AIS Ch2

Accounting
Information
Systems
Chera Emiru
Chera Emiru/AIS/2005/
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Overview of
Business Processes
Chapter 2
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Learning Objectives
1 Explain the three basic functions performed by an
accounting information system (AIS).
2 Describe the documents and procedures used in an
AIS to collect and process transaction data.
3 Discuss the types of information that can be provided
by an AIS.
4 Describe the basic internal control objectives of an
AIS and explain how they are accomplished.
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Introduction: S&S, Inc.
 The grand opening of S&S is two weeks
away.
 Scott and Susan recognize that they need
qualified accounting help and have hired a
full-time accountant, Ashton Fleming.
 Ashton is responsible for creating an
accounting information system (AIS).
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 What questions does Ashton ask himself?
– How am I going to organize things?
– Where do I start?
– What information does S&S need in order to
operate effectively?
– How can that information be provided?
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– How am I going to collect and process data
about all the types of transactions that S&S will
engage in?
– How do I organize all the data that will be
collected?
– How should I design the AIS so that the
information provided is reliable and accurate?
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Learning Objective 1
Explain the three basic functions an
accounting information system
(AIS) performs.
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Introduction
 This chapter provides an overview
of how an AIS can perform its three
basic functions :
1. To collect and store data about the
organization’s business activities and
transactions efficiently and effectively
2 To provide information useful for decision
making
3 To provide adequate controls to ensure that data
are recorded and processed accurately
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Introduction
 This chapter 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
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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
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The Three Basic Functions
Performed by an AIS
1 To collect and store 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.
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Performed by an AIS
2 To provide 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
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Performed by an AIS
3 To provide 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.
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Basic Subsystems in the AIS
1. The revenue cycle: involves activities of
selling goods or services and collecting
payment for those sales.
2. The expenditure cycle: involves
activities of buying and paying for goods
or services used by the organization.
3. The human resources/payroll cycle:
involves activities of hiring and paying
employees.
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4. The production cycle: involves activities
converting raw materials and labor into
finished goods.
5. The financing cycle: involves activities of
obtaining necessary funds to run the
organization, repay creditors, and distribute
profits to investors.
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Financing Expenditure Human
Cycle Cycle Resources
General Ledger & Reporting System
Production Revenue
Cycle Cycle
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Describe the documents and procedures
used in an AIS to collect and process
transaction data.
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The Data Processing Cycle
 The data processing cycle consists of four
steps:
1. Data input
2. Data storage
3. Data processing
4. Information Output
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The Data Processing Cycle
 The trigger for data input is usually
business activity. 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
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Data Processing Cycle:
Data Input
 Historically, most businesses used paper
source documents to collect data and then
transferred that data into a computer.
 Today, most data are recorded directly
through data entry screens.
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Data Input
 Control over data collection is
improved by:
– prenumbering each source document and
using turnaround documents
– having the system automatically assign a
sequential number to each new transaction
– employing source data automation
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Common Source
Documents and Functions
HUMAN RESOURCES CYCLE
Source Document Function
W4 forms Collect employee

