Adopted from Accounting Information Systems

Romney, M.B. and Steinbart, P.J.

 Chapter 1:
Overview of AIS
Chapter Outline
What is the difference between data and
information?
What is an accounting information system?
Why is the AIS an important topic to study?
What is the role of the AIS in the value chain?
How does the AIS provide information for
decision making?
What are the basic strategies and strategic
positions an organization can pursue?
Data vs Information

Data Processing
Relevant Information
Data Reliable data processed
Data to be
Complete
Data meaningful and
Timely
useful to others
Understandable
costand
Verifiable
benefits of
information
 The Information System

Data Processing Information

data data information

collection management generation

data
data control
processing
Accounting Information System

a unified structure that employ

physical resources and components
to transform economic data into
accounting information for external
and internal users
WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
Its fundamental to accounting.
Accounting is an information-providing
activity, so accountants need to understand:
How the system that provides that
information is designed, implemented
and used.
How financial information is reported
How information is used to make
decisions
WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
Its fundamental to accounting.
Other accounting courses focus on how the
information is provided and used.
An AIS course places greater emphasis on:
How the data is collected and
transformed
How the availability, reliability, and
accuracy of the data is ensured
AIS courses are not number-crunching
courses
WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
Its fundamental to accounting.
The skills are critical to career success.
Auditors need to evaluate the accuracy and
reliability of information produced by the
AIS.
WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
Its fundamental to accounting.
The skills are critical to career success.
Tax accountants must understand the
clients AIS adequately to be confident that
it is providing complete and accurate
information for tax planning and
compliance work.
WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
Its fundamental to accounting.
The skills are critical to career success.
In management consulting, the design,
selection, and implementation of
accounting systems is a rapid growth area.
WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
Its fundamental to accounting.
The skills are critical to career success.
In private industry and not-for-profits,
systems work is considered the most
important activity performed by
accountants.
WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
Its fundamental to accounting.
The skills are critical to career success.
The AIS course complements other
systems courses.
Other systems courses focus on design and
implementation of information systems,
databases, expert systems, and
telecommunications.
AIS courses focus on accountability and
control.
WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
Its fundamental to accounting.
The skills are critical to career success.
The AIS course complements other
systems courses.
AIS topics are tested on the new CPA
exam.
Makes up about 25% of the Business
Environment & Concepts section of the CPA
exam.
WHY STUDY ACCOUNTING
INFORMATION SYSTEMS?
Its fundamental to accounting.
The skills are critical to career success.
The AIS course complements other
systems courses.
AIS topics are tested on the new CPA
exam.
AIS topics impact corporate strategy and
culture.
 6 Components of an AIS

people procedure

X!
security AIS data

Information
technology software
Business Functions of an AIS
Collect and store data about organizational
activities, resources and personnel
Transform data into information that is
useful for making decisions
Provide adequate controls to safeguard the
organizations asset, to ensure that the
assets and data are available when needed
and the data are accurate and reliable
Value Chain
Infrastructure
sequence of business
Human resource management
activities
by which,
Technology in the perspective of
the end user, value is added to
Purchasing
products and services
produced by an organization
ROLE OF THE AIS IN THE VALUE
CHAIN
Supplier For example, the inbound logistics of a
Inbound Logistics business, links to the outbound logistics
Operations of its suppliers.
Outbound Logistics Business
Marketing & Sales Inbound Logistics
Service Operations
Outbound Logistics Customer
Marketing & Sales Inbound Logistics
Service Operations
Outbound Logistics
Marketing & Sales
Service
ROLE OF THE AIS IN THE VALUE
CHAIN
Supplier And the outbound logistics of a
Inbound Logistics business, links to the inbound logistics
Operations of its customers.
Outbound Logistics Business
Marketing & Sales Inbound Logistics
Service Operations
Outbound Logistics Customer
Marketing & Sales Inbound Logistics
Service Operations
Outbound Logistics
Marketing & Sales
Service
Decision Structure and Scope

Unstructured Strategic
decision planning

Semi-structured Management
decision control

Structured Operational
decision control
THE AIS AND CORPORATE
STRATEGY
Corporations have:
Unlimited opportunities to invest in
technology
Limited resources to invest in
technology
Must identify the improvements likely to
yield the highest return.
This decision requires an understanding of
the entitys overall business strategy.
Basic Business Strategies
Product differentiation strategy
- Adding features or services to
charge customer a premium price

