CHAPTER 1

Accounting Information Systems:

INTRODUCTION

• Questions to be addressed in this chapter include:

 What is the meaning of system, data, and information?

 What is an accounting information system (AIS)?
 Why is the AIS an important topic to study?
 What is the role of the AIS in the value chain?
 How does the AIS provide information for decision making?
 What are the basic strategies and strategic positions an organization can pursue?

SYSTEMS, DATA, AND INFORMATION

• A System is:
– A set of interrelated components
– That interact
– To achieve a goal
• Most systems are composed of smaller subsystems . . .
• . . . and vice versa!
• Every organization has goals.The subsystems should be designed to maximize achievement of
the organization’s goals.
• Even to the detriment of the subsystem itself.
• EXAMPLE: The production department (a subsystem) of a company might have to forego its
goal of staying within its budget in order to meet the organization’s goal of delivering product
on time.
• Goal conflict occurs when the activity of a subsystem is not consistent with another subsystem
or with the larger system.
• Goal congruence occurs when the subsystem’s goals are in line with the organization’s goals.
• The larger and more complicated a system, the more difficult it is to achieve goal congruence.
• The systems concept encourages integration (i.e., minimizing the duplication of recording,
storing, reporting, and processing).
• Dataare facts that are collected, recorded, stored, and processed by an information system.
• Organizations collect data about:
– Events that occur
– Resources that are affected by those events
– Agents who participate in the events
• Information is different from data.
• Information is data that have been organized and processed to provide meaning to a user.
• Usually, more information and better information translates into better decisions.

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 • However, when you get more information than you can effectively assimilate, you suffer from
information overload.
– Example: Final exams week!
• When you’ve reached the overload point, the quality of decisions declines while the costs of producing
the information increases.
Benefits of information
Benefits of information may include:
– Reduction of uncertainty
– Improved decisions
– Improved ability to plan and schedule activities
– Cost of producing information: Costs may include time and resources spent:
• Collecting data
• Processing data
• Storing data
• Distributing information to users
– Value of information:Costs and benefits of information are often difficult to quantify,
but you need to try when you’re making decisions about whether
to provide information.
Characteristics that make information useful:
1. Relevance:-It reduces uncertainty by helping you predict what will happen or confirm
what already has happened.
2. Reliability:- It’s dependable, i.e., free from error or bias and faithfully portrays events and
activities.
3. Completeness: -It doesn’t leave out anything that’s important.
4. Timeliness: - You get it in time to make your decision.
5. Understandability: -It’s presented in a manner you can comprehend and use.
6. Verifiability:- A consensus notion—the nature of the information is such that different
people would tend to produce the same result.
7. Accessibility:-You can get to it when you need it and in a format you can use.

• Information is provided to both:

1. External users
2. Internal users
1. External users
• External users primarily use information that is either:
• MANDATORY INFORMATION—required by a governmental entity, or
• ESSENTIAL INFORMATION—required to conduct business with external parties, such as
purchase orders.
• In providing mandatory or essential information, the focus should be on:
• Minimizing costs.
• Meeting regulatory requirements.
• Meeting minimum standards of reliability and usefulness.

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2. Internal users
 Internal users primarily use discretionary information.
 The primary focus in producing this information is ensuring that benefits exceed costs, i.e., the
information has positive value.

