Chapter 2 - Foundational Concepts Of The AIS
Instructors Manual
Ø Interrelationship Of Business Processes And The AIS. Business processes occur so that organizations may serve its customers. As the many business processes occur, all of the data generated must be collected and processed by the accounting information system. The accounting information system collects detailed information from these business processes. In manual systems, this collection is through the use of source documents, special journals, and subsidiary ledgers. As this detailed information is processed, it is summarized in the general ledger accounts. Whether the system is manual or computerized, it must collect the data from business processes, summarize and process this data, and provide outputs.
Ø Types Of Accounting Information Systems.
o Manual Systems are those systems that use manual record keeping processes and paper-based records. Usually, that includes only very small organizations. These manual systems use paper-based documents such as source documents, turnaround documents, general ledger, general journal, special journals, subsidiary ledgers, and employees follow certain processes to record transactions in the documents. Even in a computerized system, some of these manual steps may still occur. For example, a human may write information on a source document before it is entered into an IT system.
o Legacy Systems. Legacy systems are older IT systems that may have been in place within the organization for many years. These are usually systems based on mainframe host computers and older technology. They were written in computer languages such as COBOL or Basic. In 2002, an estimate indicated that at least 80% of organizations had legacy systems. There are both advantages and disadvantages to legacy systems. When the benefits of newer systems outweigh the advantages of the legacy systems, many companies replace the legacy systems with newer technology. As an alternative to replacing legacy systems, some organizations may just enhance them. Two methods of enhancing legacy systems are screen scrapers and enterprise application integration.
o Modern, Integrated Systems. These systems are based on current technology and fall into three categories. These systems are purchased software, rather than software developed internally. Purchased software has the advantages of lower costs, fewer bugs, and a shorter implementation time.
Ø Accounting Software Market Segments. Accounting software can be categorized according to the type of enterprise is its intended market. The four categories of accounting software types are small companies, midmarket companies, beginning ERP, and high end or tier 1 ERP. Small company accounting software is intended for companies with revenue of approximately $250,000 or less. Midmarket accounting software is targeted to companies with revenue between $250,000 and $10 million. Beginning ERP is intended for companies with revenue between $10 and $100 million. Tier 1 ERP systems are targeted to companies with revenue in excess of $100 million. Software companies are consistently trying to expand the market they serve and this leads to software vendors trying to serve the category above or below them. Thus, a single software system might be targeted to companies slightly larger or smaller than the original, intended market.
Ø Input Methods For AIS. Almost all business processes generate some type of accounting data. There are many different types of processes, and many different ways to capture the data from these processes.
o Source Documents And Keying. Transaction data is often captured on pre-printed, sequentially numbered source documents. From this source document, the data is keyed (typed in) into an IT system. This process is time consuming and error prone. Many companies have replaced this source document and keying approach with newer technology.
o Bar Codes. Bar codes are symbols on product packaging. You see these bar codes on products you buy at department stores. Bar codes can be used with a bar code reader to input inventory movement and employee time.
o Point Of Sale Systems. The most well-known use of bar codes is in Point of Sale Systems. The Universal Product Code on products is read by a bar code scanner at the cash register. Many retail establishments use point of sale systems.
o Electronic Data Interchange. The intercompany, computer-to-computer transfer of business documents in a standard format. EDI permits the electronic transmission of purchase orders, invoices, and payments between trading partners.
o E-Business And E-Commerce. E-business includes all forms of online electronic business transactions and processing, whereas, e-commerce is online buying and selling by consumers. When data is exchanged electronically, much of the manual processing is eliminated, thereby reducing time, cost, and errors.
Ø Processing Methods
o Batch Processing. In batch processing, all similar transactions within a specified time are grouped together and processed as a batch. This method is efficient for large volumes of like transactions; it has a better audit trail and is easier to control, the hardware and software systems can be cheaper and simpler, and personnel become specialized. However, data duplication is likely; it is not well suited to changes in only a few records; maintenance of files can be more time consuming; integration across the enterprise is more difficult; and there is an inherent time lag.
o Online And Real Time Processing. Each transaction is entered and processed as it occurs, in real-time. This eliminates the time lag inherent in batch systems; input errors can be checked as data is entered; files are updated in real-time, and integration of business processes is easier. However, the hardware and software is more expensive and complex; there may be more susceptibility to unauthorized access; ad they are more difficult to audit.
Ø Outputs Of The AIS. There are many kinds of outputs and only a few are described here. Some outputs are documents exchanged with trading partners such as invoices, statements, or purchase orders. Some are internal documents such as credit memorandums. Some outputs are in the form of reports for either internal or external users. These could include financial statements or aged receivables reports. Internal reports might be printed, viewed on a screen, or customizable queries.
Ø Documenting Systems. A picture of a system in the form of a chart or map is a concise, complete, and easy-to-understand way to view a process or system.
o Process Maps. It is a pictorial representation of a business process using five symbols. It shows the steps and sequence of a business process and may show flow through individual departments.
o System Flowcharts. It shows inputs, computerized processing, and outputs of a computer system. It displays the sequence of processes and the media used in processing and storage. It uses standard flowchart symbols.
o Document Flowcharts. It also uses standard flowchart symbols, but shows only the flow of documents among or between departments or units. They are useful in understanding document flow and some aspects of internal controls.
o Data Flow Diagrams. It shows the logical design of a system using four symbols. They re used by system professionals in structured design to show successive exploded levels of detail.
o Entity Relationship Diagrams. It is a pictorial representation of the logical structure of a database. It shows the entities, the attributes of those entities, and the cardinality, or the relationships between entities.
Ø Client-Server Computing. In a client-server system, two types of computers are networked together to accomplish processing. Client computers are “smart” terminals that can share some of the processing tasks. The server manages ad stores the large database and runs complex application programs. Tasks are assigned to either the client or server on the basis of which can handle the task most efficiently. In distributed presentation, the client manipulates data for presentation, but does not do any other significant processing. In distributed applications, the client PC does participate in processing beyond presentation of data. Many ERP systems use a web browser and individual PCs as the client computers.
Ø Ethical Considerations At The Foundation Of AIS. An AIS can be used as a tool to conduct or cover up fraud or theft. If the IT systems are not closely monitored, these frauds could go undetected for long periods. As companies choose and implement IT systems, they must consider the ability to monitor these systems for fraud or unethical behavior.
Ø Appendix A: Resources, Events, Agents In AIS. The REA model views accounting systems as data about resources, events, and agents. Resources are assets such as cash or inventory. Events are the business processes, and agents are parties such as the customer or vendor. REA is used as a model to understand accounting systems, but as of yet is limited in the practical application.
1