Low-cost strategy
- Striving to be the most efficient
producer of a product and service
Chapter Summary
What is the difference between data and
information?
What is an accounting information system?
Why is the AIS an important topic to study?
What is the role of the AIS in the value chain?
How does the AIS provide information for
decision making?
What are the basic strategies and strategic
positions an organization can pursue?
 Chapter 2:
Business Processes
Chapter Outline
What are the basic business activities in
which an organization engages?
What role does the data processing cycle
play in organizing business activities and
providing information to users?
What is the role of the information
system and enterprise resource planning
in modern organizations?
INFORMATION NEEDS AND
BUSINESS ACTIVITIES
Businesses engage in a variety of activities, including:
Acquiring capital An effective
Each AIS
activity
Buying buildings and equipment needsrequires
to be able to
Hiring and training employees integrate
Purchasing inventory
different types
information of
Doing advertising and marketing of decisions!
different types
Selling goods or services
(financial
Each or non-
decision
Collecting payment from customers
financial) and
Paying employees requires
from different
Paying taxes different types
Paying vendors
sources (internal
oforinformation.
external)
 INTERACTION WITH EXTERNAL
AND INTERNAL PARTIES

External Internal
Parties
AIS
Parties

The interaction is typically two-way, in that

the AIS sends information to and receives
information from these parties.
BUSINESS CYCLES
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
BUSINESS CYCLES
The transaction cycle is a process:
Begins with capturing data about a transaction
Ends with an information output, such as
financial statements
BUSINESS CYCLES
Many business activities are paired in give-
get exchanges
The basic exchanges can be grouped into
five major transaction cycles.
Revenue cycle
Expenditure cycle
Production cycle
Human resources/payroll cycle
Financing cycle
BUSINESS CYCLES
Many business activities are paired in give-
get exchanges
The basic exchanges can be grouped into
five major transaction cycles.
Revenue cycle
Expenditure cycle
Production cycle
Human resources/payroll cycle
Financing cycle
REVENUE CYCLE
The revenue cycle involves interactions
with your customers.
You sell goods or services and get cash.

Give Get
Goods Cash
BUSINESS CYCLES
Many business activities are paired in give-
get exchanges
The basic exchanges can be grouped into
five major transaction cycles.
Revenue cycle
Expenditure cycle
Production cycle
Human resources/payroll cycle
Financing cycle
EXPENDITURE CYCLE
The expenditure cycle involves interactions
with your suppliers.
You buy goods or services and pay cash.

Give Get
Cash Goods
BUSINESS CYCLES
Many business activities are paired in give-
get exchanges
The basic exchanges can be grouped into
five major transaction cycles.
Revenue cycle
Expenditure cycle
Production cycle
Human resources/payroll cycle
Financing cycle
PRODUCTION CYCLE
In the production cycle, raw materials and
labor are transformed into finished goods.

Give Raw Get

Materials & Finished
Labor Goods
BUSINESS CYCLES
Many business activities are paired in give-
get exchanges
The basic exchanges can be grouped into
five major transaction cycles.
Revenue cycle
Expenditure cycle
Production cycle
Human resources/payroll cycle
Financing cycle
HUMAN RESOURCES/
PAYROLL CYCLE
The human resources cycle involves
interactions with your employees.
Employees are hired, trained, paid,
evaluated, promoted, and terminated.

Give Get
Cash Labor
BUSINESS CYCLES
Many business activities are paired in give-
get exchanges
The basic exchanges can be grouped into
five major transaction cycles.
Revenue cycle
Expenditure cycle
Production cycle
Human resources/payroll cycle
Financing cycle
FINANCING CYCLE
The financing cycle involves interactions with
investors and creditors.
You raise capital (through stock or debt), repay
the capital, and pay a return on it (interest or
dividends).

Give Get
Cash cash
THE DATA PROCESSING
An important function of the AIS is to
efficiently and effectively process the data
about a companys transactions.
In manual systems, data is entered into paper
journals and ledgers.
In computer-based systems, the series of
operations performed on data is referred to as
the data processing cycle.
THE DATA PROCESSING
The data processing cycle consists of four
steps:
Data input
Data storage
Data processing
Information output
THE DATA PROCESSING