WHAT IS AIS?
• AIS is a system that collects, records, stores, and processes data to produce information for
decision makers.
• It can:
– Use advanced technology; or
– Be a simple paper-and-pencil system; or
– Be something in between.
• Technology is simply a tool to create, maintain, or improve a system.
• The functions of an AIS are to:
– Collect and store data about events, resources, and agents.
– Transform that data into information that management can use to make decisions about
events, resources, and agents.
– Provide adequate controls to ensure that the entity’s resources (including data) are:
• Available when needed
• Accurate and reliable
WHY STUDY ACCOUNTING INFORMATION SYSTEMS?
A. It’s fundamental to accounting.
 Accounting is an information-providing activity, so accountants need to understand:
– How the system that provides that information is designed, implemented, and used.
– How financial information is reported.
– How information is used to make decisions.
• Other accounting courses focus on how the information is provided and used.
• An AIS course places greater emphasis on:
– How the data is collected and transformed.
– How the availability, reliability, and accuracy of the data is ensured.
• AIS courses are not number-crunching courses.
B. The skills are critical to career success.
• Auditors need to evaluate the accuracy and reliability of information produced by the AIS.
• Tax accountants must understand the client’s AIS adequately to be confident that it is
providing complete and accurate information for tax planning and compliance work.
• In private industry and not-for-profit, systems work is considered the most important
activity performed by accountants.
• In management consulting, the design, selection, and implementation of accounting
systems is a rapid growth area.
C. The AIS course complements other systems courses.
• Other systems courses focus on design and implementation of information systems,
databases, expert systems, and telecommunications.

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 • AIS courses focus on accountability and control.
D. AIS topics are tested on the new CPA exam.
• Makes up about 25% of the Business Environment & Concepts section of the CPA exam.
E. AIS topics impact corporate strategy and culture.

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 ROLE OF THE AIS IN THE VALUE CHAIN
• The objective of most organizations is to provide value to their customers.
• Although “adding value” is a commonly used buzzword, in its genuine sense, it means making
the value of the finished component greater than the sum of its parts.
• It may mean:
– Making it faster
– Making it more reliable
– Providing better service or advice
– Providing something in limited supply
– Providing enhanced features
– Customizing it
• Value is provided by performing a series of activities referred to as the value chain. These
include:
– Primary activities
– Support activities
• These activities are sometimes referred to as “line” and “staff” activities respectively.
1. Primary activities
• Primary activities include:
– Inbound logistics: -Receiving, storing, and distributing the materials that are inputs to
the organization’s product or service.
– Operations: - Transforming those inputs into products or services.
– Outbound Logistics: - Distributing products or services to customers.
– Marketing and Sales: - Helping customers to buy the organization’s products or services.
– Service: - Post-sale support provided to customers such as repair and maintenance
function.
2. Support activities
• Support activities include:
– Firm infrastructure: -Accountants, lawyers, and administration. Includes the company’s
accounting information system.
– Human Resources: - Involves recruiting and hiring new employees, training employees,
paying employees, and handling employee benefits.
– Technology: -Activities to improve the products or services (e.g., R&D, Web site
development).
– Purchasing: -Buying the resources (e.g., materials, inventory, fixed assets) needed to carry
out the entity’s primary activities.
• Information technology can significantly impact the efficiency and effectiveness with which the
preceding activities are carried out.
• An organization’s value chain can be connected with the value chains of its customers, suppliers,
and distributors.

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 There is variation in the degree of structure used to make decisions:
– Structured decisions:-
 Repetitive and routine.
 Can be delegated to lower-level employees.
 EXAMPLE: The decision about extending credit to customers.
– Semi-Structured decisions
 Incomplete rules.
 Require subjective assessments.
 EXAMPLE: Setting a marketing budget for new product.
– Unstructured decisions
 Non-recurring and non-routine.
 Require a great deal of subjective assessment.
 EXAMPLE: Choosing the cover for a magazine.
 There is also variation in the scope of a decision’s effect:
– Occupational(Operational) control decisions
 Relate to performance of specific tasks
 Often of a day-to-day nature.
 EXAMPLE: Deciding whether to order inventory.
– Management control decisions
 Relate to utilizing resources to accomplish organizational objectives.
 EXAMPLE: Budgeting.
– Strategic planning decisions
 The “what do we want to be when we grow up” types of questions.
 Involves establishing:
o Organizational objectives
o Policies to achieve those objectives
 EXAMPLE: Deciding whether to diversify the company into other product
lines.
 In general, the higher a manager is in the organization, the more likely he/she is to be engaging
in:
– Less structured decisions
– Broader scope (i.e., strategic planning) decisions

