Overview of Business
Processes
Chapter 2
Edited Hull, Hayes, and El-Masry
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The Three Basic Functions
Performed by an AIS (Pg. 7)
1
The efficient and effective processing of
data about a company’s transactions:



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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The Three Basic Functions
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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Comparison of financial Statements
and Management Reports
Management Reports
1. Internally focus
2. No mandatory rules
3. Financial and nonfinancial
information; subjective
information possible
4. Emphasis on the future
5. Internal evaluation and
decisions based on very
detailed information
Financial Statements
1. Externally focus
2. Must follow externally
imposed rules
3. Objective financial
information
4. Historical orientation
5. Information about the
firm as a whole
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The Three Basic Functions
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
Financing
Cycle
Expenditure
Cycle
Human
Resources
General Ledger & Reporting System
Production
Cycle
Revenue
Cycle
Cycle Give – Get Transactions
Financing cycle get cash, give cash
 Expenditure cycle – give cash, get
goods
 Human resources cycle – give cash,
get labor
 Production cycle – give labor, give
raw materials, get finished goods
 Revenue cycle – give goods, get cash

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Capture Transaction Data
on Source Documents
Control over data collection is
improved by prenumbering each
source document.
 Accuracy and efficiency in recording
transaction data can be further
improved if source documents are
properly designed.

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
Turnaround Documents are records of
company data sent to an external
party and then returned to the system
as an input.
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Source Documents and Functions for the
Revenue Cycle
Source Document
Function
Sales order
Record customer order.
Delivery ticket
Record delivery to customer.
Sales invoice
Bill customer for sales on account
Remittance advice
Receive cash.
Deposit slip
Record amounts deposited.
Credit memo
Support adjustments to customer accounts.
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Source Documents and and Functions for
the Expenditure Cycle
Source Document
Function
Purchase requisition
Request that purchasing department order goods.
Purchase order
Request goods from vendors.
Receiving report
Record receipt of merchandise.
Check
Pay for items.
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Source Documents and Functions for the
Human Resource 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.
(Job Costing System)
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Source Documents and Functions for the
General Ledger & Reporting System
Source Document
Journal voucher
(JV)
Function
Record entry posted to general ledger.
May come from various journals.
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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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Record Transaction Data
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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Record Transaction Data
in Journals
1
2
3
4
Credit sales
Cash receipts
Purchases on account
Cash disbursements
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Record Transaction Data
in Journals
Page 5
Sales Journal
Invoice
Date
Dec. 1
Dec. 1
Dec. 1
Account
Account
Post
Number Debited
Number
Ref.
201
202
203
Lee Co. 120-122
May Co. 120-033
DLK Co. 120-111
TOTAL:
3
3
3
Amount
800.00
700.00
900.00
2,400.00
120/502
Post Transactions to
Ledgers
The general ledger contains summary-level data
for every asset, liability, equity, revenue, and
expense account of an organization.
A subsidiary ledger records all the detailed data
for any general ledger account that has many
individual subaccounts.
Commonly used subsidiary ledgers….
– accounts receivable
– inventory
– accounts payable
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Post Transactions to
Ledgers
Sales Journal
Page 5
Invoice Account Account Post
Date Number Debited Number Ref. Amount
Dec. 1
203
DLK Co. 120-1113
900.00
TOTAL
2,400.00
120/502
General Ledger
Account: Accounts Receivable Account Number: 120
Date Description Post Ref Debit Credit Balance
Dec. 1 Sales
SJ5
2,400
2,400
Post Transactions to
Ledgers
Sales Journal
Page 5
Invoice Account Account Post
Date Number Debited Number Ref. Amount
Dec. 1
203
DLK Co. 120-1113
900.00
TOTAL
2,400.00
120/502
General Ledger
Account: Credit Sales
Account Number: 502
Date Description Post Ref Debit Credit Balance
Dec. 1 Sales
SJ5
2,400 2,400
What is an Audit Trail?
An audit trail provides a means to
check the accuracy and validity of
ledger postings.
 Observe that the posting reference for
$2,400 credit to the sales account in
the general ledger, SJ5, refers back to
page 5 of the sales journal.

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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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Chart of Accounts
ASSETS (100-199)
Current Assets (100-150)
101 Cash
105 Accounts Receivable
107 Inventory
Long-Term Assets (151-199)
151 Land
152 Building
LIABILITIES (200-299)
Current Liabilities (200-219)
201 Notes Payable
202 Accounts Payable
Long-Term Liabilities (220-239)
222 Mortgage Payable
OWNERS’ EQUITY (300-399)
301 Capital Stock
330 Retained Earnings
SALES (400-499)
400 Sales Revenue
EXPENSES (500-599)
500 Cost of Goods Sold
523 Rent Expense
528 Advertising
2-23Expense
573 Utility Expense
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Financial Statements
The second function of the AIS is to
provide management with information
useful for decision making.
 The preparation of financial
statements consists of a sequence of
activities.

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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.
 What reports does management
need?

–
–
–
inventory status
budgets
performance reports
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Managerial Reports
What is a budget?
A budget is the formal expression of
goals in financial terms.
 What are some types of budgets?

–
–
–
cash
operating
capital
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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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Internal Control
Considerations

1
2
3
The third function of an AIS is to
provide adequate internal controls to
accomplish three basic objectives:
Ensure that the information is reliable.
Ensure that business activities are
performed efficiently.
Safeguard organizational assets.
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Internal Control
Considerations

1
2
What are two important methods for
accomplishing these objectives?
Provide for adequate documentation of all
business activities.
Design the AIS for effective segregation of
duties, including:
a-authorizing transactions
b-recording transactions
c-custody of assets
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Enterprise Resource Planning (ERP)


ERP systems are designed to integrate
all aspects of a company’s operations
(including both financial and nonfinancial information) with the traditional
functions of an AIS.
Major ERP systems include ORACLE and
SAP. Refer to SQL Oracle Handouts
(DDL, DML, and DQL).
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