Process
Manipulate the input
(data) to produce
output (information)
Input
Any data or instructions
you enter into a
computer
Output
Data that has been
Storage processed into
information
Area in a computer
that can hold data and
information for future
use
44
THE DATA PROCESSING
Data input
Data storage
Data processing
Information output
DATA INPUT
The first step in data processing is to
capture the data.
Usually triggered by a business activity.
Data is captured about:
The event that occurred
The resources affected by the event
The agents who participated
DATA INPUT
A number of actions can be taken to
improve the accuracy and efficiency of data
input:
Turnaround documents
EXAMPLE: The stub on your telephone bill that you
tear off and return with your check when you pay the
bill.
The customer account number is coded on the
document, usually in machine-readable form, which
reduces the probability of human error in applying the
check to the correct account.
DATA INPUT
A number of actions can be taken to
improve the accuracy and efficiency of data
input:
Turnaround documents
Source data automation
Capture data with minimal human intervention.
EXAMPLES:
ATMs for banking
Point-of-sale (POS) scanners in retail stores
Automated gas pumps that accept your credit card
DATA INPUT
A number of actions can be taken to
improve the accuracy and efficiency of data
input:
Turnaround documents
Source data automation
Well-designed source documents and data
entry screens
DATA INPUT
A number of actions can be taken to
improve the accuracy and efficiency of data
input:
Turnaround documents
Source data automation
Well-designed source documents and data entry
screens
Using pre-numbered documents or having
the system automatically assign sequential
numbers to transactions
THE DATA PROCESSING
Data input
Data storage
Data processing
Information output
DATA STORAGE
Data needs to be organized for easy and
efficient access.
Lets start with some vocabulary terms with
respect to data storage.
DATA STORAGE
Ledger
A ledger is a file used to store cumulative
information about resources and agents. We
typically use the word ledger to describe the set of
t-accounts. The t-account is where we keep track
of the beginning balance, increases, decreases,
and ending balance for each asset, liability,
owners equity, revenue, expense, gain, loss, and
dividend account.
DATA STORAGE
Ledger
Following is an example of a ledger account for
accounts receivable:
GENERAL LEDGER

ACCOUNT: Accounts Receivable Account Number: 120

Date Description Post Ref Debit Credit Balance

01/01/05 42,069.00
01/03/05 Sales S03 1,300.00 43,369.00
01/13/05 Cash collections CR09 4,600.00 38,769.00
01/23/05 Sales S04 5,600.00 44,369.00
DATA STORAGE
Ledger
General ledger
The general ledger is the summary level
information for all accounts. Detail information
is not kept in this account.
DATA STORAGE
Ledger
General ledger
Example: Suppose XYZ Co. has three customers.
Anthony Adams owes XYZ $100. Bill Brown
owes $200. And Cory Campbell owes XYZ $300.
The balance in accounts receivable in the general
ledger will be $600, but you will not be able to tell
how much individual customers owe by looking at
that account. The detail isnt there.
DATA STORAGE
Ledger
General ledger
Subsidiary ledger
The subsidiary ledgers contain the detail accounts
associated with the related general ledger account.
The accounts receivable subsidiary ledger will
contain three separate t-accountsone for
Anthony Adams, one for Bill Brown, and one for
Cory Campbell.
DATA STORAGE
Ledger
General ledger
Subsidiary ledger
The related general ledger account is often called
a control account.

The sum of the subsidiary account balances

should equal the balance in the control account.
DATA STORAGE
Ledger
General ledger
Subsidiary ledger
Coding techniques
Coding is a method of systematically assigning
numbers or letters to data items to help classify
and organize them. There are many types of
codes including sequence code, block codes, and
group codes.
DATA STORAGE
Ledger
General ledger
Subsidiary ledger
Coding techniques
Group coding schemes are often used in
assigning general ledger account numbers.
DATA STORAGE
The chart of accounts is a list of all general
Ledger
ledger accounts an organization uses.
General ledger
The structure of this chart is an important AIS
Subsidiary
issue, as itledger
must contain sufficient detail to meet
the organizations
Coding techniquesneeds.
Chart of accounts
DATA STORAGE
Ledger
General ledger
Subsidiary ledger and some accounting
In manual systems
Coding techniques
packages, the first place that transactions
Chart
are entered is the journal.
of accounts
Journals
DATA STORAGE
An audit trail exists when there is sufficient
Ledger
documentation to allow the tracing of a
General ledger
transaction from beginning to end or from the
Subsidiary ledger
end back to the beginning.
The inclusion
Coding techniquesof posting references and
document numbers enable the tracing of
Chart of accounts
transactions through the journals and ledgers
Journals
and therefore facilitate the audit trail.
Audit trail
DATA STORAGE
Now that weve learned some storage
terminology, lets return to the data storage
process.
When transaction data is captured on a
source document, the next step is to record
the data in a journal.
A journal entry is made for each transaction
showing the accounts and amounts to be
credited.
DATA STORAGE
If you took a principles of financial accounting
class, you probably worked with journals that
looked something like this:

01/15/10 Accounts receivable 2,200

Sales revenue 2,200

01/18/10 Cash 1,800

Accounts receivable 1,800

01/21/10 Salaries expense 900

Cash 900
DATA STORAGE
You may not have gotten much experience with
special journals, but in most real-world situations,
journal entries really work like this.
Entries are originally made in the general journal only
for
Non-routine transactions.
Summaries of routine transactions
Routine transactions are originally entered in special
journals. The most common special journals are:
Credit sales
Cash receipts
Credit purchases
Cash disbursements
DATA STORAGE
Lets work through an example with a
special journal. In this case well use the
sales journal.
DATA STORAGE
On December 1, a sale is made to Avatar
Company for P800. Avatar Company was
sent Invoice No. 201.
Page 5 Sales Journal
Invoice Account Account
Date Number Debited Number Post Ref. Amount
12/01/04 201 Lee Co. 120-122 800.00
DATA STORAGE
The general ledger account number for accounts
receivable is No. 120. Avatar Company was
about the 122nd customer, so their subsidiary
account number is 120-122.
Page 5 Sales Journal
Invoice Account Account
Date Number Debited Number Post Ref. Amount
12/01/10 201 Avatar 120-122 800.00
DATA STORAGE
The next sale on December 1 was made to
ToyStor Co. for P700.

