INTERRELATIONSHIPS OF BUSINESS PROCESSES AND THE AIS

 Chapter 1 introduced an accounting information system as a system that captures,

records, processes, and reports accounting information. The information captured is the
result of financial transactions within the organization or between the organization and its
customers and vendors. When a transaction occurs, there are systematic and defined steps
that take place within the organization to complete the underlying tasks of the transaction.
These steps are business processes.
 A business process is a prescribed sequence of work steps completed in order to produce
a desired result for the organization. A business process is initiated by a particular kind of
event, has a well-defined beginning and end, and is usually completed in a relatively
short period of time. Business processes occur so that the organization may serve its
customers.
 Every organization exists to serve customers in some way. Some organizations make and
sell products, while others provide services to customers. The examples of beverage or
food service to customers are business processes.
 Each business process has a set of systematic steps undertaken to complete it. Some
business processes you see in your everyday life. The examples of beverage or food
service to customers are business processes.
 As these many business processes occur, data are generated that must be collected by the
accounting information system. As the systematic steps are undertaken in a business
process, the accounting information system must capture and record the related financial
data.

TYPES OF ACCOUNTING INFORMATION SYSTEMS

1. Manual Systems
2. Legacy Systems
3. Modern, Integrated IT Systems
Manual Systems
 Most large or medium-size organizations use computerized account- ing systems
rather than manual record-keeping systems. For example, even if the calculation and
printing of a paycheck in an organization are computerized, the employee time card
may be completed by hand.
 Small organizations often use manual record-keeping systems and even computerized
systems may rely on some manual record keeping it is important to examine manual
processes in accounting information systems. An entirely manual system would
require source documents and paper-based ledgers and journals.
 o A source document is a record that captures the key data of a transaction.
Some examples of source documents are employee time cards, purchase
orders, sales orders, and cash receipts.
o A turnaround document is an output of the accounting system that can be
used as an input in a different part of the accounting system. An example is
your credit card statement, which is a computer output of the system your
credit card company uses.

 The general ledger provides details for the entire set of accounts used in the
organization’s accounting systems. Transactions or transaction summaries are posted
to the general ledger from the general journal and special journals.
 The general journal is the place of original entry for any transactions that are not
recorded in special journals. The general journal is used to record non-routine
transactions and adjusting and closing entries.
 Special journals are established to record specific types of transactions. For
example, a sales journal records all sales.
 Subsidiary ledgers maintain detailed information regarding routine transactions,
with an account established for each entity. For example, the accounts receivable
subsidiary ledger maintains all detailed information regarding customer purchases,
payments, and balances due.

 The source documents, journals, and ledgers comprise the manual records in a manual
accounting system. To record in these journals and ledgers, there must be established
processes that employees follow in collecting source documents and entering
information from source documents into the appropriate journals and ledgers.
 Automated systems maintain the same structure of subsidiary ledgers and general
ledger accounts; however, the difference is that automated ledgers are computer files
rather than paper records.
 it is important to understand that the hardware and software are not the entire
accounting information system. The established process of entering the order is part
of the accounting information system because it is part of the business process that
captures accounting data. Therefore, accounting information systems include human
as well as IT processes.
 Accounting software usually has modules for accounts receivable, accounts payable,
payroll, and possibly other processes. For example, the accounts receivable module
processes and records all credit sales and maintains detailed information about
customer transactions, collections, and balances due.
Legacy Systems
  A legacy system is an existing system in operation within an organization.
 A legacy system uses older technology in which the organization has a
considerable investment and that might be entrenched in the organization.
 Some legacy systems have been in place for many years; perhaps the organization
spent much time developing, maintaining, and customizing the system.
 Often, legacy systems are based on old or inadequate technology.

There are both advantages and disadvantages to maintaining these older systems. The
advantages are that legacy systems
1. have often been customized to meet specific needs in the organization
2. often support unique business processes not inherent in generic accounting
software
3. contain invaluable historical data that may be difficult to integrate into a new
system
4. are well supported and understood by existing personnel who are already
trained to use the system

