the users
converted into detailed specifics that are coded and tested?
A) Conceptual design B) implementation and conversion
C) Physical design D) systems analysis
2. Proper systems analysis is a five-step process. What is the step in which analysts conduct an
extensive study of the present system to gain a thorough understanding of how it works?
A) Feasibility study B) information needs and requirements
C) Systems analysis report D) systems survey
3. The question of what the project should and should not accomplish is determined in what step
of systems analysis?
A) Feasibility study B) initial investigation
C) Systems analysis report D) systems survey
4. In which phase of the systems development life cycle is the feasibility study first performed?
A) Conceptual design B) implementation and conversion
C) Physical design D) system analysis
5. In which phase of the systems development life cycle are the broad needs of the users
converted into detailed specifics that are coded and tested?
A) Conceptual design B) implementation and conversion C) Physical design D) systems analysis

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 CHAPTER FIVE
5. ACCOUNTING INFORMATION SYSTEM APPLICATION

Learning Objectives

 Understand what Revenue cycle and AIS Application

 Explain Expedition cycle and AIS Application

 Discuss Production cycle and AIS Application

 Discuss HR cycle and AIS Application

 Explain General ledger & reporting system

5.1 THE REVENUE CYCLE:SALES TO CASH COLLECTIONS

Introduction

The revenue cycle is a recurring set of business activities and related information processing

operations associated with providing goods and services to customers and collecting their cash

payments. The primary external exchange of information is with customers. Management also

has to evaluate the efficiency and effectiveness of revenue cycle processes: The revenue cycle

requires data about:

- Events that occur.

- Resources used.

- Agents who participate.

The data needs to be accurate, reliable, and timely. Four basic business activities are performed

in the revenue cycle:

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 1. Sales order entry

2. Shipping

3. Billing

4. Cash collection

1. Sales order entry

Sales order entry is performed by the sales order department.

Steps in the sales order entry process include:

 Take the customer’s order.

 Check the customer’s credit.

 Check inventory availability.

 Respond to customer inquiries (may be done by customer service or sales order entry).

 Respond to customer inquiries (may be done by customer service or sales order entry).

 Sales order entry is performed by the sales order department.

 The sales order department typically reports to the VP of Marketing.

Steps in the process include:

 Take the customer’s order.

 Check the customer’s credit.

 Check inventory availability.

 Respond to customer inquiries (may be done by customer service or sales order entry).

What are the four basic business activities which are performed in the revenue cycle?

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2. Shipping

- The second basic activity in the revenue cycle is filling customer orders and shipping

the desired merchandise.

The process consists of two steps.

 Picking and packing the order

 Shipping the order

- The warehouse department typically picks the order

- The shipping departments packs and ships the order

- Both functions include custody of inventory and ultimately report to the VP of

Manufacturing.

The shipping department compares the following quantities:

o Physical count of inventory.

o Quantities indicated on picking ticket.

o Quantities on sales order.

- Discrepancies can arise if:

o Items weren’t stored in the location indicated

o Perpetual inventory records were inaccurate.

- If there are discrepancies, a back order is initiated.

- A major shipping decision is the choice of delivery methods:

o Some companies maintain a fleet of trucks.

o Companies increasingly outsource to commercial carriers.

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 - Reduces costs.

- Allows company to focus on core business.

o Selecting best carrier means collecting and monitoring carrier performance data for:

- On-time delivery.

- Condition of merchandise delivered.

3. Billing

The third revenue cycle activity is Billing customers i.e., - sending invoice to customer.

This activity involves two tasks:

 Invoicing(a document that is issued by a seller to the buyer that indicate the quantity and

cost)

 Updating accounts receivable

Accurate and timely billing is crucial. Billing is an information processing activity that

repackages and summarizes information from the sales order entry and shipping activities.

Requires information from:

- Shipping Department on items and quantities shipped.

- Sales on prices and other sales terms.

Mention activities performed in billing customers

4. Cash collection

The final activity in the revenue cycle is collecting cash from customers. The cashier handles

customer remittances and deposits them in the bank. Because cash and checks are highly

vulnerable, controls should be in place to discourage theft.

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  Accounts receivable personnel should not have access to cash (including checks).

5.2 THE EXPENDITURE CYCLE: PURCHASING TO CASH DISBURSEMENTS

The primary external exchange of information is with suppliers (vendors).Information flows to

the expenditure cycle from other cycles, e.g.: The revenue cycle, production cycle, inventory

control, and various departments provide information about the need to purchase goods and

materials.