withholding data.
Time cards Record time worked

by employees.
Job time tickets Record time spent

on specific jobs.
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Common Source Documents
and Functions
GENERAL LEDGER AND
REPORTING SYSTEM
Source Document Function
Journal voucher Record entry posted to
general ledger.
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Data Processing
 Batch processing is the periodic updating of
the data stored about resources and agents
 On-line, real-time processing is the
immediate updating as each transaction
occurs
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Data Storage
 An entity is something about which
information is stored.
 Each entity has attributes or characteristics
of interest, which need to be stored.
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Record Transaction Data
in Journals
 After transaction data have been
captured on source documents, 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 debited and credited.
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in Journals
 The general journal records infrequent
or nonroutine transactions.
 Specialized journals simplify the
process of recording large numbers of
repetitive transactions.
 What are the four most common types
of transactions?
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in Journals
1 Credit sales
2 Cash receipts
3 Purchases on account
4 Cash disbursements
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inSales
Journals
Journal
Page 5
Invoice Account Account Post
Date Number Debited Number Ref. Amount
Dec. 1 201 Lee Co. 120-122 3 800.00
Dec. 1 202 May Co. 120-033 3 700.00
Dec. 1 203 DLK Co. 120-111 3 900.00
TOTAL: 2,400.00
120/502
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Post Transactions to Ledgers
 Ledgers are used to summarize the financial
status, including the current balance, of
individual accounts.
 The general ledger contains summary-level
data for every asset, liability, equity,
revenue, and expense account of an
organization.
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 A subsidiary ledger records all the detailed
data for any general ledger account that has
many individual subaccounts.
 What are some commonly used subsidiary
ledgers?
– accounts receivable
– inventory
– accounts payable
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 What is the general ledger account
corresponding to a subsidiary ledger called?
– control account
 A control account contains the total amount
for all individual accounts in the subsidiary
ledger.
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Sales Journal Page 5
Date Invoice Account Account Post Amount
Number Debited Number Ref.
Dec 1 203 DLK Co. 120-111 3 900.00
Total 2,400.00
120/502
General Ledger
Account: Accounts Receivable Account Number:
120
Date Descriptio Post Ref. Debit Credit Balance
n Chera Emiru/AIS/2005/
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Dec 1 Sales SJ5 2,400 2,400
What is the
Chart of Accounts?
 The chart of accounts is a list of all general
ledger accounts used by an organization.
 It is important that the chart of accounts
contains sufficient detail to meet the
information needs of the organization.
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Discuss the types of information that

an AIS can provide.
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Providing Information for
Decision Making
 The second function of the AIS is to provide
management with information useful for
decision making.
 The information an AIS provides falls into
two main categories:
– Financial Statements
– Managerial Reports
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Financial Statements
 Prepare a trial balance.
 Make adjusting entries.
 Prepare the adjusted trial balance.
 Produce the income statement.
 Make closing entries.
 Produce the balance sheet.
 Prepare the statement of cash flows.
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Managerial Reports
 The AIS must also be able to provide
managers with detailed operational
information about the organization’s
performance.
 Two important types of managerial reports
are
– budget
– performance reports
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Managerial Reports
What is a budget?
 A budget is the formal expression of goals
in financial terms.
 One of the most common types of budget is
a cash budget.
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Managerial Reports
What is a performance report?
 A performance report lists the budgeted and
actual amounts of revenues and expenses
and also shows the variances, or differences,
between these two amounts.
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Managerial Reports
Magic Co. Monthly Performance Report
Budget Actual Variance
Sales $32,400 $31,500 ($900)
Cost of Goods 12,000 14,000 (2,000)
Gross Margin $20,400 $17,500 ($2,900)
Other Expenses 9,000 7,000 2,000
Operating Income $11,400 $10,500 ($900)
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Describe the basic internal control

objectives of an AIS and explain how
they are accomplished.
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Internal Control
Considerations
 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.
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Internal Control
Considerations
 What are two important methods for
accomplishing these objectives?
1 Provide for adequate documentation of all
business activities.
2 Design the AIS for effective segregation of
duties.
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Adequate Documentation
 Documentation allows management to
verify that assigned responsibilities were
completed correctly.
 What did Ashton encounter while working
as an auditor that gave him a firsthand
glimpse of the types of problems that can
arise from inadequate documentation?
– failure to bill for repair work
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What is
Segregation of Duties?
 Segregation of duties refers to dividing
responsibility for different portions of a
transaction among several people.
 What functions should be performed by
different people?
– authorizing transactions
– recording transactions
– maintaining custody of assets
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End of Chapter 2
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AIS Ch2

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AIS Ch2

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Accounting

General Ledger & Reporting System

W4 forms Collect employee

Time cards Record time worked

Job time tickets Record time spent

Dec. 1 201 Lee Co. 120-122 3 800.00

Dec. 1 202 May Co. 120-033 3 700.00

Dec. 1 203 DLK Co. 120-111 3 900.00

Discuss the types of information that

Describe the basic internal control

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