There are also many disadvantages to maintaining older systems. The disadvantages are
that legacy systems
1. are costly to maintain in both dollars and time
2. often lack adequate, up-to-date supporting documentation
3. may not easily run on new hardware, and the old hardware and parts needed
for maintenance may become obsolete
4. are not usually based on user-friendly interfaces such as Microsoft Windows
or Apple’s Mac OS
5. tend to use software written in older computer languages, and fewer
programmers are available for maintenance
6. are often difficult to modify to make them Web-based or user-friendly
7. become difficult to integrate when companies merge or acquire other
companies, in which case consolidating subsidiary company information into
one set of financial statements and reports can involve many manual and
error-prone steps
 Organizations do not always completely replace legacy systems with newer hardware and
software systems, but they often try to use new technology to enhance the existing
systems. One approach is to use screen scrapers, or front- ware, which add modern, user
friendly screen interfaces to legacy systems.
 A second approach to upgrading is to use software that bridges legacy systems to new
hardware and software systems and interfaces. These interface bridges are called
 enterprise application integration, or EAI. EAI is a set of processes, software and
hardware tools, methodologies and technologies to integrate software systems.
 The third method is complete replacement of legacy systems. If the organization an
afford the time and money required, the purchase and implementation f modern,
integrated systems may be the best approach.

Modern Integrated System

 AIS environment, numerous accounting software systems are available for purchase
that integrate many or all of the business processes within an organization. In the
early days of computer automation of accounting, much of the accounting software
was developed and written internally by the organization’s IT staff. Today,
companies more frequently purchase software rather than develop it internally.
 The new programs sold by software development companies are more user friendly
than legacy accounting systems, typically utilize the latest technology in data storage
and Internet interfaces, and offer clients powerful, technologically advanced systems
that serve as an important part of the accounting information system.
 There are many advantages to purchasing accounting software rather than developing
software in-house. Purchased software has a lower cost, shorter implementation time,
and fewer bugs.
 These modern, integrated systems usually run in one of two types of computer
architectures, or models.
INPUT METHODS USED IN BUSINESS PROCESSES
 As the steps in a business process occur, accounting data are generated that must be
captured and recorded in the accounting information system. Account- ing data are the
input of the accounting information system. For example, a sale generates much
accounting data that must be collected and recorded, such as customer identification
information, identifying information for items and quantities sold, and information on
discounts offered and taken.

 SOURCE DOCUMENTS AND KEYING. Within business processes, the accounting

data are often initially captured and recorded on a source document. One example of
capturing data on a source document is the use of an employee time card. As an employee
begins and ends a workday, he or she records start and end times on the time card. At the
end of the pay period, this source document is forwarded to the payroll department to
generate a paycheck. In a computerized system, the start and end work times are keyed
into the software, meaning that the payroll employee uses a keyboard to input the data.
  BAR CODES. A bar code is a printed code consisting of a series of vertical, machine-
readable, rectangular bars and spaces that vary in width and are arranged in a specific
way to represent letters, numbers, and other human-readable symbols. When inventory
parts are counted or moved, a bar code scanner reads the bar code to input the necessary
identification of that part. That is, the method of inputting data is not a manual keying of
data, but a machine reading data by the bar code scanner. Another example of the use of
bar codes to input account- ing data is employee ID badges.

 POINT OF SALE SYSTEMS. A point of sale system (POS) is a method of using

hardware and software that captures retail sales transactions by standard bar coding. The
bar code label on the products is usually called the universal product code, or UPC.
Nearly all large retail stores use POS systems integrated into the cash register. As a
customer checks out through the cash register, the bar codes are scanned on the items
purchased, prices are determined by accessing inventory and price list data, sales
revenue is recorded, and inventory values are updated.

 ELECTRONIC DATA INTERCHANGE. Electronic data interchange (EDI) is the

inter-company, computer-to-computer transfer of business documents in a standard
business format. EDI transmits purchase orders, invoices, and payments electronically
between trading partners. Since transmission is electronic, the paper source documents
and the manual keying of those documents are eliminated. For example, if Company A
plans to purchase from Company B via EDI, Company A transmits a purchase order
electronically to Company B. Company B’s computer system receives and processes the
order electronically. The mailing of a paper purchase order and the keying of that order
by Company B has been eliminated. Therefore, we can see that EDI is a method of
electronically inputting data into the accounting system. As was true of the other IT
enabled input methods, this reduces time, cost, and errors.

