Accounting Information Systems

Fifteenth Edition, Global Edition

Chapter 2
Overview of Transaction
Processing and Enterprise
Resource Planning Systems

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Learning objectives of this chapter

Describe the data processing cycle used to

process transactions, including how data is
input, stored, and processed and how
information is output.

Discuss how organizations use enterprise

resource planning (E R P) systems to
process transactions and provide
information.

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How do an organization’s business processes affect the design of its AIS? Give
examples of how differences among organizations are reflected in their AIS

An organization’s AIS must reflect its business processes and its line of business. For example:
 Manufacturing companies will need a set of procedures and documents for the
production cycle; non-manufacturing companies do not.
 Passenger service companies (e.g., airlines) generally receive payments in advance
of providing services. Therefore, accounts receivable procedures are not needed;
instead, they must develop procedures to account for prepaid revenue.
 Financial institutions do not need extensive inventory control systems.
 Construction firms typically receive payments at regular intervals, based on the
percentage of work completed. Thus, their revenue cycles must be designed to
track carefully all work performed and the amount of work remaining to be done.
 Service companies do not sell physical goods and, therefore, do not need inventory
control systems. They must develop and maintain detailed records of the work
performed for each customer to provide backup for the amounts billed. Tracking
employee time is especially important for these firms because labor is the major
cost component.

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The Data Processing Cycle

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Data Input
Steps in Processing Input are:

 Capture transaction data triggered by a

business activity (event).
 Make sure captured data are accurate and
complete.
 Ensure company policies are followed (e.g.,
approval of transaction).

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Data Capture
Information collected for an activity
includes:
 Activity of interest (e.g., sale)
 Resources affected (e.g., inventory and
cash)
 People who participated in the activity
(e.g., customer and employee)
Information comes from source
documents.
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Source Documents
 Captures data at the source when the
transaction takes place
 Paper source documents (e.g. invoices,
timecards, sales orders, and purchase
orders).
 Turnaround documents (e.g. Utility bill).
 Source data automation (captured data
from machines, e.g., point-of-sale scanners
at grocery store)

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Data Storage
 General ledger (contains summary-level data
on main accounts).
 Subsidiary ledgers (e.g., Accounts receivable)

 Chart of accounts: List of numbers assigned to

each account

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Coding Techniques
Sequence codes—items numbered consecutively to
account for all items (i.e., pre-numbered forms).
Block code—blocks of numbers reserved for specific
categories of data (i.e., product numbers that start
with a 2 are refrigerators).

Product Code Product Type

1000000-1999999 Electric range
2000000-2999999 Refrigerator
3000000-3999999 Washer
4000000-4999999 Dryer

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Coding Techniques
 Group codes—two or more subgroups of digits
used to code items
Digit Position Meaning
1-2 Product line, size, style
3 Color
4-5 Year of manufacture
6-7 Operational features

What does AIS course

number 34432 tell you?

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Coding Techniques

Mnemonic codes—letters and numbers

interspersed to identify an item (i.e. Dry300W05 is
low end (300), white (W) dryer (D R Y) made by
Sears manufacturer (05)).

*Coding should be consistent, has a meaning, and

easy to remember

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Data Storage Elements
 Data is stored in master files or transaction files.

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Data Processing

Four types of processing (C R U D):

 Creating new records (e.g., adding a customer)
 Reading existing data
 Updating previous record or data
 Deleting data

Data processing can be batch processed (e.g.,

post records at the end of the business day) or in
real-time (process as it occurs).

