CHAPTER 1

OVERVIEW OF COMPUTER
SYSTEM AND CONCEPT

Romney, 14ed
COMPUTER APPLICATION
IN ACCOUNTING

CHAPTER 1
OVERVIEW OF COMPUTER SYSTEM AND CONCEPT

An accounting as an information system (AIS) is a system of collecting,

storing and processing financial and accounting data that are used by
decision makers. An accounting information system is generally a
computer-based method for tracking accounting activity in conjunction with
information technology resources.

1.1 THE IMPORTANCE OF COMPUTER SYSTEM IN ACCOUNTING

o Improving the quality and reducing the costs of products or services. For
example, an AIS can monitor machinery so operators are notified immediately
when performance falls outside acceptable quality limits. This helps maintain
product quality, reduces waste, and lowers costs.

o Improving efficiency. For example, timely information makes a just-in-time

manufacturing approach possible, as it requires constant, accurate, up-to-date
information about raw materials inventories and their locations.

o Sharing knowledge. Sharing knowledge and expertise can improve operations

and provide a competitive advantage. For example, CPA firms use their
information systems to share best practices and to support communication
between offices. Employees can search the corporate database to identify experts
to provide assistance for a particular client; thus, a CPA firm’s international
expertise can be made available to any local client.

o Improving the efficiency and effectiveness of its supply chain. For example,
allowing customers to directly access inventory and sales order entry systems
can reduce sales and marketing costs, thereby increasing customer retention
rates.

o Improving the internal control structure. An AIS with the proper internal
control structure can help protect systems from fraud, errors, system failures,
and disasters.

o Improving decision making. Improved decision making is vitally important.

 DPA10023 Computer Application in Accounting

SIX COMPONENTS AIS TO FULFIL IMPORTANT BUSINESS FUNCTIONS:

o Collect and store data about organizational activities, resources, and personnel.
Organizations have a number of business processes, such as making a sale or
purchasing raw materials, which are repeated frequently.

o Transform data into information so management can plan, execute, control, and
evaluate activities, resources, and personnel.

o Provide adequate controls to safeguard the organization’s assets and data

TERMS USED IN ACCOUNTING SYSTEM :

o A system is a set of two or more interrelated components that interact to achieve

a goal. Most systems are composed of smaller subsystems that support the larger
system. For example, a college of business is a system composed of various
departments, each of which is a subsystem. Moreover, the college itself is a
subsystem of the university. Each subsystem is designed to achieve one or more
organizational goals. Changes in subsystems cannot be made without
considering the effect on other subsystems and on the system as a whole.

o Goal conflict occurs when a subsystem’s goals are inconsistent with the goals
of another subsystem or with the system as a whole.

o Goal congruence occurs when a subsystem achieves its goals while contributing
to the organization’s overall goal. The larger the organization and the more
complicated the system, the more difficult it is to achieve goal congruence.

o Data are facts that are collected, recorded, stored, and processed by an
information system. Businesses need to collect several kinds of data, such as the
activities that take place, the resources affected by the activities, and the people
who participate in the activity. For example, the business needs to collect data
about a sale (date, total amount), the resource sold (good or service, quantity
sold, unit price), and the people who participated (customer, salesperson).

o Information is data that have been organized and processed to provide meaning
and improve the decision-making process. As a rule, users make better decisions
as the quantity and quality of information increase.

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CHARACTERISTICS OF THE SYSTEM.

o Relevant- Reduces uncertainty, improves decision making, or confirms or

corrects prior expectations.

o Reliability- Free from error or bias; accurately represents organization events or

activities.

o Complete- Does not omit important aspects of the events or activities it

measures.

o Timely- Provided in time for decision makers to make decisions.

o Understandable- Presented in a useful and intelligible format.

o Accessibility- Available to users when they need it and in a format they can use.

o Verifiability- Two independent, knowledgeable people produce the same

information.

SIX COMPONENTS IN ACCOUNTING SYSTEM.

o The people who use the system

o The procedures and instructions used to collect, process, and store data

o The data about the organization and its business activities

o The software used to process the data

o The information technology infrastructure, including the computers, peripheral

devices, and network communications devices used in the AIS

o The internal controls and security measures that safeguard AIS data

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DATA PROCESSING CYCLE.

o The four operations (data input, data storage, data processing, and information
output) performed on data to generate meaningful and relevant information.

DATA INPUT

o The first step in processing input is to capture transaction data and enter them
into the system. The data capture process is usually triggered by a business
activity. Data must be collected about three facets of each business activity:

a. Each activity of interest

b. The resource(s) affected by each activity
c. The people who participate in each activity

o For example, the most frequent revenue cycle transaction is a sale, either for
cash or on credit. S&S may find it useful to collect the following data about a
sales transaction:

_ Date and time the sale occurred

_ Employee made the sale and the checkout clerk who processed the sale
_ Checkout register where the sale was processed
_ Item(s) sold
_ Quantity of each item sold
_ List price and actual price of each item sold
_ Total amount of the sale
_ Delivery instructions
_ For credit sales: customer name, customer bill-to and ship-to addresses

o Historically, most businesses used paper source documents to collect data

about their business activities. They later transferred that data into the
computer. When the data is entered using computer screens, they often retain
the same name and basic format as the paper source document it replaced.

