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Chapter 2 - Foundational Concepts of The AIS

Instructor Manual
Interrelationship Of Business Processes And The AIS. Business processes
occur so that organizations may serve their 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. Manual systems use manual record keeping processes
and paper-based records 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.
Usually, only very small organizations use manual systems. However, even in
a large, computerized system, some 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. 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 continue to commit resources to maintain
and/or enhance them. Two methods of enhancing legacy systems are screen
scrapers and enterprise application integration.
o Modern, Integrated IT Systems. These systems are based on current
technology. They are purchased software, rather than software developed
internally, but may be modified to meet the organizations needs. Purchased
software has the advantages of lower costs, fewer bugs, and a shorter
implementation time. These modern, integrated systems usually run in one of
two types of computer models: client-server or cloud computing.
o 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 such as
manipulation and presentation of data. The server manages and 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. Many ERP systems use a web browser and individual PCs as the
client computers.
o Cloud Computing. Cloud computing is a centralized approach to IT whereby
servers are purchased from a third party provider; thus, the organizations
data and software reside with a third party. Cloud computing services include
Software as a Service (SaaS), Database as a Service (DaaS), Platform as a
Service (PaaS), and Infrastructure as a Service (IaaS). The cloud computing
approach is growing in popularity due to its advantages of scalability,
expanded access, reduced infrastructure, and cost savings.
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
$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 Used in Business Processes. 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, employees enter the data into the IT system using a keyboard.
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 machine-readable symbols consisting of a series
of bars and spaces. You see these bar codes on products you buy at grocery
stores and all types of retail stores. Bar codes can be used with a bar code
reader to track inventory movement and monitor employee time worked.
o Point Of Sale Systems. The most well-known use of bar codes is in Point of
Sale Systems. The Universal Product Code on product labels is read by a
bar code scanner at the cash register. Many retail establishments use point
of sale systems, using either bar code readers or touch screens.
o Electronic Data Interchange. EDI is the intercompany, computer-tocomputer 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 are exchanged
electronically, much of the manual processing is eliminated, thereby reducing
time, cost, and errors.

Processing Accounting Data

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 maintains a well-defined
audit trail and provides batch totals for enhanced 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. With online and real-time processing,
transactions are entered and processed as they occur. This eliminates the
time lag inherent in batch systems; input errors can be checked as data are
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.
Outputs Of The AIS Related to Business Processes. 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, including financial statements
or aged receivables reports. Internal reports might be printed, viewed on a screen,
or customizable queries.
Documenting Processes and 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
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 using standard flowchart symbols. It displays the
sequence of processes and the media used in processing and storage.
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
o Data Flow Diagrams. It shows the logical design of a system using four
symbols. They are 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.
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 customers or vendors. REA is used as a model to understand
accounting systems, but as of yet is limited in practical application.