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 Corporations have:
– Unlimited opportunities to invest in technology.
– Limited resources to invest in technology.
 Consequently, they must identify the improvements likely to yield the highest return.
 This decision requires an understanding of the entity’s overall business strategy.
 Michael Porter suggests that there are two basic business strategies companies can follow:
– Product-differentiation strategy:-
 A product-differentiation strategy involves setting your product apart from those
of your competitors, i.e., building a “better” mousetrap by offering one that’s
faster, has enhanced features, etc.
– Low-cost strategy
 A low-cost strategy involves offering a cheaper mousetrap than your
competitors. The low cost is made possible by operating more efficiently.
 Sometimes a company can do both, but they normally have to choose.
 Porter also argues that companies must choose a strategic position among three choices:
– Variety-based strategic position
 Offer a subset of the industry’s products or services.
 EXAMPLE: An insurance company that only offers life insurance as opposed
to life, health, property-casualty, etc.

– Needs-based strategic position
 Serve most or all of the needs of a particular group of customers in a target
market.
– Access-based strategic position
 Serve a subset of customers who differ from others in terms of factors such as
geographic location or size.
 EXAMPLE: Satellite Internet services are intended primarily for customers in
rural areas who cannot get DSL or cable services.
 These strategic positions are not mutually exclusive and can overlap.
 Choosing a strategic position is important because it helps a company focus its efforts as
opposed to trying to be everything to everybody.
EXAMPLE: A radio station that tries to play all types of music will probably fail.
 It’s critical to design the organization’s activities so they reinforce one another in achieving the
selected strategic position. The result is synergy, which is difficult for competitors to imitate.
 The Internet makes strategy more important than ever
 Enterprise resource planning (ERP) systems integrate all aspects of a company’s operations
with its traditional AIS.
 The key feature of ERP systems is the integration of financial data and other nonfinancial
operating data.


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 CHAPTER 2
Overview of Business Processes
INTRODUCTION
• Questions to be addressed in this chapter include:
– What are the basic business processes in which an organization engages?
• What decisions must be made to undertake these processes?
• What information is required to make those decisions?
– What role does the data processing cycle play in organizing business processes and
providing information to users?
– What is the role of the information system and enterprise resource planning in modern
organizations?
INFORMATION NEEDS AND BUSINESS PROCESSES
• Businesses engage in a variety of processes, including:
– Acquiring capital
– Buying buildings and equipment  Each activity requires
– Hiring and training employees different types of decisions.
– Purchasing inventory  Each decision requires
– Doing advertising and marketing different types of
– Selling goods or services
information.
– Collecting payment from customers
– Paying employees
– Paying taxes
– Paying vendors
• Types of information needed for decisions:
– Some is financial
– Some is nonfinancial
– Some comes from internal sources
– Some comes from external sources
• An effective AIS needs to be able to integrate information of different types and from different
sources.
By improving business processes leading
to efficient production

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INTERACTION WITH EXTERNAL AND INTERNAL PARTIES

Internal External
Parties AIS Parties

• The AIS interacts with external parties, such as customers, vendors, creditors, and
governmental agencies.
• The AIS also interacts with internal parties such as employees and management.
• The interaction is typically two ways, in that the AIS sends information to and receives
information from these parties.
BUSINESS CYCLES
• 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:
– Sell goods to customers
– Depreciate equipment
• The business transaction cycle is a process that:
– Begins with capturing data about a transaction.
– Ends with an information output, such as financial statements.
• Many business processes are paired in give-get exchanges.
• Basic exchanges can be grouped into five major transaction cycles:
1. Revenue cycle
2. Expenditure cycle
3. Production cycle
4. Human resources/payroll cycle
5. Financing cycle
1. REVENUE CYCLE:-
 The revenue cycle involves interactions with your customers.
 You sell goods or services and get cash.

Give Get
Goods Cash
2. EXPENDITURE CYCLE:
 The expenditure cycle involves interactions with your suppliers.
 You buy goods or services and pay cash.