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o Turnaround documents are company output sent to an external party, who

often adds data to the document, and then are returned to the company as an
input document. They are in machine-readable form to facilitate their
subsequent processing as input records. An example is a utility bill that is sent
to the customer, returned with the customer’s payment, and read by a special
scanning device when it is returned.

DATA PROCESSING

o Once business activity data have been entered into the system, they must be
processed to keep the databases current. The four different types of data
processing activities, referred to as CRUD, are as follows:

a. Creating new data records, such as adding a newly hired employee to the
payroll database.

b. Reading, retrieving, or viewing existing data.

c. Updating previously stored data.

d. Deleting data, such as purging the vendor master file of all vendors the
company no longer does business with.

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o Updating done periodically, such as daily, is referred to as batch processing.

Although batch processing is cheaper and more efficient, the data are current
and accurate only immediately after processing. For that reason, batch
processing is used only for applications, such as payroll, that do not need
frequent updating and that naturally occur or are processed at fixed time
periods.

o Most companies update each transaction as it occurs, referred to as online, real-

time processing because it ensures that stored information is always current,
thereby increasing its decision-making usefulness. It is also more accurate
because data input errors can be corrected in real time or refused. It also
provides significant competitive advantages. For example, FedEx updated its
mission statement to include the phrase “Positive control of each package will be
maintained by utilizing real-time electronic tracking and tracing systems with
FedEx’s system, employees and customers can track the exact location of each
package and estimate its arrival time. A combination of the two approaches is
online batch processing, where transaction data are entered and edited as they
occur and stored for later processing.

INFORMATION OUTPUT

o The final step in the data processing cycle is information output. When displayed
on a monitor, output is referred to as “soft copy.” When printed on paper, it is
referred to as “hard copy.” Information is usually presented in one of three forms:
a document, a report, or a query response.

o Documents are records of transaction or other company data. Some, such as

checks and invoices, are transmitted to external parties. Others, such as
receiving reports and purchase requisitions, are used internally. Documents can
be printed out, or they can be stored as electronic images in a computer. For
example, Toys ‘R’ Us uses electronic data interchange to communicate with its
suppliers. Every year it processes over half a million invoices electronically,
thereby eliminating paper documents and dramatically reducing costs and
errors. This has resulted in higher profits and more accurate information.

o Reports are used by employees to control operational activities and by managers

to make decisions and to formulate business strategies. External users need
reports to evaluate company profitability, judge creditworthiness, or comply with
regulatory requirements. Some reports, such as financial statements and sales
analyses, are produced on a regular basis. Others are produced on an exception
basis to call attention to unusual conditions. For example, S&S could have its
system produce a report to indicate when product returns exceed a certain
percentage of sales. Reports can also be produced on demand.

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o 1.2 INFORMATION OF BUSINESS PROCESS

o A transaction is an agreement between two entities to exchange goods or

services or any other event that can be measured in economic terms by an
organization. Examples include selling goods to customers, buying inventory
from suppliers, and paying employees. The process that begins with capturing
transaction data and ends with informational output, such as the financial
statements, is called transaction processing.

o Many business activities are pairs of events involved in a give-get exchange.

Most organizations engage in a small number of give-get exchanges, but each
type of exchange happens many times. For example, S&S will have thousands of
sales to customers every year in exchange for cash. Likewise, S&S will
continuously buy inventory from suppliers in exchange for cash.

o These exchanges can be grouped into five major business processes or

transaction cycles:

a. The revenue cycle, where goods and services are sold for cash or a future
promise to receive cash.

b. The expenditure cycle, where companies purchase inventory for resale or

raw materials to use in producing products in exchange for cash or a future
promise to pay cash.

c. The production or conversion cycle, where raw materials are transformed

into finished goods.

d. The human resources/payroll cycle, where employees are hired, trained,

compensated, evaluated, promoted, and terminated.

e. The financing cycle, where companies sell shares in the company to

investors and borrow money, and where investors are paid dividends and
interest is paid on loans

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What Is the Accounting Cycle?

The accounting cycle is a collective process of identifying, analysing, and recording the
accounting events of a company. The series of steps begin when a transaction occurs
and end with its inclusion in the financial statements. Additional accounting records
used during the accounting cycle include the general ledger and trial balance.