Page 5 Sales Journal

Invoice Account Account
Date Number Debited Number Post Ref. Amount
12/01/10 201 Avatar 120-122 800.00
12/01/10 202 ToyStor 120-033 700.00
DATA STORAGE
The third and final sale on December 1 was
made to Karate Co. for P900.

Page 5 Sales Journal

Invoice Account Account
Date Number Debited Number Post Ref. Amount
12/01/10 201 Avatar 120-122 800.00
12/01/10 202 ToyStor 120-033 700.00
12/01/10 203 Karate 120-111 900.00
DATA STORAGE
Suppose the company making these sales posts
transactions at the end of each day.
Consequently, at days end, they will post each
individual transaction to the accounts receivable
subsidiary ledger:
An P800 increase in accounts receivable (debit) will
be posted to Avatars subsidiary account (120-122).
A P700 debit will be posted to ToyStors subsidiary
account (120-033).
A P900 debit will be posted to Karates subsidiary
account (120-111).
DATA STORAGE
Then a summary journal entry must be made to
the general journal. The sales for the period are
totaled. In this case, they add up to P2,400.

Page 5 Sales Journal

Invoice Account Account
Date Number Debited Number Post Ref. Amount
12/01/10 201 Avatar 120-122 800.00
12/01/10 202 ToyStor 120-033 700.00
12/01/10 203 Karate 120-111 900.00
TOTAL 2,400.00
120/502
DATA STORAGE
The 120/502 that appears beneath the total
indicates that a summary journal entry is made in
the general journal with a debit to accounts
receivable (120) and a credit to sales (502).
Page 5 Sales Journal
Invoice Account Account
Date Number Debited Number Post Ref. Amount
12/01/10 201 Avatar 120-122 800.00
12/01/10 202 ToyStor 120-033 700.00
12/01/10 203 Karate 120-111 900.00
TOTAL 2,400.00
120/502
DATA STORAGE
The entries in the general journal are periodically (or
automatically) posted to the general ledger. The P2,400
debit to accounts receivable will be posted to the
accounts receivable control account, and the P2,400
credit will be posted to the general ledger account for
sales. 12/01/10 Accounts receivable 2,400
Sales revenue 2,400

12/01/10 Cash 1,800

Accounts receivable 1,800

12/01/10 Salaries expense 900

Cash 900
DATA STORAGE
When routine transactions occur, they are recorded in
special journals.
When non-routine transactions occur, they are recorded
in the general journal.
Periodically, the transactions in the special journal are
totaled, and a summary entry is made in the general
journal.
The individual line items in the special journal are posted
to the subsidiary ledger accounts.
The items in the general journal are posted to the general
ledger.
Periodically, the balances in the general ledger control
accounts are compared to the sums of the balances in the
related subsidiary accounts.
COMPUTER-BASED STORAGE
CONCEPTS
Entity
Attribute
Record
Data Value
Field
File
Master File
Transaction File
Database
COMPUTER-BASED STORAGE
CONCEPTS
An entity is something about which
information is stored.
In your universitys student information
system, one entity is the student. The
student information system stores
information about students.
What are some other entities in your
student information system?
COMPUTER-BASED STORAGE
CONCEPTS
Attributes are characteristics of interest
with respect to the entity.
Some attributes that a student information
system typically stores about the student
entity are:
Student ID number
Phone number
Address
What are some other attributes about
students that a university might store?
COMPUTER-BASED STORAGE
CONCEPTS
A field is the physical space where an
attribute is stored.
The space where the student ID number is
stored is the student ID field.

Col. 1-9 Col. 10-30 Col. 31-40 Col. 41-50

328469993 SIMPSON ALICE 4053721111
328500732 ANDREWS BARRY 4057440236
529036409 FLANDERS CARLA 4057475863
COMPUTER-BASED STORAGE
CONCEPTS
A record is the set of attributes stored for a
particular instance of an entity.
The combination of attributes stored for
Barry Andrews is Barrys record.

Col. 1-9 Col. 10-30 Col. 31-40 Col. 41-50

328469993 SIMPSON ALICE 4053721111
328500732 ANDREWS BARRY 4057440236
529036409 FLANDERS CARLA 4057475863
COMPUTER-BASED STORAGE
CONCEPTS
A data value is the intersection of the row
and column.
The data value for Barry Andrews phone
number is 405-744-0236.