Information also flows from the expenditure cycle:

 When the goods and materials arrive.

 Information is provided to the general ledger and reporting function for internal and

external financial reporting.

The primary objective of the expenditure cycle is to minimize the total cost of acquiring, and

maintaining inventory, supplies, and services.

Decisions that must be made include:

o What level of inventory and supplies should we carry?

o What vendors provide the best price and quality?

o Where should we store the goods?

o Can we consolidate purchases across units?

o How can IT improve inbound logistics?

o Is there enough cash to take advantage of early payment discounts?

o How can we manage payments to maximize cash flow?

Management also has to evaluate the efficiency and effectiveness of expenditure cycle processes.

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These evaluations require data about:

 Events that occur.

 Resources affected.

 Agents who participate.

 This data needs to be accurate, reliable, and timely

The three basic activities performed in the expenditure cycle are:

o Ordering goods, supplies, and services.

o Receiving and storing these items.

o Paying for these items.

These activities mirror the activities in the revenue cycle.

What expenditure cycle?

Enumerate the three basic activities performed in the expenditure cycle?

5.3 PRODUCTION CYCLE

The production cycle involves the transformation of labor and raw material into finished goods.

In this cycle raw materials are purchased and converted to finished goods. Similarly, labor costs

are also incurred in this cycle labor forces in the production processes.

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 5.4 HUMAN RESOURCES/PAYROLL CYCLE

o The human resources cycle involves interactions with employees.

o Employees are hired, trained, paid, evaluated, promoted, and terminated.

Justify activities undertaken in production cycle and human resources/payroll cycle

5.5 GENERAL LEDGER AND REPORTING SYSTEM

The General Ledger & Reporting System (GLARS) includes:

 The processes in place to update general ledger accounts, and

 Prepare reports that summarize results of the organization’s activities.

One of the primary functions of GLARS is to collect and organize data from:

 Each of the accounting cycle subsystems

 The treasurer, who provides entries with respect to non-routine activities such as

transactions with creditors and investors.

 The budget department, which provides budget numbers.

 The controller, who provides adjusting entries.

Mention the primary functions of GLARS

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Model Exam Questions
Multiple Choice Items: Choose The Best Answer From The Given Alternatives.
1. Which area provides information to the system about hiring, terminations, and pay rate
changes?
A) Payroll B) timekeeping
C) Purchasing D) HR
2. involves the transformation of labor and raw material into finished goods.
A) Human resources cycle C) production cycle
B) Revenue cycle D) Expenditure cycle
3. The final activity in the revenue cycle is:
A) Collecting cash from customers C) Taking customer’s order
B) Billing customers D) filling customer orders and shipping the goods
4. Which of the following is/are activities/s performed in the expenditure cycle?
A) Ordering goods, supplies, and services
B) Receiving and storing these items
C) Paying for these items
D) All
5. Which of the following is he correct order of basic activities performed in the revenue cycle:
A) Shipping -> Billing -> Cash collection -> Sales order entry
B) Billing -> Sales order entry-> Shipping -> Cash collection
C) Sales order entry -> Shipping -> Billing -> Cash collection
D) Cash collection-> Shipping -> Billing -> Sales order entry

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ANSWER KEY

For Model Exam Questions

Model Exam Questions -1

1. A 2. B 3. B 4. D 5. B 6. C 7. D

Model Exam Questions -2

1. B 2. A 3. C 4. D 5. B 6. B

Model Exam Questions -3

1. A 2. C 3. D 4. B 5. B

Model Exam Questions -4

1. C 2. D 3. B 4. D 5. C

Model Exam Questions -5

1. D 2. C 3. A 4. D 5. C

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REFERENCES

 Marshall B. Romney ,Paul John Steinbart accounting information systems

Nitethedition,Printice hall business publishing
 Bodnar and Hopwood, (1998), Accounting Information Systems, 7th Edition,
Prentice Hall, Inc.
 Boockholdt J.L., (1999). Accounting Information Systems. Singapore: McGraw-
Hill.
 Essential of Access 3000, by David Thew, Springer publication
 Gelinas, et al, (1999), Accounting Information Systems, 4th Edition, South
Western Publishing Co. USA.
 Klooster and Allen's.Integrated Accounting for Windows, 3rd Edition. south-
western Thomson learning,
 James A. Hall, (2001). Accounting Information Systems. Ohio: Thomson
Learning.

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