 E-BUSINESS AND E-COMMERCE. Data are also electronically exchanged between

trading partners in e-business and e-commerce. E-business relates to all forms of online
electronic business transactions and processing, whereas e-commerce is a type of e-
business that is specific to consumer online buying and selling.
PROCESSING ACCOUNTING DATA
 Processing accounting data involves calculations, classification, summarization, and
consolidation. In manual accounting systems, this process- ing occurs through the
established manual methods and the recording, posting, and closing steps in the journals
and ledgers. Automated processing can be accomplished by batch processing or online
and real-time processing. These methods are described next.
 BATCH PROCESSING. Batch processing requires that all similar transactions are
grouped together for a specified time, and then this group of transactions is processed
together as a batch. Batch processing is best suited to applications having large volumes
of similar transactions that can be processed at regular intervals.

Advantages to batch processing:

1. It is very efficient for large volumes of like transactions where most items in a
master file are used during each processing run.
2. The basic accounting audit trail is maintained, because there are well- defined
beginning and ending periods and a set of documents to reconcile to the batch
being processed.
3. Such systems generally use less costly hardware and software than other
methods.
4. The hardware and software systems are not as complicated as online systems and
are therefore easier to understand.
5. It is generally easier to control than other types of computerized systems. Batch
totals can be used to ensure the batch was processed correctly.
6. When personnel are dedicated to batch processing, they become specialized and
efficient in processing those routine transactions.

Disadvantages to batch processing:

1. Processing can take longer than normal if the master files are large and not all records
in the master file are used. For example, if only a few customer payments are to be
processed from a large master file of customer records, it may take a legacy system
with older hardware (that reads all master file records in sequence) as long to deliver
the output as it would take if all the customer records were demanded.
2. In legacy systems with older hardware, adding or deleting records takes much
computer maintenance time due to the sequential structure of the files.
3. In legacy systems with older hardware, some data duplication is likely, because each
batch process often uses its own separate master file. Accounts payable and
purchasing may be separate batch processes with separate master files, but in both
master files vendor information, for example, would be duplicated.
4. Integration across business processes is difficult in legacy systems that are batch-
oriented. The isolated master files and separate batch processing systems make
integration very difficult
5. By necessity, batch systems have a time lag while all transactions in a batch are
collected. This means that available information in files will not always be current, as
it would in real-time systems.
 6. Legacy systems with older hardware may require that both the transaction files and
master files be sorted in the same sequential order. This leads to less flexibility in
record storage and retrieval.

 ONLINE AND REAL-TIME PROCESSING. Most modern, integrated systems frequently

use online and real-time processing. With online processing, transactions are not grouped
into batches; rather, each transaction is entered and processed individually. Some online
processing systems are also real-time processing systems. Real-time processing means that
the transaction is processed immediately, and in real time, so that the output is available
immediately. Online processing is best suited to applications in which there is a large volume
of records, but only a few records are needed to process any individual transaction.

The advantages to real-time processing are as follows:

1. As data are entered in real time, the system checks for input errors. There- fore, errors
can be corrected immediately.
2. Information is provided to users on a timely basis, without the time lag inherent in
batch systems.
3. Since all data are in a database system and are updated in real time, all files are
constantly up to date.
4. The business processes are integrated into a single database so that a single system is
achieved.

The disadvantages of real-time systems are as follows:

1. The hardware and software are more expensive than those used for batch systems.
2. A single database that is shared is more susceptible to unauthorized access of data,
unless extensive controls are implemented to prevent unauthorized access.
3. Real-time systems can be difficult to audit because of the complexity of the system.
OUTPUTS FROM THE AIS RELATED TO BUSINESS PROCESSES
General categories of outputs:
1. Trading partner documents such as checks, invoices, and statements
2. Internal documents
3. Internal reports
4. External reports
 Some of the outputs of the accounting information system are documents exchanged with
trading partners such as customers and vendors. Invoices and statements are examples of
 documents sent to customers. Checks are outputs sent to vendors. These outputs may be in
electronic or paper form. For example, electronic outputs include checks sent to vendors via
electronic funds transfer and customer invoices sent via electronic data interchange.
 Internal documents are another form of output from an accounting information system.
Examples of internal documents include credit memorandums, receiving reports, production
routing documents, and production scheduling documents. These documents may be printed
paper forms, or they may be in the form of screen outputs viewed on the user’s computer.
 External reports are usually financial statements that include a balance sheet, income
statement, and statement of cash flows. There are an unlimited number of potential inter- nal
reports, as this category comprises any information that management deter- mines is useful to
the business. Internal reports provide feedback to managers to assist them in running the
business processes under their control. For example, an aged accounts receivable report may
be prepared for the manager responsible for accounts receivable; the managers who oversee
inventory would be interested in an inventory status report identifying those products that are
at low stock levels.
 Internal reports vary by process, by manager level, and by the type of organization.. They
are designed specifically for the function that is the subject of the report. Internal reports
may be printed on paper, viewed on a computer screen, or created (either on screen or
paper) as customizable queries that allow a manager to “drill down” into the details of the
process being managed.
DOCUMENTING PROCESSES AND SYSTEMS
 Systems professionals and accountants must understand the documentation and charts
that describe accounting systems. Such documentation allows the accountant to analyze
and understand the procedures and processes of a business process and the systems that
capture and record accounting data.
 The various types of popular pictorial representations of processes and systems used in
businesses today include the following:

1. Process maps
2. System flowcharts
3. Document flowcharts
4. Data flow diagrams
5. Entity relationship diagrams (ER diagrams)

1. Process maps are pictorial representations of business processes in which the actual flow
and sequence of events in the process are presented in diagram from the start of a
process, the steps within the process, and a finish of the process. Process maps are
becoming a popular way to represent business processes, particularly as organizations
undergo business process reengineering. Five symbols are used in process map.
2. A system flowchart is intended to depict the entire system, including inputs, manual and
computerized processes, and outputs. System flowcharts do not necessarily show details
of each process, but display the overall sequence of processes and the media used for
processing and storage. Processing and storage are shown as manual or computerized.
Inputs can be documents, keying of input, electronic input, or processes that feed data to
other processes. Outputs may be documents, statements, reports, data stored in files, or
data fed into other processes.
3. A document flowchart shows the flow of documents and information among
departments or units within an organization. Document flowcharts are usually divided
into columns, each representing a department or unit of the organization. Document
flowcharts trace each document in a process from its ori- gin to its final destination.
 A document flowchart is a special kind of system flowchart that depicts only
document flows.
 Document flowcharts, data flow diagrams, and process maps will be used in
selected chapters of this book to illustrate business processes.
4. A data flow diagram, or DFD, is used by systems professionals to show the log- ical
design of a system. The advantage of DFDs is that they use only four symbols and are
simple to read and understand.
 Data flow diagrams are shown in many of the chapters that follow. Systems
professionals use data flow diagrams in structured system design, a process
wherein the logical system is diagrammed at a high, conceptual level first.
5. Entity relationship diagrams, or ER diagrams, are pictorial representations of the
logical structure of databases. An ER diagram identifies the entities, the attributes of
entities, and the relationship between entities.
 Entities can be thought of as the nouns that represent items in the account- ing
system. Employees, customers, vendors, and inventory items are examples of
entities. Each entity has attributes, or characteristics of the entity. For example,
employees have attributes such as last name, first name, pay rate, and number of
withholdings.
 Database structures tend to be complex because entities are related to each other,
and these relationships can be complex. For example, vendors and inventory
items are two sets of entities that are related because the business buys inventory
items from vendors. Any individual inventory item could be purchased from many
vendors, and any single vendor could sell many different items to the business.
 The relationships between entities in ER diagrams are depicted by a concept
called cardinality. Cardinality refers to how many instances of an entity relate to
each instance of another entity.
 Cardinality describes each of the following three manners in which entities relate
to each other:
 1. One to one: Each employee has one personnel file. Likewise, each
personnel file belongs to only one employee.
2. One to many: One supervisor has many employees. Each employee
has only one supervisor.
3. Many to many: Each vendor can sell many items, and each item can be
purchased from many vendors.
ETHICAL CONSIDERATIONS AT THE FOUNDATION OF ACCOUNTING
INFORMATION SYSTEMS
 The existence of computerized accounting information systems presents specific
challenges for accountants in terms of the potential for unethical behavior.
 The accounting information system is often the tool used to commit or cover up unethical
behavior. This is true regardless of the extent of computerization. However, it can be
especially difficult to detect instances of computer fraud within certain computerized
environments, especially if there is only one person or a limited number of IT personnel
within the organization with responsibility for maintaining these computer systems.
 Accountants should be aware of opportunities for unethical behaviors within the various
business processes. If accountants are well informed about these risks, they can be better
prepared to control such exposure. As a company chooses features and options for its
accounting information systems, the importance of monitoring those systems should not
be overlooked as a factor in deci- sion making.