Chapter 2 - Foundational Concepts Of The AIS
Instructors Manual
 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.
 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.
 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
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$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.
 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.
 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.
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 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.
 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.
 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.
 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.
 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.
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