Chapter 1: Accounting Information Systems – An Overview

1. What is the diff b\w Data & Information?

• Data: Raw facts (e.g., numbers, dates, names) without context.
• Information: Organized data with context that is meaningful for decision-making.
→Data alone has limited use. When structured (Eg:invoice), it becomes useful info.
2. What makes information useful?
1. Relevant – Applicable to the decision at hand.
2. Reliable – Free from bias or error.
3. Complete – Includes all necessary data.
4. Timely – Available when needed.
5. Understandable – Easy to comprehend.
6. Verifiable – Can be confirmed independently.
7. Accessible – Easily retrievable when required.
Keyword Example
Relevant An accounts receivable aging report used in credit granting decisions.
The data on a report was checked by two clerks working independently. -
Reliable
A report checked by 3 different people for accuracy.
Complete Accounts receivable aging report that included all customer accounts.
An accounts receivable aging report was received before the credit
manager had to make a decision whether to extend customer credit.
Timely
-The manager worked over the weekend and found the customer's
production request report on the company network.
The report was carefully designed so that the data contained on the
Understandable
report became information to the reader.
Verifiable The data on a report was checked by two clerks working independently
Accessible The manager was able to find the report on the company’s network.

What is an Accounts Receivable Aging Report?

An accounts receivable aging report lists customer account balances based on the
length of time they have been outstanding. It categorizes receivables into aging periods,
such as 0–30 days, 31–60 days, 61–90 days, and over 90 days.

Why is an Accounts Receivable Aging Report Needed for an Audit?

The report is required during an audit to verify whether the company's accounts
receivable balance is accurately valued. It helps auditors assess the likelihood of
collecting outstanding debts and determine if provisions for bad debts are adequate.
What is Accounts Receivable Aging Report Used for in Normal Comp Operations?
The accounts receivable aging report is used to:
• Evaluate current credit policies.
• Set appropriate credit limits for new customers.
• Review and adjust credit limits for existing customers.
• Estimate the amount of bad debts.
• Initiate collection procedures for overdue accounts.

What Data is Needed to Prepare the Report?

To prepare an accounts receivable aging report, you need:
• Credit sales data.
• Cash collections data for each customer who was granted credit.

Where Will You Collect the Data From?

The required data can be collected from:
• Sales transaction files or tables.
• Cash collections files or tables.
If data is maintained manually, it can be gathered from:
• Daily or monthly sales reports.
• Daily or monthly cash receipts reports.

How Will You Collect the Necessary Data?

• If the data is stored electronically (machine-readable form), you can collect it by
preparing and running programs or queries to extract sales and cash receipts data.
• If the data is maintained on paper, it must be collected manually from the sales
and cash receipts reports.
What Will the Report Look Like?
The accounts receivable aging report should be organized with the following columns:

It can be prepared using Excel or any other spreadsheet application, or in a paper

format if necessary.

How Will You Distribute the Report?

• Audience: The report should only be distributed to employees with operational or
authority responsibility over customer accounts, such as:
o Accounts Receivable Clerk
o Credit Manager
o Controller
 • No.of Copies: Only as many copies as necessary should be produced to
maintain confidentiality.
• Distribution Method: If electronic, restrict access to authorized personnel only.
If paper-based, deliver securely to ensure confidentiality.
• Security Features: Store the electronic report on a password-protected server.
Encrypt the file if sending by email or sharing via server.
Cycle Activities
Purchase raw materials, Pay for raw materials, Record goods received
Expenditure cycle from vendor, Pay utility bills, Pay property taxes on office building, Send
an order to a vendor, Put purchased goods into the warehouse
Financing cycle Pay off mortgage on factory, Draw on line-of-credit, Obtain a bank loan
Hire a new assistant controller, Disburse payroll checks to factory
HR/payroll cycle workers, Record factory employee timecards, Send new employees to a
business ethics course, Pay federal payroll taxes
Establish a $10,000 credit limit for a new customer, Update the
allowance for uncollectible accounts, Complete picking ticket for
Revenue cycle
customer order, Sell concert tickets, Sell DVD player, Collect payment
on customer accounts, Pay sales commissions
Production cycle Decide how many units to make next month
Chart of accounts must be tailored to an org’s specific needs. Discuss how the
chart of A/c for the following org would differ from the one presented for S&S.
 Differences in Chart of Accounts for Various Organizations Compared to S&S
a. University- No equity/summary drawing a/cs. Instead, universities have a fund
balances section for each type of fund.
• Types of funds:
o Current Fund: Used for operating expenses, not capital expenditures.
o Loan Funds: Used to account for scholarships and loans.
o Endowment Funds: Account for resources from specific donors, where the principal is
preserved, and the income is used for specific purposes.
o Plant Funds: Used for major capital expenditures. These funds are divided into
restricted and unrestricted categories.
→Unlikely to have Notes Receivable, but may have Accounts Receivable for students
paying tuition in instalments.
• Revenue sources include: Tuition and fees, Gifts, Investment income, Sales of services,
Public university funding (e.g., state appropriations)
->Student loans = assets ->Student deposits = liabilities
b. Bank- Loans to customers = assets, current/noncurrent depending on their term.
Customer accounts = liabilities
• No inventory, No cost of goods sold (COGS)
• Revenue types include: Interest on loans, Investment income, Service charges.
c. Government Unit- No equity/summary drawing a/cs. Uses fund balances instead.
• Balance sheet has two major categories: Assets, Liabilities & Fund Equity.
• Uses a separate chart of accounts for each fund: General fund, Special revenue fund,
Capital projects fund, Debt service fund.
• Rev & exp a/cs are grouped by purpose (eg: police, highways, sanitation, education).
• Encumbrance accounts are included to track committed but not yet spent funds.
• Revenue types include: Taxes, Licenses, Permits, Fines, Charges for services.
• Taxes receivable is a separate a/c due to imp, No COGS.
d. Manufacturing Company
• Uses several types of inventory a/cs: Raw materials, Work-in-process, Finished goods
• COA includes additional digits: To code revenues and expenses by product
To code assets/liabilities by divisions
• Contains more detailed COGS and production-related expense a/cs
e. Expansion of S&S (e.g., into multiple stores or divisions)
• Add additional digits to the COA to:
o Track revenues and expenses by products and by stores
o Track assets and liabilities by store or division
 Q.SDC is a company with 4 divisions that make auto parts. The controller, Mr.
Mace, wants a new chart of accounts (COA) that is:
o Easy to manage and not too long (only 6 digits).
o Divided into major categories: assets, liabilities, equity, revenue, and expenses.
o Able to track:
o Up to 10 control accounts under each major category.
o Up to 100 subsidiary accounts under each control account.
o Up to 5 product groups per division.
o Up to 6 cost centers per product group.
o 56 expense or variance types.
o ➤ The 6-digit code format is: ABCDEF
Digit(s) What it Means Details
1 = Heat Treating
2 = Extruding
A Division Code
3 = Small Parts Stamping
4 = Machining
1 = Asset
2 = Liability
B Account Type 3 = Equity
4 = Revenue
5 = Expense
If B = 1–3 → Balance sheet subcategories (e.g.,
Subcategory or Product current asset = 1)
C
Group If B = 4–5 → Product group (1–5), or 6 =
General/Non-revenue
Control Account or Cost If B = 1–3 → Control account (1–9)
D
Center If B = 4–5 → Cost center (1–6)
Subsidiary or Expense If B = 1–3 → Subsidiary accounts (01–99)
EF
Code If B = 5 → Expense or variance code (01–56)

