Accounting Information Systems

CHAPTER TWO
OVERVIEW OF BUSINESS PROCESSES
2.1) Introduction;
In this chapter introduces you the fundamentals of business processes and then focus on several core
business processes that are common to many businesses. We begin with a brief refresher of the basics of
financial accounting. Although you may be wondering why we talk about the bookkeeping process in this
part, these concepts are actually at the heart of an AIS. That is, fundamental elements of accounting are
embedded in modern accounting information systems, and they are the basis for a company’s annual
financial statements. These fundamental elements include journals and ledgers accounts, trial balances,
and financial statements. We discuss these concepts from the perspective of simple, paper journals and
records because this simplifies the discussion of the key business processes. It is important to recognize,
however, that business processes in firms with large, database driven AISs will often not involve paper
source documents or traditionally formatted journals or ledgers.
The nature and types of business processes vary, depending on the information needs of a specific
organization. Nevertheless, a number of business processes are common to most organizations. In this
chapter, we examine business transactions related to the sales process (sales and cash collection) and the
purchasing process (expenditures for materials and supplies and cash payment).
Businesses are under tremendous pressure to cut costs, reduce capital expenditures, and become as
efficient as possible at their core competencies. As a result, companies search globally to achieve
efficiencies, that it’s called business without boundaries
2.2) Business Processes and Events;
An accounting cycle can begin in a number of different ways. For instance, accounting personnel can
create a transaction from a source document, or a customer may order products online. Regardless of how
the process starts, at the end of the process we issue annual financial reports and close the temporary
accounts in preparation for a new cycle. Thus፣ they should form a central core within the study of
accounting information systems (AISs).
Thus, in order to provide a standard classification approach for business processes a set of eight
business processes was identified that defines the full range of activities a firm engages in to conduct its
business. Within these processes are business functions that describe in greater detail the specific activity
that a firm performs in order to produce its product, provide its service, or otherwise achieve its objective.
The processes begin with the procurement of inputs and end with those services provided after the sale of
the good or service. The eight processes are grouped into core business processes and support business
processes. Core business processes relate most directly to the basic business of the firm, with operations

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representing the key industry activity of the company. Support business processes facilitate core business
processes.
2.2.1) What is a Business Process Means?
A business process or business method is a collection of related, structured activities or tasks that
produce a specific service or product (serve a particular goal) for a particular customer or customers. It
often can be visualized with a flowchart as a sequence of activities with interleaving decision points or
with a Process Matrix as a sequence of activities with relevance rules based on the data in the process. It
is a set of linked activities that take an input and transform it to create an output. Ideally, the
transformation that occurs in the process should add value to the input and create an output that is more
useful and effective to the recipient either upstream or downstream. Thus, the following are the
characteristics for a business process;
(1) Definability; it must have clearly defined boundaries, input and output.
(2) Order; it must consist of activities that are ordered according to their position in
time and space.
(3) Customer; there must be a recipient of the process' outcome, a customer.
(4) Value-adding; the transformation taking place within the process must add
value to the recipient, either upstream or downstream.
(5) Embeddedness; a process cannot exist in itself, it must be embedded in an
organizational structure.
(6) Cross-functionality; a process regularly can, but not necessarily must, span
several functions.
Generally, the business processes can be classified in to the following types;
(1) Management processes; the processes that govern the operation of a system.
Typical management processes include corporate governance and strategic
management.
(2) Operational processes; processes that constitute the core business and create the
primary value stream. Typical operational processes are purchasing,
manufacturing, advertising and marketing, and sales.
(3) Supporting processes; which support the core processes. Examples include
accounting, recruitment, call center, technical support.
What are the basic business processes in which an organization engages? Thus, businesses engage
in a variety of processes, including;
 Acquiring capital,  Buying buildings and equipment,
 Hiring and training employees,  Purchasing inventory,
 Doing advertising and marketing  Selling goods or services,
 Collecting payment from customers,  Paying employees,
 Paying taxes, and  Paying vendor,

