Overview Of

Business Processes

Chapter 2

Addis Ababa University; School of Commerce; Wogayeu W. 1-1

 Learning Objectives
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 Explain the three basic functions performed by

an accounting information system (AIS);
 Describe the documents and procedures used in
an AIS to collect and process transaction data;
 Discuss the types of information that can be
provided by an AIS.
 Describe the basic internal control objectives of
an AIS and explain how they are accomplished.

Addis Ababa University; School of Commerce; Wogayeu W.

  What are the three basic Functions of AIS?
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1. Collecting and storing data about the organization’s business

activities and transactions efficiently and effectively:
 Capture transaction data on source documents.
 Record transaction data in journals, which present a chronological
record of what occurred.
 Post data from journals to ledgers, which sort data by account type.
2 Providing management with information useful for decision making:
 In manual systems, this information is provided in the form of reports
that fall into two main categories:
– financial statements
– managerial reports
3 Providing adequate internal controls:
 Ensure that the information produced by the system is reliable.
 Ensure that business activities are performed efficiently and in
accordance with management’s objectives.
 Safeguard organizational assets.
Addis Ababa University; School of Commerce; Wogayeu W.
  What are the 5 basic Subsystems of AIS?
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 They are called Business / Transaction Cycles or Modules of AIS.
They are expressed in “give-to-get” relation.

They are the 5 basic exchanges or business functions that generate

accounting data.
1.Revenue cycle: involves activities of selling goods or services and
collecting payment for those sales.
2.Expenditure cycle: involves activities of buying and paying for goods or
services used by the organization.
3.Human resources/Payroll cycle: involves activities of hiring and paying
employees.
4.Production cycle: involves activities of converting raw materials and labor
into finished goods.
5.Financing cycle: involves activities of obtaining necessary funds to run the
organization, repay creditors, and distribute profits to investors.

Addis Ababa University; School of Commerce; Wogayeu W.

  What are the 5 basic Subsystems of AIS? (Cont’d…)
2-5

Financing Expenditure Human

Cycle Cycle Resources

General Ledger & Reporting System

Production Revenue
Cycle Cycle
Addis Ababa University; School of Commerce; Wogayeu W.
  What are the steps of Data Processing Cycle? (Cont’d…)
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
The data processing cycle consists of
four steps:
1. Data input
2. Data storage
3. Data processing
4. Information Output

Addis Ababa University; School of Commerce; Wogayeu W.

  What are the steps of Data Processing Cycle?
(Cont’d…)
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2.3.1. Data Input

The cause for data input is usually business activity (Transaction Cycles).
 Data must be collected about:
1. Each event of interest.
2. The resources affected by each event.
3. The agents who participate in each event
 Data entry can be :
1. Indirectly : paper source documents to collect data and then transferred
into a computer.
2. Directly : through computer data entry screens.

Addis Ababa University; School of Commerce; Wogayeu W.

 What are the steps of Data Processing Cycle?(Cont’d…)
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2.3.1. Data Input.

Generic Example Agent
Resource Event
Agent
Sales Transaction Customer
Inventory Sale
Sales man
Payment to Supplier
Cash Payment Cashier

Supplier
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  What are the steps of Data Processing Cycle?
(Cont’d…)
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2.3.1. Data Input

 Accuracy & Control over data collection is improved by:
1. Pre-numbering Source documents.
2. System automatically assign a sequential number to each new
transaction.
3. Computer instructions.
4. Turnaround documents.
5. Source data automation.

Addis Ababa University; School of Commerce; Wogayeu W.

  What are the steps of Data Processing Cycle?
(Cont’d…)
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2.3.2. Data Processing Methods

 There are two methods:
1. Batch Processing Method is the periodic
updating of the data stored about resources and
agents. e.g. Peachtree accounting Software -
Batch Processing Method
2. On-line, Real-time Processing (OLRT) Method
is the immediate updating as each transaction
occurs . e.g. Peachtree Accounting Software -
On-line, Real-time Processing (OLRT) Method
Addis Ababa University; School of Commerce; Wogayeu W.
  What are the steps of Data Processing Cycle?
(Cont’d…)
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Accounting Cycle in Manual System

Addis Ababa University; School of Commerce; Wogayeu W.

  What are the steps of Data Processing Cycle? ?(Cont’d…)
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1. Journalizing- recording transactions data in

Journals.
 After transaction data have been captured on
source documents, the next step is to record the
data in a journal.
1. General Journal records infrequent or non-routine
transactions.
2. Special Journals simplify the process of recording
large numbers of repetitive transactions. E.g. Sales
Journal, Purchase Journal, Cash Receipts
Journal, Cash Disbursements Journal, etc.
Addis Ababa University; School of Commerce; Wogayeu W.
  What are the steps of Data Processing Cycle? ?(Cont’d…)
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2. Posting – transferring transactions to Ledgers.