Give Get
Cash Goods
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3. PRODUCTION CYCLE
Give Raw
 In the production cycle, raw materials and labor are transformed into finished goods.
Get
Materials & Finished
Labor
4. HUMAN RESOURCE /PAYROLL Goods
CYCLE
 The human resources cycle involves interactions with your employees.
 Employees are hired, trained, paid, evaluated, promoted, and terminated.

Give Get
Cash
5. FINANCING CYCLE
Labor
 The financing cycle involves interactions with investors and creditors.
 You raise capital (through stock or debt), repay the capital, and pay a return on it (interest
or dividends).

Give Get

Cash cash
Thousands of transactions can occur within any of these cycles.
 But there are relatively few types of transactions in a cycle.
 EXAMPLE: In the revenue cycle, the basic give-get transaction is:
– Give goods
– Get cash
Other transactions in the revenue cycle include:
 Handle customer inquiries  Update sales and Accts Rec. for sales
 Take customer orders  Receive customer payments
 Approve credit sales  Update Accts Rec. for collections
 Check inventory availability  Handle sales returns, discounts, and bad
 Initiate back orders debts
 Pick and pack orders  Prepare management reports
 Ship goods  Send info to other cycles
 Bill customers

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 Transactions in the expenditure cycle:
 MAJOR GIVE-GET:  Update accounts payable for purchase
 Give cash; get goods or services  Approve invoices for payment
 OTHER TRANSACTIONS  Pay vendors
 Requisition goods and services  Update accounts payable for payment
 Process purchase orders to vendors  Handle purchase returns, discounts, and
 Receive goods and services allowances
 Store goods  Prepare management reports
 Receive vendor invoices  Send info to other cycles

Transactions in the financing cycle:

 MAJOR GIVE-GET:  Pay dividends to investors and interest
 Give cash; get cash to lenders
 OTHER TRANSACTIONS  Retire debt
 Forecast cash needs  Prepare management reports
 Sell securities to investors  Send info to other cycles
 Borrow money from lenders

• Every transaction cycle:

– Relates to other cycles.
– Interfaces with the general ledger and reporting system, which generates information
for management and external parties.

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The Revenue Cycle

The Expenditure Cycle

Production Cycle

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The HR/Payroll Cycle

The Financing Cycle

The General Ledger and Reporting System

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• Many accounting software packages implement the different transaction cycles as separate
modules.
– Not every module is needed in every organization, e.g., retail companies don’t have a
production cycle.
– Some companies may need extra modules.
– The implementation of each transaction cycle can differ significantly across companies.
• However the cycles are implemented, it is critical that the AIS be able to:
– Accommodate the information needs of managers.
– Integrate financial and nonfinancial data.
TRANSACTION PROCESSING:
THE DATA PROCESSING CYCLE
• 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?
• To answer these questions, they must understand data processing concepts.
• An important function of the AIS is to efficiently and effectively process the data about a
company’s transactions.
– 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 four steps:
1. Data input
2. Data storage
3. Data processing
4. Information output
1. DATA INPUT
• The first step in data processing is to capture the data.
• Usually triggered by a business activity.
• Data is captured about:
– The event that occurred.
– The resources affected by the event.
– The agents who participated.
• A number of actions can be taken to improve the accuracy and efficiency of data input:
– Turnaround documents.
 EXAMPLE: The customer account number is coded on the document,
usually in machine-readable form, which reduces the probability of
human error in applying the check to the correct account.
– Source data automation.
 Capture data with minimal human intervention.
 EXAMPLES:
 ATMs for banking.