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What type of information needs and business processes? Thus, effective Accounting Information
System needs to be able to integrate information of different types and from different sources. The types
of information needed for decisions regarding of the business processes may differ from each other. These
mar require, some is financial information, some is nonfinancial information, some comes from internal
sources, and some comes from external sources.
The following are the five core business processes characterizing any firm;
(1) Procurement, logistics, and distribution; those activities associated with obtaining and
storing inputs, and storing and transporting finished products to customers.
(2) Operations; those activities which transform inputs into final outputs, either goods or
services.
(3) Product or service development; activities associated with bringing a new, improved, or
redesigned product or service to market. Among these activities are research, marketing
analysis, design, and engineering.
(4) Marketing, sales and customer accounts; activities aimed at informing existing or
potential buyers. These activities include promotion, advertising, telemarketing, selling, and
retail management.
(5) Customer and after sales services; support services provided to customers after they
purchase the good or service. Such activities include training, help-desk services, call-center
services, and customer support for guarantees and warranties.
In addition to these five core business processes, there are three support business processes
characterize a firm;
(1) General management and firm infrastructure; Corporate governance (legal, finance,
planning, and public and government relations), accounting, building services,
management, and administrative support.
(2) Human resource management; Activities associated with recruiting, hiring, training,
compensating, and dismissing personnel.
(3) Technology and process development; Activities related to maintenance, automation,
design or redesign of equipment, hardware, software, procedures, and technical knowledge.
2.2.2) The Core Business Processes;
Thus, the following are the core business processes characterizing any firm;
(1) Strategic management; those activities carried out at the highest managerial levels.
Included are the formation, implementation, and evaluation of cross-functional decisions
that enable the organization to achieve long-term objectives. The following are among such
operations, that coordinating activities, setting product strategy, identifying new
investments, acquisitions, and divestments.
(2) Procurement, logistics, and distribution; those activities associated with obtaining and
storing inputs and with storing and transporting finished products to customers, that buying,
shipping, distributing, receiving, loading, transporting, packing, warehousing.
(3) Operations; those activities which transform inputs into final outputs, either goods or
services. In most cases, business functions categorized as operations will equate with the

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industry code of the establishment or the activity most directly associated with that code.
The specific function, the production of a good or the provision of a service, will relate to
the specific industry. Operations activities are includes, assembling products, managing
production, producing goods, managing services, providing services, conducting quality
assurance or quality control, fabricating components.
(4) Product or service development; activities such as the following, associated with bringing
a new, improved, or redesigned product or service to market (many of these activities are
research, marketing analysis, design, and engineering activities). These includes, developing
business plans, developing products or services, analyzing markets, researching products or
services, designing products or services, testing.
(5) Marketing, sales, and customer accounts; activities aimed at informing existing or
potential buyers (many of these activities are promotion, advertising, telemarketing, selling,
and retail management activities). These includes, advertising, conducting market research,
managing accounts, coordinating media relations, billing, merchandizing, branding or
managing products, processing orders, collecting payments, selling, marketing,
telemarketing, support business processes.
(6) General management and firm infrastructure; Corporate governance (legal, finance,
planning, and public and government relations), accounting, building services, management,
and administrative support activities. These includes, Accounting, Managing fraud,
Providing administrative support, Providing general management, Providing cafeteria
services, Managing government relations, Providing clerical support, Providing
housekeeping services, Managing contracts, Providing investor relations, Managing
documents, Providing legal and regulatory support, Providing facility or maintenance
services, Planning, Managing finances, and Maintaining security,
(7) Human resources management; activities associated with recruiting, hiring, training,
compensating, and dismissing personnel. These includes, Providing employee assistance,
Hiring and firing personnel, Managing human resources, Recruiting Offering labor relations
services, and Training Managing payroll and compensation.
(8) Technology and process development: Activities related to maintenance, automation,
design or redesign of equipment, hardware, software, procedures, and technical knowledge.
These includes, Developing computer systems, Providing Internet services, Maintaining or
repairing, computer systems, Designing processes, Managing data, Developing and testing
software, Processing data, Providing software and information technology services,
Engineering.
Thus, any Computer is a machine for processing and calculation. The following 3 steps have to be
gone through in a sequence;
(1) Data or instructions to be received, (received data) for business processing,
(2) Data to be processed (according to instruction), (processes data), and
(3) Result or output information, (output results). Then, this is called Input-process output
cycle.
Bits of information, Raw Data are provided to the computer. They are encoded. The computer can
understand. After processing according to instructions, it gives the result -the output. Instructions should
be given. This is called program. For example, Data consist of two numbers - 5, 6. Processing is