 Ledgers are used to summarize the financial status
including the current balance of individual accounts.
a. General ledger contains summary level data for every
A, L, C, revenue, and expense a/c of an entity.
b. Subsidiary ledger records all the detailed data for any
general ledger account that has many individual
subaccounts. E.g. A/R, A/P, Inventory, etc.
 The general ledger account corresponding to a
subsidiary ledger called controlling account – it
contains the total amount for all individual accounts in
the subsidiary ledger.
Addis Ababa University; School of Commerce; Wogayeu W.
 What are the steps of Data Processing Cycle? (Cont’d…)

2.3. 3. Data Storage

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 What are the steps of Data Processing Cycle?
(Cont’d…)

2.3. 3. Data Storage

 Entity - something about which information is stored. E.g. employees, inventory
items, and customers, etc.
 Attributes - characteristics of interest which need to be stored about an entity.
Generally, each type of entity possesses the same set of attributes. The specific data
values for those attributes, however, will differ among entities
 Field – a physical space to store data values or information about attributes of an
entity.
 Record - the set of fields that contain data about various attributes of the same
entity.
 File - a group or a set of related records. For example, all customer receivable
records are stored in an account receivable file.
 Database - a set of interrelated, centrally coordinated files. For example, the
accounts receivable file might be combined with customer, sales, inventory and
related files to form a customer database.
 Ledger - the files used to store cumulative information about resources and agents
in AIS. E.g. Customers, Vendors, Inventory, etc.
Addis Ababa University; School of Commerce; Wogayeu W.
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What are the steps of Data Processing Cycle? (Cont’d…)

2.3.4. Providing Information

 The second function of the AIS.
 Either in the form of papers(hardcopy) or displayed on a computer screen ( soft copy)
 Two main categories:
1. Financial Statements
 They are primarily designed to external users. E.g. Investors, Creditors, etc.
 They comprise:
a. Income statement-results of Operations

b. Retained earning statement-change in R/E

c. Owners equity statement-capital position.

d. Balance sheet- financial Position.

e. Statement of cash flows-cash flows.

2. Managerial Reports
 Provide managers with detailed operational information about the organization’s performance.
 Used for planning & controlling current operations & formulating long-range plans.
 Two important types of managerial reports are:
i. Budget
ii. Performance reports
Addis Ababa University; School of Commerce; Wogayeu W. 2-16
 What are the steps of Data Processing Cycle?
(Cont’d…)
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II. Managerial Reports

A. What is a budget?
 A budget is the formal expression of goals in financial
terms.
 It indicates the revenue to be generated, the capital to be
employed, the expenditure to be incurred and finally
the income to be generated. E.g. Master/Short run
budget, Long run budget, etc.
 It is a managerial tool used to mobilize the resources.
E.g. Money, Labor, Capital, Materials, etc.

Addis Ababa University; School of Commerce; Wogayeu W.

 What are the steps of Data Processing Cycle?
(Cont’d…)
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II. Managerial Reports

B. What is a performance report?
 It the list of the budgeted and actual amounts of revenues
and expenses and also shows the variances, or differences,
between these two amounts.
ABC Company
Performance Report
Budget Actual Variance
Sales $32,400 $31,500 ($900)U
CGS 12, 000 14,000 (2,000)U
GM $20,400 $17,500 ($2,900)U
Expenses 9,000 7,000 2,000 F
Op. Income $11,400 $10,500 ($900)U
Addis Ababa University; School of Commerce; Wogayeu W.
 What is Internal Control ?
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 The third function of an AIS is to provide adequate

internal controls to accomplish three basic objectives:
1. Ensure that the information is reliable.
2. Ensure that business activities are performed efficiently.
3. Safeguard organizational assets.
 The two important methods for accomplishing these
objectives are :
1. Adequate documentation of all business activities.
2. Effective segregation of duties.
Addis Ababa University; School of Commerce; Wogayeu W.
  What is Internal Control ?(Cont’d…)
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 A. Adequate Documentation
 It refers to source documents, records, reports,
financial and accounting policies manual, etc.
1. It allows management to verify that assigned
responsibilities were completed correctly.
2. It can help organizations quickly detect potential
problems.
3. It can also ensure that an organization does not
make commitments it can not keep.
4. It provides policy & procedures manual.
Addis Ababa University; School of Commerce; Wogayeu W.
 What is Internal Control ? (Cont’d…)
B. Segregation of Duties
 It refers to dividing responsibility for different portions of a transaction among
several people.
 It helps to safeguard assets and improve accuracy because each person can
look at and thereby limit the others’ actions.
 What functions should be performed by different people?
– authorizing transactions.
– recording transactions.
– maintaining custody of assets.
 Small organizations however do not always have enough staff to segregate
duties effectively.
 Effective control can still be achieved there through close supervision and
owner performance of some key business activities. E.g. Write checks on the
company’s account , approve the granting of credit to new customers or the
extension of additional credit to existing ones should made by Principals .
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 Thank You for Your Attention!
22

Any
Questions?

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The End
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