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  Point-of-sale (POS) scanners in retail stores.
 Automated gas pumps that accept your credit card.
– Well-designed source documents and data entry screens.
 How do these improve the accuracy and efficiency of data input?
– Using pre-numbered documents or having the system automatically assign
sequential numbers to transactions.
 What does it mean if a document number is missing in the sequence?
 What does it mean if there are duplicate document numbers?
– Verify transactions.
 EXAMPLE: Check for inventory availability before completing an
online sales transaction.
2. DATA STORAGE
• Data needs to be organized for easy and efficient access.
• Let’s start with some vocabulary terms with respect to data storage.
– Ledger
 A ledger is a file used to store cumulative information about resources
and agents. We typically use the word ledger to describe the set of t-
accounts. The t-account is where we keep track of the beginning
balance, increases, decreases, and ending balance for each asset,
liability, owners’ equity, revenue, expense, gain, loss, and dividend
account.
 Following is an example of a ledger account for accounts receivable:


– General ledger
 The general ledger is the summary level information for all accounts.
Detail information is not kept in this account.
 Example: Suppose XYZ Co. has three customers. A owes XYZ $100. B
owes $200. And C owes XYZ $300. The balance in accounts receivable
in the general ledger will be $600, but you will not be able to tell how
much individual customers owe by looking at that account. The detail
isn’t there.

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– Subsidiary ledger
 The subsidiary ledgers contain the detail accounts associated with the
related general ledger account. The accounts receivable subsidiary
ledger will contain three separate t-accounts—one for A, one for B, and
one for C.
 The related general ledger account is often called a “control” account.
 The sum of the subsidiary account balances should equal the balance in
the control account.
– Coding techniques
 Coding is a method of systematically assigning numbers or letters to
data items to help classify and organize them. There are many types of
codes including:
o Sequence codes
o Block codes
o Group codes
 With sequence codes, items (such as checks or invoices) are numbered
consecutively to ensure no gaps in the sequence. The numbering helps
ensure that:
o All items are accounted for.
o There are no duplicated numbers, which would suggest errors or
fraud.
 When block codes are used, blocks of numbers within a numerical
sequence are reserved for a particular category.
o EXAMPLE:
o 001–003
o 004–007
o 008–009
 When group codes are used, two or more subgroups of digits are used to
code an item.
 EXAMPLE: The code in the upper, right-hand corner of many checks is
a group code organized as follows:
o Digits 1–2 Bank number
o Digit 3 Federal Reserve District
o Digits 4–7 Branch office of Federal Reserve
o Digits 8–9 State
 Group coding schemes are often used in assigning general ledger
account numbers. The following guidelines should be observed:
o The code should be consistent with its intended use, so make
sure you know what users need.
o Provide enough digits to allow room for growth.
o Keep it simple in order to:
• Minimize costs

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 • Facilitate memorization
• Ensure employee acceptance
 Make sure it’s consistent with:
• The company’s organization structure
• Other divisions of the organization
– Chart of accounts
 The chart of accounts is a list of all general ledger accounts an
organization uses.
 Group coding is often used for these numbers, e.g.:
o The first section identifies the major account categories, such as
asset, liability, revenue, etc.
o The second section identifies the primary sub-account, such as
current asset or long-term investment.
o The third section identifies the specific account, such as accounts
receivable or inventory.
o The fourth section identifies the subsidiary account, e.g., the
specific customer code for an account receivable.
 The structure of this chart is an important AIS issue, as it must contain
sufficient detail to meet the organization’s needs.
– Journals
 In manual systems and some accounting packages, the first place that
transactions are entered is the journal.
 A general journal is used to record:
o Non-routine transactions, such as loan payments
o Summaries of routine transactions
o Adjusting entries
o Closing entries
 A special journal is used to record routine transactions. The most
common special journals are:
o Cash receipts
o Cash disbursements
o Credit sales
o Credit purchases
– Audit trail
 An audit trail exists when there is sufficient documentation to allow the
tracing of a transaction from beginning to end or from the end back to
the beginning.
 The inclusion of posting references and document numbers enable the
tracing of transactions through the journals and ledgers and therefore
facilitate the audit trail.
• Now that we’ve learned some storage terminology, let’s return to the data storage process.

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• 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.
• If you took a principles of financial accounting class, you probably worked with journals that
looked something like this:

• You may not have gotten much experience with special journals, but in most real-world
situations, journal entries really work like this.
– Entries are originally made in the general journal only for:
 Non-routine transactions
 Summaries of routine transactions
• Routine transactions are originally entered in special journals. The most common special
journals are:
 Credit sales
 Cash receipts
 Credit purchases
 Cash disbursements
• Let’s work through an example with a special journal. In this case we’ll use the sales journal.
• On December 1, a sale is made to Lee Co. for $800. Lee Co. was sent Invoice No. 201.