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manipulating data with certain procedures to suit the need of the user. The same data can give different
information according to instruction. Input is through a key board. Output is the screen display or the
printer. We can verify before it is printed. External storage is necessary. It is called floppy disc. All
these are known as hardware. Thus, the following are six fundamental business data processing
concepts;
Steps in Data Data Processing Methods
Processing Semi-Manual Electro –
Operation Manual Electronic Methods
(Mechanical) Mechanical
(1) Originating Handwritten Typewriter Pre punched Magnetic & Optical
records Cash register cards, etc. character reader,
Online terminals etc.
(2) Processing Hand Cash register, Accounting Computer
Posting and book-keeping, machines,
Calculations accounting punched
machine cards
machines
(3) Storing Paper, files, - Trays of Magnetic tapes,
journals, cards optical disks, etc.
ledgers
(4) Retrieving By file clerk. - Manual tray Online inquiry with
Book keeper movement direct access devices,
manual movement of
storage media.
(5) Reproducing Copying Duplicator, Punched Hard copies
with carbon addressing card
paper machines machines
(6) Communicating Written Documents Printed Online data
Reports, Prepared by Documents transmission printed
Hand carried machines output, e-mail, Etc.
messages
2.2.3) Business Data Processing Cycle and Functions;
The following table summarizes the functions of a business data processing.
(1) Origination; the source of origin of the business data is to be processed. The type,
nature of the data must be determined. The source is in the process of communication
in the organization. Example, Sale order, Purchase order.
(2) Input; the second function involved in the processing of data is the input of data
stored on these source documents into the data processing system. The input of data
into a data processing system occurs when data stored on the data documents is
recorded in some manner acceptable for entry into the data processing system.
Example, information pertaining to employee recorded in an employee time card, is an
input for pay roll accounting system.
(3) Manipulation;
(A) Classifying; some characteristics must be identified grouped according to their
designation, department,… etc. Data are codified in the form of alphabetic, or
numeric abbreviation.
(B) Sorting; arrangement is a logical order is necessary for easy processing. This

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arrangement is called sorting. Alphabetic arrangement is type of sorting.

(C) Verification; before processing this must be verified.
(D) Scanning; searching for an assimilating facts.
(E) Comparing, or the simultaneous examination of two or more items of data as a
basis for subsequent action.
(F) Calculating; arithmetical manipulation of the data to give some useful results.
This is very important. Here only we get results as the output.
(G) Recording; whatever conclusion is arrived at should be kept as a permanent
record for that employee.
(H) Summarizing; data must be reduced to a concise form. This is called
summarizing.
(I) Filtration; of unwanted things should be eliminated from the data. Indexing
makes retrieval easier.
(4) Output;
(A) Reporting; presenting the processed data,
(B) Issuance of documents such as cheques invoices and reports,
(C) Retrieval; fetching of a need item by the user, and
(D) Analysis;
(5) Storage; for Further use, processed data must be stored. The following is the process
for data processing. Thus, the following diadram shows the basic pattern of data-
processing;

2.2.4) Events;
An event is something that happens during the course of a business process which affects the sequence
or timing of activities of a process. Events can be a start event, intermediate events and end events. Thus,
the following are examples of events;
(1) An observation; customer order arrived, policy form completed.
(2) A change in state; policy activated, customer order processed
(3) A message; stock situation update, customer order message.
2.3) Identifying the Events in Business Process;
An economic event that affects the assets and equities of the firm, is reflected in its accounts, and is
measured in monetary terms. The most common financial transactions are economic exchanges with
external parties. These include the sale of goods or services, the purchase of inventory, the discharge of
financial obligations, and the receipt of cash on account from customers. Financial transactions also
include certain internal events such as the depreciation of fixed assets; the application of labor, raw
materials, and overhead to the production process; and the transfer of inventory from one department to
another. Financial transactions are common business events that occur regularly. For instance, thousands
of transactions of a particular type (sales to customers) may occur daily.