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Information Output
The data stored in the database files can be
viewed
Online (soft copy)
Printed out (hard copy)
 Document (e.g., sales invoice)
 Report (e.g., monthly sales report)
 Query (question for specific information in
a database, e.g., Which division had the
most sales for the month?)
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Test Your Understanding

Please login into: Socrative.com

Choose: Student login
Room name: 6011ACC

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Enterprise Resource
Planning (E R P) Systems

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 Finance
Inventory

HR
Sales

Shop floor
execution
Production
planning

Vend
or
 Centralized System
[ERP]
Finance
Inventor
y
HR

Sales
ERP
Shop floor
execution
Production
planning

Vendor
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Enterprise Resource
Planning (E R P) Systems
 Integrates activities from the entire
organization
 Revenue Cycle
 Expenditure Cycle
 Production Cycle
 H/R Payroll Cycle
 General Ledger and Reporting System

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 Advantages of E R P System
 Integrated enterprise-wide single view of the
organization’s data which streamlines the flow
of information.
 Integrated financial processes: Example: An
online retailer's ERP system integrates order
processing, inventory management, and accounts
payable. When a customer places an order, the
system updates inventory, processes the payment,
and records the transaction in the general ledger.
 Automation of routine tasks/reduce
cost/increase customer satisfaction

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 Advantages of E R P System
 Data captured once (i.e., no longer need sales
to enter data about a customer and then
accounting to enter same customer data for
invoicing).

 Greater visibility and monitoring capabilities

for management

 Standardization of procedures and reports

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 Advantages of E R P System
 Improve access of control of the data through security
settings (also use robust authentication and encryption,
to protect sensitive customer information and ensure
data security and compliance with financial regulations).
 Streamline audit trails: The system provides a
comprehensive audit trail, allowing auditors to trace all
changes to financial transactions, making the auditing
process more efficient.
 Enhance decision making (e.g. producing data
analytics to identify sales trends. The system generates
reports that help the company decide which products to
promote, which stores to expand, and which to close,…
etc).
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Disadvantages of E R P
System
Costly
Significant amount of time to implement
Complexity
User resistance (learning new things is
sometimes hard for employees)

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 Activity 1
Identify whether the following transactions belong
in a master file or a transaction file.
 Update customer address change

 Update unit pricing information

 Record daily sales

 Record payroll checks

 Change employee pay rates

 Record Sales Commissions

 Change employee office location

 Change customer credit limit

 Change vendor payment discount terms

 Record purchases

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 Activity 1
Identify whether the following transactions belong in a
master file or a transaction file.
 Update customer address change: Master

 Update unit pricing information : Master

 Record daily sales : Transaction
 Record payroll checks : Transaction
 Change employee pay rates : Master
 Record Sales Commissions : Transaction
 Change employee office location : Master

 Change customer credit limit : Master

 Change vendor payment discount terms : Master

 Record purchases : Transaction

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Activity 2
Describe an audit trail
 An audit trail provides a means to check the accuracy and
validity of postings to the ledger. The posting references
and document numbers help provide the audit trail. An
audit trail exists when company transactions can be traced
through the AIS from where it originated to where they
end up on the financial statements.

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 Activity 3
 Describe the relationship between the general & subsidiary ledgers.
The general ledger contains summary-level information about every
asset, liability, equity, revenue, and expense account in an
organization. The balances in general ledger accounts form the starting
point for preparation of financial statements and various other financial
reports.
A subsidiary ledger provides support for any general ledger account for
which individual subaccounts (e.g., accounts receivable, accounts
payable, inventory, and fixed assets) are required. The subsidiary ledger
records and maintains the detail-level information by having a separate
record for each customer, vendor, inventory item, or fixed asset. The
sum of the subsidiary ledger balances should equal the balance in the
general ledger account.
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Key Terms
• Data processing cycle • Entity
• Source documents • Attributes
• Turnaround documents • Field
• Source data automation • Record
• General ledger • Data value
• Subsidiary ledger • File
• Control account • Master file
• Coding • Transaction file
• Sequence code • Database
• Block code • Batch processing
• Group code • Online, real-time processing
• Mnemonic code • Document
• Chart of accounts • Report
• Specialized journal • Query
• Audit trail • Enterprise resource planning (E R P)
system
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