Col. 1-9 Col. 10-30 Col. 31-40 Col. 41-50

328469993 SIMPSON ALICE 4053721111
328500732 ANDREWS BARRY 4057440236
529036409 FLANDERS CARLA 4057475863
COMPUTER-BASED STORAGE
CONCEPTS
A file is a group of related records.
The collection of records about all students
at the university might be called the student
file. If there were only three students and
four attributes stored for each student, the
file might appear as shown below:
Col. 1-9 Col. 10-30 Col. 31-40 Col. 41-50
328469993 SIMPSON ALICE 4053721111
328500732 ANDREWS BARRY 4057440236
529036409 FLANDERS CARLA 4057475863
COMPUTER-BASED STORAGE
CONCEPTS
A master file is a file that stores
cumulative information about an
organizations entities.
It is conceptually similar to a ledger in a
manual AIS in that:
The file is permanent
The file exists across fiscal periods
Changes are made to the file to reflect
the effects of new transactions.
COMPUTER-BASED STORAGE
CONCEPTS
A transaction file is a file that contains
records of individual transactions (events)
that occur during a fiscal period.
It is conceptually similar to a journal in a
manual AIS in that:
The files are temporary
The files are usually maintained for one
fiscal period
COMPUTER-BASED STORAGE
CONCEPTS
A database is a set of interrelated,
centrally-coordinated files.
When files about students are integrated
with files about classes and files about
instructors, we have a database.
Student Class
File File