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Before examining the various functions, we might consider an overview of transaction processing. As
Figure 2-1 portrays, the various component transaction processing systems of a typical firm form several
distinct though highly interrelated groupings.
Figure 2.1; Reletationships among transaction processing systems;

Figure 2.2; Transaction oriented cycles for merchandise firm;

Thus, many business activities are paired in give-get exchanges. The basic exchanges can be grouped
into five major transaction cycles. These are the, revenue cycle, expenditure cycle, production cycle,
human resources or payroll cycle, and financing cycle.

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 The revenue cycle includes events pertaining to the sale of merchandise and the
receipts of cash in payment thereof.
 The expenditure cycle includes events pertaining to the acquisition of merchandise
and services and the disbursements of cash in payment thereof.
 The resource management cycle includes events pertaining to the acquisition,
management, and disposal of such resources as investments and fixed assets. (Since
the labor of employees is both a service and a resource, the payroll system may fit
either within this cycle or the expenditure cycle.) The resource management cycle
also encompasses cash disbursed to acquire the resources and cash received upon
their disposal.
 The general ledger and financial reporting cycle (that, system) accepts all the
financial transactions deriving from the first three cycles, including adjustment -type
transactions, and generates financial reports on a cyclical basis.
Thus, in identifying events in business process, the following points should be addressed;
(1) Identify people/actors and roles.
(2) Identify what they do and when they do it.
(3) List the events with;
(A) Sources and destinations,
(B) Preconditions, and
(C) Timescale for usage.
The Business Event Processing should be as follows;
Event Decide Respond
Responding to an event with actions in a business environment is called as business event processing.
Example;
Business Issue addressed Event Sources Event
Processing(Action)
Insurance Fraud prevention Claim System Fraud Department
Healthcare Increase in Sales Customer Relationship Call Center, Marketing
Management Department
Manufactu Stock Management Web Site, Stock Purchasing Department
ring Customer control
satisfaction
Note that; high volume event processing; high volume event can be processed only with help of
computer machine.
Thus, the Accounting Information System interacts with external parties, such as customers, vendors,
creditors, and governmental agencies. It also interacts with internal parties such as employees and
management. The following table shows the interaction of AIS with internal and external parties.

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Figure 2.3; Interaction of AIS with internal and external parties;

The transaction cycle is a process, begins with capturing data about a transaction, and ends with an
information output, such as financial statements. Many business activities are paired in give-get
exchanges. The basic exchanges can be grouped into five major transaction cycles;
 Revenue cycle; give goods – get cash,
 Expenditure cycle; give cash – get goods,
 Production cycle; give Raw-material and labour and Get finished goods,
 Human resources or payroll cycle; give cash and Get labour,
 Financing cycle; give Cash and Get Cash. Thus, the following table shows the relation
between these major transaction cycles;
Figure 2.4; Relation between major transaction cycles;

2.4) Organizing Business Data in an Accounting Information System;

An accounting information system (AIS) is an integral part of the firm that it serves. It also interacts
with customers and others who reside outside the firm. This chapter first looks at the environments of an
AIS and business firm. It then examines the components (data) of the AIS and its accounting cycle.
Finally it discusses flows of key accounting transactions in terms of these components.
Accountants play an important role in data processing. They answer questions such as;

 What data should be entered and stored?

 Who should be able to access the data?
 How should the data be organized, updated, stored, accessed, and retrieved?
 How can, scheduled and unanticipated information needs be met?
Thus, to answer these questions, they must understand data processing concepts. An important
function of the Accounting Information System (AIS) is to efficiently and effectively process the data
about a company’s transactions.

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 In manual systems, data is entered into paper journals and ledgers.