• The general ledger account number for accounts receivable is No. 120. Lee Co. was about the
122nd customer, so their subsidiary account number is 120-122.
•

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• The next sale on December 1 was made to May Co. for $700.

• The third and final sale on December 1 was made to DLK Co. for $900.
Page 5 Sales Journal
Invoice Account Account
Date Number Debited Number Post Ref. Amount
12/01/04 201 Lee Co. 120-122 800.00
12/01/04 202 May Co. 120-033 700.00
12/01/04 203 DLK Co. 120-111 900.00

• Suppose the company making these sales posts transactions at the end of each day.
Consequently, at day’s end, they will post each individual transaction to the accounts
receivable subsidiary ledger:
• An $800 increase in accounts receivable (debit) will be posted to Lee Co.’s subsidiary account
(120-122).
• A $700 debit will be posted to May Co.’s subsidiary account (120-033).
• A $900 debit will be posted to DLK Co.’s subsidiary account (120-111).
• Then a summary journal entry must be made to the general journal. The sales for the period are
totaled. In this case, they add up to $2,400.

Page 5 Sales Journal

Invoice Account Account
Date Number Debited Number Post Ref. Amount
12/01/04 201 Lee Co. 120-122 800.00
12/01/04 202 May Co. 120-033 700.00
12/01/04 203 DLK Co. 120-111 900.00
TOTAL 2,400.00
120/502

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• The “120/502” that appears beneath the total indicates that a summary journal entry is made in
the general journal with a debit to accounts receivable (120) and a credit to sales (502).

Page 5 Sales Journal

Invoice Account Account
Date Number Debited Number Post Ref. Amount
12/01/04 201 Lee Co. 120-122 800.00
12/01/04 202 May Co. 120-033 700.00
12/01/04 203 DLK Co. 120-111 900.00
TOTAL 2,400.00
120/502
• The entries in the general journal are periodically (or automatically) posted to the general
ledger. The $2,400 debit to accounts receivable will be posted to the accounts receivable
control account, and the $2,400 credit will be posted to the general ledger account for sales.
12/01/04 Accounts receivable 2,400
Sales revenue 2,400

12/01/04 Cash 1,800

Accounts receivable 1,800

12/01/04 Salaries expense 900

Cash 900
• From time to time, the subsidiary account balances will be added up, and this sum will be
compared to the balance of the control account.
• What does it mean if they aren’t equal?
• Review so far:
– When routine transactions occur, they are recorded in special journals.
– When non-routine transactions occur, they are recorded in the generaljournal.
– Periodically, the transactions in the special journal are totaled, and a summary entry is
made in the general journal.
– The individual line items in the special journal are posted to the subsidiary ledger
accounts.
– The items in the general journal are posted to the general ledger.
– Periodically, the balances in the general ledger control accounts are compared to the
sums of the balances in the related subsidiary accounts.
• The rest of the story:
– As transactions occur, they are recorded in journals and then posted to ledgers.
– But that’s not the end of the story.

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 – At the end of each accounting period, we complete the process by carrying out the
following steps.
–
• Using the balances in the general ledger, prepare a trial balance.
Debit Credit
Cash 1,000
Accounts Receivable 250
Equipment 4,000
Accum. Deprec. 360
Notes Payble 300
Common Stock 1,800
Retained Earnings 2,400
Sales Revenue 1,290
Salary expense 300
Rent expense 600
6,150 6,150
• Prepare the end-of-period adjusting entries.
– Record in journal
– Post to ledger
• Make an adjusted trial balance.
• Using the numbers in the adjusted trial balance, prepare an income statement.
• Prepare closing entries.
• Prepare:
– Statement of stockholders’ equity
– Balance sheet
– Statement of cash flows

COMPUTER-BASED STORAGE CONCEPTS

• Now let’s move on to discussing some computer-based storage concepts, including:

• Entity
• Attribute
• Record
• Data Value
• Field
• File
• Master File
• Transaction File
• Database
• 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.