Instructor
File
THE DATA PROCESSING
Data input
Data storage
Data processing
Information output
DATA PROCESSING
Updating data to record the occurrence of an
event, the resources affected by the event,
and the agents who participated, e.g.,
recording a sale to a customer.
Changing data, e.g., a customer address
Adding data, e.g., a new customer.
Deleting data, e.g., removing an old
customer that has not purchased anything in
5 years.
DATA PROCESSING
Updating can be done through several
approaches:
Batch processing
DATA PROCESSING
Batch processing:
Source documents are grouped into batches,
and control totals are calculated.
Periodically, the batches are entered into the
computer system, edited, sorted, and stored in
a temporary file.
The temporary transaction file is run against
the master file to update the master file.
Output is printed or displayed, with error
reports, transaction reports, and control totals.
DATA PROCESSING
Updating can be done through several
approaches:
Batch processing
On-line Batch Processing
DATA PROCESSING
On-line batch processing:
Transactions are entered into a computer
system as they occur and stored in a
temporary file.
Periodically, the temporary transaction
file is run against the master file to
update the master file.
The output is printed or displayed.
DATA PROCESSING
Updating can be done through several
approaches:
Batch processing
On-line Batch Processing
On-line, Real-time Processing
DATA PROCESSING
On-line, Real-time Processing
Transactions are entered into a computer
system as they occur.
The master file is immediately updated
with the data from the transaction.
Output is printed or displayed.
DATA PROCESSING
Updating can be done through several
approaches:
Batch processing
On-line Batch Processing
On-line, Real-time Processing
If youre going through enrollment,
which of these approaches would you
prefer that your university was using?
Why?
THE DATA PROCESSING
Data input
Data storage
Data processing
Information output
INFORMATION OUTPUT
This output can be in the form of:
Documents
Documents are records of transactions or other
company data.
Documents generated at the end of the
transaction processing activities are known as
operational documents (as opposed to source
documents).
INFORMATION OUTPUT
This output can be in the form of:
Documents
Reports
Reports are used by employees to control
operational activities and by managers to make
decisions and design strategies.
They may be produced on a regular basis, on an
exception basis or on demand
Organizations should periodically reassess
whether each report is needed.
INFORMATION OUTPUT
This output can be in the form of:
Documents
Reports
Queries
Queries are user requests for specific pieces of
information.
They may be requested periodically or one
time
They can be displayed on monitor (softcopy)
or on screen (hardcopy)
INFORMATION OUTPUT
Output can serve a variety of purposes:
Financial statements can be provided to both
external and internal parties.
Some outputs are specifically for internal use:
For planning purposes
Budgets: an entitys formal expression of goals
in financial terms
Sales forecasts
INFORMATION OUTPUT
Output can serve a variety of purposes:
Financial statements can be provided to both
external and internal parties.
Some outputs are specifically for internal use:
For planning purposes
For management of day-to-day operations
INFORMATION OUTPUT
Output
Performance
can reports
serve are outputs that
a variety are used for
of purposes:
control purposes.
Financial statements can be provided to both
These reports compare an organizations standard or
external
expected and internal
performance parties.
with its actual outcomes.
Some outputs
Management are specifically
by exception for internal
is an approach use:
to utilizing
performance reports
For planning that focuses on investigating and
purposes
acting on management
For only those variances that operations
of day-to-day are significant.
For control purposes
INFORMATION OUTPUT
Output can serve a variety of purposes:
Financial statements can be provided to both
external and internal parties.
Some outputs are specifically for internal use:
For planning purposes
For management of day-to-day operations
For control purposes
For evaluation purposes
INFORMATION OUTPUT
Behavioral implications of managerial
reports:
YOU GET WHAT YOU MEASURE!
INFORMATION OUTPUT
Suppose an instructor wants to improve student
learning.
He decides to encourage better attendance by grading
students on attendance (i.e., measuring it).
The result will be better student attendance, i.e., you get
what you measure.
The improved attendance may or may not improve
learning outcomes.
Students may be getting better grades when attendance is
measured, but not learning more.
Some students may in fact reduce their studying because
they believe they can use the attendance score to boost
their grade. This behavior would be a dysfunctional
result of the measurement.
INFORMATION OUTPUT
Budgets can cause dysfunctional behavior.
EXAMPLE: In order to stay within budget, the IT
Department did not buy a security package for its
system.
A hacker broke in and devastated some of their data
files.
Critical security measures were foregone in order to
meet budgetary goals.
The resulting costs far outweighed the savings.
INFORMATION OUTPUT
Budgeting can also be dysfunctional in
that the focus can be redirected to
creating acceptable numbers instead of
achieving organizational objectives.
Does this mean organizations shouldnt
budget?
INFORMATION OUTPUT
The saying goes, Not many people sit around
and have a roast goose fall in their lap.
In other words, if you want a roast goose, you
have to aim.
With financial results, youre also unlikely to
achieve when you dont aim.
Just be careful where you aim!
ROLE OF THE AIS
The traditional AIS captured financial data.
Non-financial data was captured in other,
sometimes-redundant systems
Enterprise resource planning (ERP) systems
are designed to integrate all aspects of a
companys operations (including both financial
and non-financial information) with the
traditional functions of an AIS.
Chapter Summary
What are the basic business activities in
which an organization engages?
What role does the data processing cycle
play in organizing business activities and
providing information to users?
What is the role of the information
system and enterprise resource planning
in modern organizations?
End of Chapter 2
 Chapter 3:
Systems Development and
Documentation Techniques
Chapter Outline
What is the purpose of documentation?
Why do accountants need to understand
documentation?
What documentation techniques are used in
accounting systems?
What are data flow diagrams and
flowcharts?
How are they alike and different?
How are they prepared?
Types of Documentation Tools
Narrative (written description)
Flowcharts
Diagrams
Other written materials
Types of Documentation Tool
Data flow diagrams
Graphical descriptions of the sources and
destinations of data. They show:
Where data comes from
How it flows
The processes performed on it
Where it goes
Types of Documentation Tool
Data flow diagrams
Flowcharts
Document flowcharts describe the flow of
documents and information between
departments or units.
System flowcharts describe the relationship
between inputs, processing, and outputs for a
system.
Program flowcharts describe the sequence of
logical operations performed in a computer
program.
DATA FLOW DIAGRAMS
A data flow diagram (DFD)
graphically describes the flow of data
within an organization. It is used to:
Document existing systems
Plan and design new systems
There is no black-and-white approach
to developing a DFD.
DATA FLOW DIAGRAMS
Example of a data flow
Accounts
diagram of the customer Receivable
payment process

Remittance
1.0 data 2.0
Customer Process Update Credit
Customer Payment A/R Receivables Manager
payment Information

Deposit

Bank
DATA FLOW DIAGRAMS
A data flow diagram consists of four
basic elements:
Data sources and destinations
Data flows
Transformation processes
Data stores
DATA FLOW DIAGRAMS
A data flow diagram consists of
four basic elements:
Data sources and destinations
Data flows
Transformation processes
Data stores
DATA FLOW DIAGRAMS
Data sources and destinations
Appear as squares
Represent organizations
or individuals that send
or receive data used or
produced by the system
An item can be both a source and a
destination
DATA FLOW DIAGRAMS
Can you tell which are
Accounts
sources and which are Receivable
destinations?

Remittance
1.0 data 2.0
Customer Process Update Credit
Customer Payment A/R Receivables Manager
payment Information

Deposit

Bank
DATA FLOW DIAGRAMS
A data flow diagram consists of
four basic elements:
Data sources and destinations
Data flows
Transformation processes
Data stores
DATA FLOW DIAGRAMS
Data flows
Appear as arrows
Represent the flow of data
between sources and destinations,
processes, and data stores
DATA FLOW DIAGRAMS
Does it appear that a data
flow can be two-way? If Accounts
Receivable
so, how is it handled?