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1.3 NATURE OF DOCUMENTATION SYSTEM

Documentation explains how a system works, including the who, what, when, where,
why, and how of data entry, data processing, data storage, information output, and
system controls. Popular means of documenting a system include diagrams,
flowcharts, tables, and other graphical representations of data and information. These
are supplemented by a narrative description of the system, a written step-by-step
explanation of system components and interactions.
Documentation tools are important on the following levels:

a. At a minimum, you must be able to read documentation to determine how a

system works.

b. You may need to evaluate documentation to identify internal control strengths

and weaknesses and recommend improvements as well as to determine if a
proposed system meets the company’s needs.

c. More skill is needed to prepare documentation that shows how an existing or

proposed system operates.

This chapter discusses the following documentation tools:

1. Data flow diagram (DFD), a graphical description of data sources, data flows,
transformation processes, data storage, and data destinations

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2. Flowchart, which is a graphical description of a system. There are several types of

flow charts, including:

a. Document flowchart, which shows the flow of documents and information

between departments or areas of responsibility

b. System flowchart, which shows the relationship among the input,

processing, and output in an information system

c. Program flowchart, which shows the sequence of logical operations a

computer performs as it executes a program.

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3. Business Process diagrams, which are graphical descriptions of the business

processes used by a company Accountants use documentation techniques extensively.
Auditing standards require that independent auditors understand the automated and
manual internal control procedures an entity uses. One good way to gain this
understanding is to use business process models or flowcharts to document a system,
because such graphic portrayals more readily reveal internal control weaknesses and
strengths.

1.4NATURE OF STORAGE AND DATABASE

The difference between database and storage

o Storage could be a file or object storage which is a physical disk.

o Database is some sort of organised data store is a logical store

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What are primary and secondary storage devices?

o Answer: A computer stores data using several different methods. Therefore, there
are different levels of data storage, which may be referred to as primary
and secondary storage. A computer's internal hard drive is often considered a
primary storage device, while external hard drives and other external media are
considered secondary storage devices.

o However, primary and secondary storage may also refer specifically to

the components inside the computer. In this case, primary storage typically refers to
random access memory (RAM), while secondary storage refers to the computer's
internal hard drive.

o RAM, commonly called "memory," is considered primary storage, since it stores data
that is directly accessible by the computer's CPU. RAM is a high-speed storage
medium that can be accessed with minimal delay. Because the RAM is connected
directly to the CPU via the memory bus, the CPU can access data stored in RAM
very quickly. For this reason, RAM is used to store data loaded by
active programs and the operating system.

o Hard drives are considered secondary storage since they are not connected directly
to the CPU. Instead, hard drives send and receive data through an I/O bus, which
may pass through a cache or other type of memory before getting to the CPU. Also,
hard drives are not as fast a RAM, which means they cannot transfer data as
quickly. However, unlike RAM, hard drives retain data when the computer is turned
off. This is because hard drives store data magnetically, while RAM requires an
electrical current.

o While the computer's primary internal hard drive is the most common
secondary storage device, other devices may be considered secondary storage devices
as well. These include additional internal hard drives, external hard drives,
and optical drives, which are used for CDs, DVDs, and other optical media.

Off-line storage – Memory card, USB flash drive

o Offline storage refers to any storage medium that must be physically inserted into
a system every time a user’s wants to access or edit data. Offline storage can be any
type of internal or external storage that can easily be removed from the computer.

o Offline storage is also known as removable storage.

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o Offline storage is any storage that is not currently online, live or connected to the
computer. The data stored in offline storage remains permanently in the storage
device even if it’s disconnected or unplugged from the computer after the data has
been stored. Offline storage is generally portable in nature and can be used on
different computer systems. Common examples of offline storage include floppy
disks, compact disks and USB sticks.

Cloud storage – iCloud, sky drive

o Cloud storage is a model of computer data storage in which the digital data is
stored in logical pools. The physical storage spans multiple servers (sometimes in
multiple locations), and the physical environment is typically owned and managed
by a hosting company.

Why Store Your Data in the Cloud?

o Since the advent of the internet, the technology industry has been steadily
moving away from local storage to remote, server -based storage and
processing—what is known as the cloud. Look at music and movies: We
used to play them from local media, but now they're streamed from servers.
By keeping your own documents and media files in the cloud, you can reap
the same advantages of anywhere-access and sharing. Productivity gains
and reduced local storage requirements are additional benefits. We've
rounded up the best cloud storage and file -sharing and file-syncing
services to help you decide which are right for you.

o These services provide seamless access to all your important data —Word
docs, PDFs, spreadsheets, photos, and any other digital assets —from
wherever you are. You no longer need to be sitting at your work PC to see
your work files. With cloud syncing you can get to them from your
smartphone on the train, from your tablet on your couch, and from the
laptop in your hotel room or kitchen. Using a service like those included
here means no more having to email files to yourself or plug and unplug
USB thumb drives.

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Source :

Romney, M. B., & Steinbart, P. J. (2018). Accounting Information Systems (14th ed.).
Kuala Lumpur: Pearson.

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