 In computer-based systems, the series of operations performed on data is referred to
as the data processing cycle.
The data processing cycle consists of the following major four steps;
(1) Data input; a number of actions can be taken to improve the accuracy and efficiency of data
input. Thus, the first step in data processing is to capture the data. This usually springs by a
business activity. Data is captured about, the event that occurred, the resources affected by the
event, and the agents who participated.
(2) Data storage; data needs to be organized for easy and efficient access. When transaction data is
captured on a source document, 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 credited. In manual systems
and some accounting packages, the first place that transactions are entered is the journal. Some
computer-based storage concepts, including;
(A) Entity; an entity is something about which information is stored. In your university’s
student information system, one entity is the student. The student information system
stores information about students.
(B) Attribute; attributes are characteristics of interest with respect to the entity. Some
attributes that a student information system typically stores about the student entity are,
Student ID number, Phone number, Address.
(C) Record; a record is the set of attributes stored for a particular instance of an entity.
(D) Data Value; a data value is the intersection of the row and column.
(E) Field; a field is the physical space where an attribute is stored. The space where the
student ID number is stored is the student ID field.
(F) File; is a group of related records. The collection of records about all students at the
university might be called the student file.
(G) Master File; is a file that stores cumulative information about an organization’s
entities. It is conceptually similar to a ledger in manual AIS in that: The file is
permanent, the file exists across fiscal periods, and Changes are made to the file to
reflect the effects of new transactions.
(H) Transaction File; is a file that contains records of individual transactions (events) that
occur during a fiscal period. It is conceptually similar to a journal in manual AIS in
that: The files are temporary; the files are usually maintained for one fiscal period.
(I) Database; is a set of interrelated, centrally-coordinated files. When files about students
are integrated with files about classes and files about instructors, we have a database.
(3) Data processing; once data about a business activity has been collected and entered into a
system, it must be processed. There are four different types of file processing;
(A) Updating data to record the occurrence of an event, the resources affected by the
event, and the agents who participated, e.g., recording a sale to a customer.
(B) Changing data, for example, a customer address.
(C) Adding data, for example, a new customer.
(D) Deleting data, for example, removing an old customer that has not purchased anything
in 5 years.

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(4) Information output; the final step in the information process is information output. This output
can be in the form of;
(A) Documents are records of transactions or other company data. Example, Employee
paychecks or purchase orders for merchandise Documents generated at the end of the
transaction processing activities are known as operational documents, (as opposed to
source documents). They can be printed or stored as electronic images.
(B) Reports are used by employees to control operational activities and by managers to
make decisions and design strategies. They may be produced, on a regular basis, on
an exception basis, on demand. Organizations should periodically reassess whether
each report is needed.
(C) Queries are user requests for specific pieces of information. They may be requested:
Periodically, one time they can be displayed, on the monitor, called soft copy, on the
screen, called hard copy. Thus, output can serve a variety of purposes, such that
financial statements can be provided to both external and internal parties.
2.4.1) Environment of Accounting Information System;
An AIS fits within a framework called a systems hierarchy. Figure 2-3 depicts this hierarchy. Above
the AIS is its firm, of which AIS is a part or subsystem. In a more remote sense, the AIS are also a
subsystem of the firm’s environment. Thus, on the other hand, the AIS contain such subsystems as the
transaction processing systems and information processing systems. It also interacts with two other major
subsystems. Of the firm: the operational system and the organizational structure. These subsystems are
highly interdependent.
Note that; the terms system and subsystem are interchangeable, depending on the context in which
they are used. Thus, the operational system and AIS are subsystems in reference to a firm, but they are
also systems in their own right. Thus, the following diagram shows the hierarchy of a system;
Figure 2.5; Herarichy of a system;

2.4.2) The Business Firm and Beyond;

Figure 2-4 below displays certain key characteristics that reveal that the typical business firm is itself a
system. It has one or more critical objectives, such as to maximize profits or to provide service to
customers and/or other parties. Within its boundary it maintains a variety of highly interdependent
subsystems ranging from physical plants and offices to employees and procedures. All such subsystems
have numerous common boundaries, of interfaces, through which they relate and interact. Three of the

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most important subsystems, as previously noted, are the AIS, the operational system, and the organization
structure.
Figure 2.6; A business firm and its environment;