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• What are some other entities in your student information system?

• 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
• What are some other attributes about students that a university might store?
• A field is the physical space where an attribute is stored. Data Value
• The space where the student ID number is stored is the student ID field.
Field File Record

Col. 1–9 Col. 10–30 Col. 31–40 Col. 41–50

328469993 SIMPSON ALICE 4053721111

328500732 ANDREWS BARRY 4057440236

529036409 FLANDERS CARLA 4057475863

• A recordis the set of attributes stored for a particular instance of an entity.

• The combination of attributes stored for Betty is Betty’s record.
• A data valueis the intersection of the row and column.
• The data value for ANDREWSBARRY’s phone number is 405-744-0236.
• A file is a group of related records.
• The collection of records about all students at the university might be called the student file. If
there were only three students and four attributes stored for each student, the file might appear
as shown below:
• A master fileis a file that stores cumulative information about an organization’s entities.
• It is conceptually similar to a ledger in a manual AIS in that:
– The file is permanent.
– The file exists across fiscal periods.
– Changes are made to the file to reflect the effects of new transactions.
• A 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 a manual AIS in that:
– The files are temporary.
– The files are usually maintained for one fiscal period.
• A database is a set of interrelated, centrally-coordinated files.

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• When files about students are integrated with files about classes and files about instructors, we
have a database.

Student Class
File File
Instructor
File
2. Data processing
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:
– 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.
– Changing data, e.g., a customer address.
– Adding data, e.g., a new customer.
– Deleting data, e.g., removing an old customer that has not purchased anything
in 5 years.
• Updating can be done through several approaches:
– Batch processing:
 Source documents are grouped into batches, and control totals are
calculated.
 Periodically, the batches are entered into the computer system, edited,
sorted, and stored in a temporary file.
 The temporary transaction file is run against the master file to update the
master file.
 Output is printed or displayed, along with error reports, transaction
reports, and control totals.
– Online batch processing:
 Transactions are entered into a computer system as they occur and stored
in a temporary file.
 Periodically, the temporary transaction file is run against the master file
to update the master file.
 The output is printed or displayed.
– Online, real-time processing
 Transactions are entered into a computer system as they occur.

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  The master file is immediately updated with the data from the
transaction.
 Output is printed or displayed.

4. INFORMATION OUTPUT
• The final step in the information process is information output.
• This output can be in the form of:
– Documents
 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.
– Reports
 Reports are used by employees to control operational activities and by
managers to make decisions and design strategies.
 They may be produced:
o On a regular basis
o On an exception basis
o On demand
 Organizations should periodically reassess whether each report is
needed.
– Queries
 Queries are user requests for specific pieces of information.
 They may be requested:
o Periodically
o One time
 They can be displayed:
o On the monitor, called soft copy.
o On the screen, called hard copy.
• Output can serve a variety of purposes:
– Financial statements can be provided to both external and internal parties.
– Some outputs are specifically for internal use:
 For planning purposes
o Examples of outputs for planning purposes include:
• Budgets
 Budgets are an entity’s formal expression of goals
in financial terms.
• Sales forecasts
 For management of day-to-day operations
o Example: Delivery schedules

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  For control purposes
o Performance reports are outputs that are used for control
purposes.
o These reports compare an organization’s standard or expected
performance with its actual outcomes.
o Management by exception is an approach to utilizing
performance reports that focuses on investigating and acting on
only those variances that are significant.
o
 For evaluation purposes
o These outputs might include:
• Surveys of customer satisfaction.
• Reports on employee error rates.

ROLE OF THE AIS

• The traditional AIS captured financial data.

– Non-financial data was captured in other, sometimes-redundant systems
• Enterprise resource planning (ERP) systems are designed to integrate all aspects of a
company’s operations (including both financial and non-financial information) with the
traditional functions of AIS.

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