Remittance
1.0 data 2.0
Customer Process Update Credit
Customer Payment A/R Receivables Manager
payment Information

Deposit

Bank
DATA FLOW DIAGRAMS
If two data elements flow together, then the
use of one data flow line is appropriate.

Cash Receipt & Remittance Slip Process

Customer
Payment
DATA FLOW DIAGRAMS
If a data flow is two-way, use a bi-
directional arrow.

General Update
Ledger Receiv-
ables
DATA FLOW DIAGRAMS
If the data elements do not always flow
together, then multiple lines will be
needed.

Customer Inquiry
Process
Customer Customer Payment Payment
DATA FLOW DIAGRAMS
A data flow diagram consists of
four basic elements:
Data sources and destinations
Data flows
Transformation processes
Data stores
DATA FLOW DIAGRAMS
Processes
Appear as circles
Represent the transformation of
data
DATA FLOW DIAGRAMS
Every process must have at
least one data inflow and at Accounts
Receivable
least one data outflow. Why?

Remittance
1.0 data 2.0
Customer Process Update Credit
Customer Payment A/R Receivables Manager
payment Information

Deposit

Bank
DATA FLOW DIAGRAMS
Data stores
Appear as two horizontal lines
Represent a temporary or
permanent repository of data
DATA FLOW DIAGRAMS
Notice that the inflows
Accounts
and outflows to the data Receivable
store are not labeled.

Remittance
1.0 data 2.0
Customer Process Update Credit
Customer Payment A/R Receivables Manager
payment Information

Deposit

Bank
DATA FLOW DIAGRAMS
Subdividing the DFD
The highest level of DFD is called a context
diagram.
It provides a summary-level view of the
system.
It depicts a data processing system and the
external entities that are:
Sources of its input
Destinations of its output
DATA FLOW DIAGRAMS
Depart- Govt.
ments Agencies

Employee
Payroll Employees
Processing checks
System

Bank
Human
Resources
Manage-
ment
DATA FLOW DIAGRAMS
Depart-
ments Employees
Human Employee
New employee paychecks
Resources Time
form
cards
1.0
Employee Update 2.0
Payroll
Change empl. Pay
check
form Payroll Employ- Bank
file ees

Payroll
Disburse-
3.0 5.0
ment data
Prepare Employee/ Update
reports Payroll file Gen.
Ledger
Payroll tax
Payroll disb. voucher
report
4.0 General
Pay Ledger
taxes Tax report
Manage- & payment
ment Govt.
Agencies
DATA FLOW DIAGRAMS
Depart-
ments Employees
Human Employee
New employee paychecks
Resources Time
form
cards
1.0
Employee Update 2.0
Payroll
Change empl. Pay
check
form Payroll Employ- Bank
file ees

Payroll
Disburse-
3.0 5.0
ment data
Prepare Employee/ Update
reports Payroll file Gen.
Ledger
Payroll tax
Payroll disb. voucher
report
4.0 General
Pay Ledger
taxes Tax report
Manage- & payment
ment Govt.
Agencies
DATA FLOW DIAGRAMS
RULE 1: Understand the system. Observe
the flow of information and interview people
involved to gain that understanding.
RULE 2: Ignore control processes and
control actions (e.g., error corrections). Only
very critical error paths should be included.
RULE 3: Determine the system
boundarieswhere it starts and stops. If
youre not sure about a process, include it for
the time being.
DATA FLOW DIAGRAMS
RULE 4: Draw the context diagram first, and
then draw successively greater levels of detail.
RULE 5: Identify and label all data flows.
The only ones that do not have to be labeled
are those that go into or come out of data
stores.
RULE 6: Data flows that always flow together
should be grouped together. Those that do not
flow together should be shown on separate
lines.
DATA FLOW DIAGRAMS
RULE 7: Show a process (circle) wherever a
data flow is converted from one form to another.
Every process should have at least one incoming
data flow and at least one outgoing data flow.
RULE 8: Transformation processes that are
logically related or occur simultaneously can be
grouped in one bubble.
RULE 9: Number each process sequentially. A
process labeled 5.0 would be exploded at the
next level into processes numbered 5.1, 5.2, etc.
DATA FLOW DIAGRAMS
RULE 10: Process names should include
action verbs, such as update, prepare, etc.
RULE 11: Identify and label all data stores,
whether temporary or permanent.
RULE 12: Identify and label all sources and
destinations. An entity can be both a source
and destination. You may wish to include
such items twice on the diagram, if needed, to
avoid excessive or crossing lines.
DATA FLOW DIAGRAMS
RULE 13: As much as possible, organize the
flow from top to bottom and left to right.
RULE 14: Youre not likely to get it beautiful
the first time, so plan to go through several
iterations of refinements.
RULE 15: On the final copy, lines should not
cross. On each page, include:
The name of the DFD
The date prepared
The preparers name
 DATA FLOW DIAGRAMS
4 Now that weve been through the guidelines
for developing DFDs, lets go back to the
chapter example and see if we can re-create a
part of it.
4 You may wish to create a table with the
following headings to organize your
information:
Data Inputs
Processes
Data Outputs
 DATA FLOW DIAGRAMS
Data Inputs Processes Data Outputs
 DATA FLOW DIAGRAMS
4 The first paragraph of the narrative for the payroll process
reads as follows:
When employees are hired, they complete a new employee form.
When a change to an employees payroll status occurs, such as a raise
or a change in the number of exemptions, human resources completes
an employee change form. A copy of these forms is sent to payroll.
These forms are used to create or update the records in the
employee/payroll file and are then stored in the file. Employee records
are stored alphabetically.
 DATA FLOW DIAGRAMS
4 The first paragraph of the narrative for the payroll process
reads as follows:
When employees are hired, they complete a new employee form.
When a change to an employees payroll status occurs, such as a
raise or a change in the number of exemptions, human resources
completes an employee change form. A copy of these forms is sent
to payroll. These forms are used to create or update the records in
the employee/payroll file and are then stored in the file. Employee
records are stored alphabetically.