The stability of such subsystems, as well as of the firm itself, is maintained by a variety of constraints
and controls. In addition to the physical boundary, the constraints include limited resources and available
technology. Controls include regulatory processes, such as budgets and quality inspections, which employ
feedback to keep the firm “on target” toward its objectives.
2.4.3) The Operational System;
The operational system is the work system of a firm. It includes such daily operations as running
machines and shipping gods. Taken together, these operations comprise the physical process that
transforms resources into the products and/or services provided by a firm. Figure2.5 shows the process
within a typical manufacturing firm. The process begins with materials being received from suppliers and
ends with the finished goods being shipped to customers. The separate boxes labeled “acquiring
materials,” “producing finished goods”, and so on represents the primary operations. These operations
receive assistance from supporting operations, such as production planning and maintenance. They also
require suitable amounts of the other four types of resource inputs: labor, facilities, funds, and data. The
AIS has two close relationships to the operational systems.
Thus, the following figure 2.7 suggests the AIS monitors and records the various actions of the
operational system. Consequently, managers can keep abreast of the status of each operation and the
accumulated results of all operations.

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Figure 2.7; The operational system;

Thus, the accounting information system provides data inputs to the operational system. For example, it
provides the purchase orders that trigger the delivery of materials by suppliers.
2.4.4) The Organizational Structure;
The organizational structure or system, another of the major subsystems within a firm, is the means
by which the managers direct and coordinate the network of operations. It specifies the responsibilities
and delegated authority with respect to each operation and center. In addition, it clarifies the relationships
among the various assigned responsibilities.
Figure 2.8; Key organizational functions of a manufacturing firm;

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The above figure 2.8 portrays, by means of an organization chart, the most commonly adopted type of
responsibility structure. This structure is a hierarchical arrangement of managerial levels. (Although only
two levels are shown, several additional lower levels would be necessary to compete the organizational
structure for a manufacturing firm.) At the top level is the president. Six boxes at the second level are
attached to the president’s box, thus denoting a span of management of six. That is, the six managers who
head the responsibilities centers directly to the president. They divide the work of the firm, or segregate
the overall responsibilities, into six functional areas.
(1) The marketing or distribution function has the objectives of obtaining orders from
customers and filling the orders efficiently. The former involves such sub functions as
advertising, sales promotion, and direct selling. The latter generally involves order entry,
warehousing, and shipping.
(2) The inventory management function has the objective of efficiently managing the materials
or merchandise resource. It involves such sub functions as purchasing, receiving, and
storing materials. (The inventory control sub function is usually under the accounting
function.)
(3) The production function has the objective of converting raw materials into finished goods,
thereby creating form utility. Typical primary sub functions are parts production and
assembly. Supporting sub functions include engineering design, production planning and
control, maintenance, and quality control.
(4) The personnel function has the objectives of assuring that the firm’s labor (human services)
needs are met and that the job-related needs of each employee are likewise met. Among the
typical sub functions are employment, training, employee benefits, compensation, and labor
relations.
(5) The financial function has the objectives of obtaining funds at the lowest costs and
disbursing funds efficiently. It often includes such sub functions as cash receipts, cash
disbursements, and credit checking.
(6) The accounting function has the objectives of monitoring physical operations, reporting the
financial status and results of operations, providing documents, supporting daily operations,
controlling resources, and performing special analyses. Thus, it focuses on the data
resources. Figure 2.9 shows a representative organization chart of the accounting function
for a manufacturing firm. Note that, all the boxes (organizational units), under the cost
accounting and general accounting sub functions are involved in record keeping activities.
The organizations of firms in every industry and of every type are structured according to functions.
However, other arrangements are often encountered. Thus, organizations may be structured or segmented
according to product lines, geographical territories, or markets served. They may also vary according to
the degree of authority that is delegated. Those in which relatively little authority is;

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Figure 2.9; Organization chart of the accounting functions of a manufacturing firm;

