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The Three Basic Functions Performed by an AIS

1 To collect and store data about the organizations business activities andtransactions efficiently and effectively:

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 accounttype.

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

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 managements objectives.

Safeguard organizational assets.Basic Subsystems in the AIS

1. Therevenue cycle: involves activities of selling goods or services andcollecting payment for those sales.

2. The expenditure cycle: involves activities of buying and paying for goods orservices used by the organization.

3. The human resources/payroll cycle:involves activities of hiring and payingemployees.

4. Theproduction cycle:involves activities converting raw materials and laborinto finished goods.

5. Thefinancing cycle:involves activities of obtaining necessary funds to runthe organization, repay creditors, and distribute profits to investors.

The Data Processing Cycle

The data processing cycle consists of four steps:1. Data input2. Data storage3. Data processing4. Information Output

The trigger for data input is usually business activity. Data must becollected about:

1. Each event of interest2. The resources affected by each event3. The agents who participate in each event

Common Source Documents and Functions

REVENUE CYCLE

EXPENDITURE CYCLE

HUMAN RESOURCES CYCLE

Journal voucher: record entry posted to general ledger.

Expenditur

e

Human

Resources

Production

Cycle

Revenue

C cle

Financing

Cycle

General Ledger & Reporting System

Source Document Function

Sales order Take customer order.

Remittance advice Receive cash.

Deposit slip Deposit cash receipts.

Credit memo Adjust customer accounts

Check Pay for items.

Source Document Function

Purchase order Order items.

Purchase requisition Request items.

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Data Processing Cycle:

Data Processing

Batch processingis the periodic updating of the data stored aboutresources and agents

On-line, real-time processingis the immediate updating as eachtransaction occurs

Data Storage

An entityis something about which information is stored. Each entity has attributesor characteristics of interest, which need to be

stored.

Record Transaction Data in Journals

After transaction data have been captured on source documents, the nextstep is to record the data in a journal.

A journal entry is made for each transaction showing the accounts andamounts to be debited and credited.

The general journal records infrequent or non-routine transactions. Specialized journals simplify the process of recording large numbers of

repetitive transactions.

What are the four most common types of transactions?1

Credit sales2 Cash receipts3 Purchases on account4 Cash disbursements

Post Transactions to Ledgers

Ledgers are used to summarize the financial status, including the currentbalance, of individual accounts.

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 ledgeraccount that has many individual subaccounts.

What are some commonly used subsidiary ledgers? accounts receivable inventory accounts payable

What is the general ledger account corresponding to a subsidiary ledgercalled?

control account A control account contains the total amount for all individual accounts in

the subsidiary ledger.

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.

Managerial Reports

The AIS must also be able to provide managers with detailed operationalinformation about the organizations performance.

Two important types of managerial reports are budget performance reports

What is a budget?

A budgetis the formal expression of goals in financial terms. One of the most common types of budget is a cash budget.

What is a performance report?

A performance report lists the budgeted and actual amounts of revenuesand expenses and also shows the variances, or differences, between these

two amounts.

Internal Control Considerations

The third functionof an AIS is to provide adequate internal controls toaccomplish three basic objectives:

1 Ensure that the information is reliable.2 Ensure that business activities are performed efficiently.3 Safeguard organizational assets.

What are two important methods for accomplishing these objectives?1 Provide for adequate documentation of all business activities.2 Design the AIS for effective segregation of duties.

Adequate Documentation

Documentation allows management to verify that assigned responsibilitieswere completed correctly.

What did Ashton encounter while working as an auditor that gave him afirsthand glimpse of the types of problems that can arise from inadequate

documentation?

failure to bill for repair workWhat is Segregation of Duties?

Segregation of duties refers to dividing responsibility for different portionsof a transaction among several people.

What functions should be performed by different people? authorizing transactions recording transactions maintaining custody of assets