The portion marked in red relates to activities that go on outside the

boundaries of the payroll system. Consequently, these activities will not be
included on the DFD.
 DATA FLOW DIAGRAMS
4 The first paragraph of the narrative for the payroll process
reads as follows:
When employees are hired, they complete a new employee form.
When a change to an employees payroll status occurs, such as a
raise or a change in the number of exemptions, human resources
completes an employee change form. A copy of these forms is sent
to payroll. These forms are used to create or update the records in
the employee/payroll file and are then stored in the file. Employee
records are stored alphabetically.

The portion marked in red suggests two data flows coming into the payroll
process (new employee forms and employee change forms). The source of
the inflows is the human resources department.
 DATA FLOW DIAGRAMS
Data Inputs Processes Data Outputs
New employee forms and
employee change forms
(from H.R. Dept.)
 DATA FLOW DIAGRAMS
4 The first paragraph of the narrative for the payroll process
reads as follows:
When employees are hired, they complete a new employee form.
When a change to an employees payroll status occurs, such as a
raise or a change in the number of exemptions, human resources
completes an employee change form. A copy of these forms is sent
to payroll. These forms are used to create or update the records in
the employee/payroll file and are then stored in the file. Employee
records are stored alphabetically.

The sentence marked in red suggests a process (update employee records)

with the data outflow going to a data store (the employee/payroll file).
 DATA FLOW DIAGRAMS
Data Inputs Processes Data Outputs
New employee forms and Update records (read from Updated employee/
employee change forms file and record) payroll file
(from H.R. Dept.)
 DATA FLOW DIAGRAMS
4 The first paragraph of the narrative for the payroll process
reads as follows:
When employees are hired, they complete a new employee form.
When a change to an employees payroll status occurs, such as a
raise or a change in the number of exemptions, human resources
completes an employee change form. A copy of these forms is sent
to payroll. These forms are used to create or update the records in
the employee/payroll file and are then stored in the file. Employee
records are stored alphabetically.

The final sentence in this paragraph provides information about the

physical storage of the data. Physical information is utilized in flowcharts
but not in data flow diagrams.
 DATA FLOW DIAGRAMS
Data Inputs Processes Data Outputs
New employee forms and Update records (read from Updated employee/
employee change forms file and record) payroll file
(from H.R. Dept.)

We will not do the entire DFD, however, you could finish this table by
reading the remainder of the narrative in Table 3-1 in your textbook. The
portion of the table completed so far allows us to draw the segment of the
DFD that is highlighted on the following slide.
 DATA FLOW DIAGRAMS
Depart-
ments Employees
Employee
New employee Time paychecks
Human form cards
Resources
1.0
Update 2.0
Employee Payroll
empl. Pay
Change check
Payroll Employ- Bank
form
file ees

Payroll
Disburse-
3.0 5.0
ment data
Prepare Employee/ Update
reports Payroll file Gen.
Ledger
Payroll tax
Payroll disb. voucher
report
4.0 General
Pay Ledger
taxes Tax report
Manage- & payment
ment Govt.
Agencies
 DATA FLOW DIAGRAMS
4 Keep the following in mind as you develop your
DFD:
Remember to ignore control activities, such as error
correction processes.
Some data inputs and outputs will not appear on the first
level of the DFD but appear as the processes are exploded
into greater levels of detail.
 DATA FLOW DIAGRAMS
4 The data flow diagram focuses on the logical flow of
data.
4 Next, we will discuss flowcharts, which place greater
emphasis on physical details.