Code Description
111301 Heat Treating, Asset, Current Assets, A/R Control, Customer 01
223105 Extruding, Liability, Short-term Liabilities, A/P Control, Vendor 05
331201 Small Parts, Equity, Retained Earnings, Main Account, Internal Classification
441116 Machining, Revenue, Product Group 1, Sales Dept., Sales Revenue
 Code Description
453406 Machining, Expense, Product Group 3, IT Dept., Natural Expense: Wages
456604 Machining, Expense, General Costs, Admin Dept., Variance: Utilities Overhead

3. What is the value of information?

Value of Information = Benefits – Costs
o Benefits: Improved decision-making.
o Costs: Time and resources used to gather and maintain information.
4. What is a Business Process?
• A business process is a set of related and coordinated tasks to achieve a goal.
• Involves people, machines, or both.
• Eg: Administration, IT, Sales & Marketing, Procurement, Operations, Security, etc.
5. What is a Transaction?
• A transaction is an economic exchange between two entities.
• Transactions are grouped into cycles based on give–get exchanges.
Common transaction cycles:
Cycle Give Get
Revenue Goods/Services Cash
Expenditure Cash Goods/Services
Production Labor & Materials Finished Goods
Payroll Cash Labor
Financing Cash Cash (e.g., loan)
6. Who uses AIS data?
• Internal users: Management, Employees
• External users: Investors, Government, Lenders, Customers, Board of Directors, etc.
Accounting Information System (AIS)- is A system that collects, records, stores, and
processes data for decision-making. AIS Components:
• People, Procedures, Technology (IT, Software, Data), Internal Controls.
7. How does AIS add value?
• Improves product/service quality.
• Increases efficiency and decision-making.
• Enhances supply chain and internal controls.
• Facilitates knowledge sharing.
8. How does AIS relate to corporate strategy?
• Strategy defines the organizational goal (e.g., profitability).
• AIS supports that strategy by providing relevant information to monitor progress.
 9. What is the Value Chain in AIS?
• Value Chain: Activities that add value to a product/service.
o Primary activities: Direct value (e.g., production, sales).
o Support activities: Indirect support (e.g., HR, IT).
• Supply Chain: Broader system including suppliers and customers.
Chapter 2: Overview of Transaction Processing and ERP Systems
1. What is the Data Processing Cycle?
Step 1: Data Input
• Triggered by a business event.
• Ensure data accuracy and policy compliance.
Data Sources:
• Source Documents (paper or digital)
• Turnaround Documents
• Source Data Automation (eg:barcode scanners)
Step 2: Data Storage
Organized through:
• Chart of Accounts
• Transaction Journals
• Subsidiary Ledgers
• General Ledger
→Together, they provide an audit trail (traceable path of a transaction).
Step 3: Data Processing – CRUD operations:
• Create records
• Read data
• Update data
• Delete data
→Can be done in Batch (end of day) or Real-time.
Step 4: Information Output
• Soft copy (online)
• Hard copy: Documents, Reports, Queries
2. What are Coding Techniques in AIS?
Technique Description
Sequence code Numbered sequentially (e.g., Invoice #001, #002)
Block code Blocks reserved for categories (e.g., 2xxx = refrigerators)
Group code Subgrouped digits (e.g., VIN numbers)
Mnemonic code Uses letters/numbers for meaning (e.g., DRY300W05)
3. What is an ERP (Enterprise Resource Planning) System?
• An integrated software system managing: Accounting, Procurement, HR/Payroll,
Supply Chain, Project & Risk Management, Financial Reporting
 Key ERP Features: Single database across all departments, Eliminates data
duplication, Ensures data integrity and access control, Improves customer service and
productivity
Advantages of ERP
• Integrated view across departments, Data entered 1s only, Enhances visibility &
monitoring, Standard procedures, Better security, Increase automation & productivity.
Disadvantages of ERP
• High cost and complexity
• Long implementation time
• Requires training and change management
• Customization challenges