Delegated to middle and lower managerial levels are known as centralized structures. Those in which
considerable authority is delegated to middle and lower managerial levels are known as decentralized
structures. Top managers in every firm must decide which alternatives are most suitable to its objectives
and circumstances. Thus, the organizational structure is as closely related to the accounting information
system as it is to the operational system.
(1) Manager reside in the various responsibility centers; hence, the organizational structure dictates
critical flows of information (that, managerial reports) generated by the AIS.
(2) The transactions processed by the AIS flow through various organizational departments, where
personnel perform steps in the procedures. In turn, the processing steps affect the flows of
physical resources within the operational system. Figure 2-7 illustrates these relationships for
the flow and management of merchandise inventory. It shows that seven organizational
departments are involved in processing the documents and records needed to control
merchandise inventory, from the point at which new merchandise is found to be needed to the
points at which sold merchandise is shipped to customers and suppliers are paid.
(3) The informal or social counterpart of the formal organization interacts closely with and
overlaps the informal information system (that, the “grapevine”).
2.4.5) Components of Accounting Information systems;
In performing its activities an AIS requires specific components or elements. The nature of these
components will tend to vary, depending on the degree of automation incorporated into the AIS. In the
traditional AIS that employ manual or clerical techniques, the components generally consist of source
documents, journals and registers, ledgers, files, reports and other outputs, non-computerized processing
devices and methods, and controls.
(1) Accounting Records; sales invoices can be summarized to reveal monthly totals and sales trends
by products and types of customers. A record within a master or transaction file contains a group
of logically related data items. Each data item represent item represents an attribute or
characteristic pertaining to the entity, activity, or event that is embodied in the record. Consider a

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record concerning a customer. Typical attributes in this type of record include the customer
account number, name, address, credit limit, and balance due. When such attributes appear in a
record for a specific customer, they reflect values pertaining to the customer. For example, one
particular customer may have an account number of 10003452, a name of John W. and a balance
due of Birr 250,000. A record employs fields in order to exhibit the values of attributes. Each
record within a file presents the same format of fields. We can see an instance of these statements
in the sales invoice, which is a record within a transaction file. The order date field in the invoice
contains the value 11-05-13. Although the order date value will likely change from invoice to
invoice (that, from record to record), its field will retain the same location within the format of
the record.
(2) Manual Systems; documentation in manual systems should include all the AIS components:
source documents, journals, ledgers, reports, document out-puts, charts of accounts, audit trail
details, processing device manuals, procedural steps, and controls. Numerous examples should be
provided, such as typical accounting entries and filled-in source documents. Procedures should be
described in alternative ways, such as by narrative descriptions and system flow-charts. Equally
important are those element that are related to the effective operation of the AIS. Clear policy
statements encourage employees to adhere to management’s policies. An organization chart and
job descriptions inform employees of their roles and responsibilities with respect to data
processing.
(A) Source Documents; most transactions are recorded on source documents, such as the sales
invoice Source document serve such important functions as;
(1) Depositories of the key facts concerning particular transactions for future
reference. These facts are available for preparing reports, for checking during
audits, and so forth.
(2) Authorizations of transactions. For instance, a purchase order authorizes a supplier
to deliver merchandise or materials.
(3) Documentations of actions and flows that reflect the accountability of persons or
units. For instance, suppliers’ invoices are initialed to show that they have been
checked for accuracy.
(B) Journals and Registers; a journal is the record of an original entry because it summarizes
transaction data. It is an accounting record because it reflects only those transactions that are
expressed in financial terms by means of debits and credits. For instance, a journal entry would
reflect a bank loan transaction by showing a debit to the cash account and a credit to the Notes
Payable account. Customarily, two types of journals are in use in the typical manual system: a
general journal and a special journal. A general journal has a generalized columnar format that
allows any type of accounting transaction to be recorded. A special journal, on the other hand,

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accepts transactions of a particular type. Thus, a sales journal accepts sales transactions only.
Special journals are popular because they enable transactions that occur in high volumes to be
recorded and posted efficiently. They generally accommodate most of the transaction load of a
firm, leaving for the general journal only the relatively unusual transactions and the end-of –
period adjustments. A register is a record that may serve as an alternative to a journal or as a
chronological log of non-accounting events. For instance, a check register is a record of cash
disbursement transactions; a shipping register is a log of shipments of merchandise to customers.
(C) Subsidiary Ledgers; subsidiary ledgers can be maintained for such assets as accounts receivable,
inventory, fixed assets, and investments. The values reflected in these ledgers are based on
postings from transaction documents; the total of all balances in a particular subsidiary ledger
should be equal to the balance in a corresponding control account in the general ledger. Since the
postings are performed independently of each other, the use of a subsidiary ledger provides a
crosscheck on the correctness of the control account, and vice versa.
(3) Computer – Based Systems; all of the documentation listed is needed in computer-based
systems. Even the most automated system contains some manual processing steps and involves
interactions with human users and clerks. However, additional documentation is needed because
of the presence of complex hardware and non-visible programs. Computer-related documentation
concerns the computer system itself and the humans who interface with it. In the former category
are the overall system standards, system application documentation, program documentation, and
data documentation. In the latter category are operating documentation and user documentation.
These types of documentation encompass the following.
(A) System standards; consist of those pertaining to systems development, program testing,
computer operations, security, disaster control, and so on.
(B) System application documentation; includes computer system descriptions and
flowcharts, input/output descriptions, file descriptions, and control procedures.
(C) Program documentation; includes program flowcharts or other logic diagrams, source
program listings, input/output samples, file record layouts, data formats, test data,
operating instructions, program change procedures, and error correction procedures.
(D) Data documentation includes the descriptions of data items stored within the firm’s
database, including their relationships. This type of documentation is of particular
importance to online processing and data base-oriented systems.
(E) Operating documentation includes the operating instructions for the various computer
programs, plus the required input /output files, setup procedures, list of programmed halts
and related messages and required actions, recovery and restart procedures, estimated run
times of programs, distribution of reports, and so forth. Operating documentation,
generally organized into computer “run books,” is of primary interest to computer
operators.

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(F) User documentation; includes procedures for entering data on source documents,
checks of input data for accuracy and completeness, formats and uses of reports,
possible error messages, and correction procedures. User documentation is of primary
interest to user department clerks and managers.
2.5) Types of Files and Data;
A file is a collection of logically related records within the overall database of a firm. While audit trails
in computer-based systems are less observable than in traditional manual systems, they still exist.
Accounting records in computer-based systems are represented by four different types of magnetic files.
These are, master files, transaction files, reference files, and archive or history files.
(1) Master File: a master file generally contains accounting data which is the relatively
permanent records concerning a firm’s entities and activities. The general ledger and
subsidiary ledgers are examples of master files. Data values in master files are updated
from transactions. Example payroll master file, accounts receivable master file, and fixed
asset master file etc. when a master file is created, it must contain all the data that a
company needs about the item of interest. Example in accounts payable file the company
needs to know the vendor name, address, balance, credit terms etc. the current status of
items such as the balance changes as purchases are made, payables are paid. Accordingly,
master files are continually updated as transactions occur. Master files are also frequently
queried by users to find out current balances or to extract information for analysis. Most
company reports are prepared by printing out information contained in master files.
(2) Transaction File; a transaction file is a temporary file of transaction records used to
change or update data in a master file pertaining to specific transactions. Sales orders,
inventory receipts, and cash receipts are examples of transaction files. Generally a
transaction file will contain one record for each source document. Examples include a file
of inventory issue and receipt transaction, a file of sales transaction and a file of employee
time keeping records.
(3) Reference File; a reference files are stores of data that are used as standards for processing
transactions. For example, the payroll program may refer to a tax table to calculate the
proper amount of withholding taxes for payroll transactions. Other reference files include
price lists used for preparing customer invoices, lists of authorized suppliers, employee
rosters, and customer credit files for approving credit sales.
(4) Archive or History File; an archive or history file contains records of past transactions that
are retained for future reference. These transactions form an important part of the audit
trail. Archive files include journals, prior-period payroll information, lists of former
employees, records of accounts written off, prior-period ledgers, and file of sales invoices’
pertaining to compete sales is a history file. In addition to representing an archive of past
events, a history file provides the means of making analyses.
2.6) Events and Activities;
Every accounting information system performs five major activities. These activities are, data
collection, data processing, data management, data control (plus security), and information generation.
Each of these activities consists of several types of steps. Moreover, particular sequences of steps that
span one or more activities form procedures. Note that, we have seen the detail discussion of these
activities in chapter one.

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