CHAPTER 2

OVERVIEW OF BUSINESS PROCESSES

INTRODUCTION
• Questions to be addressed in this chapter include:
– What are the basic business activities in which an organization engages?
• What decisions must be made to undertake these activities?
• What information is required to make those decisions?
– What role does the data processing cycle play in organizing business activities and
providing information to users?
– What is the role of the information system and enterprise resource planning in modern
organizations?

INFORMATION NEEDS AND BUSINESS ACTIVITIES

• Businesses engage in a variety of activities, including acquiring capital, buying buildings and
equipment, hiring and training employees, purchasing inventory, doing advertising and
marketing, selling goods or services, collecting payment from customers, paying employees,
paying taxes, and paying vendors. Each decision requires different types of information.
• Information needed for decisions may be financial or non-financial and may come from either
internal or external sources. An effective AIS needs to be able to integrate this information.

INTERACTION WITH EXTERNAL AND INTERNAL 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. These
interactions are typically two-way, 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 transaction cycle is a process that begins with capturing data about a transaction and ends
with an information output, such as a set of financial statements.
• Many business activities are paired in give-get exchanges
• The basic exchanges can be grouped into five major transaction cycles.
– Revenue cycle—Interactions with customers. Give goods; get cash.
– Expenditure cycle—Interactions with suppliers. Give cash; get goods.
– Production cycle—Give labor and raw materials; get finished product.
– Human resources/payroll cycle—Give cash; get labor.
– Financing cycle—Give cash; get cash.
• Thousands of transactions can occur within any of these cycles, but there are relatively few types
of transactions in a cycle.
• Every transaction cycle relates to other cycles and interfaces with the general ledger and reporting
system, which generates information for management and external parties.

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 • The revenue cycle gets finished goods from the production cycle; provides funds to the financing
cycle; and provides data to the general ledger and reporting system.
• The expenditure cycle gets funds from the financing cycle; provides raw materials to the
production cycle; and provides data to the general ledger and reporting system.
• The production cycle gets raw materials from the expenditure cycle; gets labor from the
HR/payroll cycle; provides finished goods to the revenue cycle; and provides data to the general
ledger and reporting system.
• The HR/payroll cycle gets funds from the financing cycle; provides labor to the production cycle;
and provides data to the general ledger and reporting system.
• The financing cycle gets funds from the revenue cycle; provides funds to the expenditure and
HR/payroll cycles; and provides data to the general ledger and reporting system.
• The general ledger and reporting system gets data from all of the cycles and provides information
for internal and external users.
• 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. So 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 and integrate financial and non-financial 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; and (4) information output.

DATA INPUT
• The first step in data processing is to capture the data. This capture is usually triggered by a
business activity. Data is captured about: the event that occurred; the resources affected by the
event; and the agents who participated.
• A number of actions can be taken to improve the accuracy and efficiency of data input:
– Turnaround documents
– Source data automation
– Well-designed source documents and data entry screens
– Using pre-numbered documents or having the system automatically assign sequential
numbers to transactions
– Verifying transactions.

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DATA STORAGE
• Data needs to be organized for easy and efficient access. Let’s start with some vocabulary terms
with respect to data storage.
• 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.
• The general ledger is the summary level information for all accounts. Detail information is not
kept in general ledger accounts.
• The subsidiary ledgers contain the detail accounts associated with the related general ledger
account. 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 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 sequence codes, block codes, and
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 all items are accounted for and that there
are no duplicate 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.
• When group codes are used, two or more subgroups of digits are used to code an item. Group
coding schemes are often used in assigning general ledger account numbers. The following
guidelines should be observed:
– The code should be consistent with its intended use, so make sure you know what users
need.
– Provide enough digits to allow room for growth.
– Keep it simple in order to minimize costs, facilitate memorization, and ensure employee
acceptance.
– Make sure it’s consistent with the company’s organization structure and other divisions of
the organization.
• 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.:
– The first section identifies the major account categories, such as asset, liability, revenue,
etc.
– The second section identifies the primary sub-account, such as current asset or long-term
investment.
– The third section identifies the specific account, such as accounts receivable or inventory.
– The fourth section identifies the subsidiary account, e.g., the specific customer code for
an account receivable.
• The structure of the chart of accounts is an important AIS issue, as it must contain sufficient detail
to meet the organization’s needs.
• In manual systems and some accounting packages, the first place that transactions are entered is
the journal.
• A general journal is used to record non-routine transactions, such as loan payments; summaries
of routine transactions; adjusting entries; and closing entries.
• A special journal is used to record routine transactions. The most common special journals are
cash receipts, cash disbursements, credit sales, and credit purchases.
• 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.

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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
debited and credited.
• When routine transactions occur, they are initially recorded in special journals (e.g., cash
receipts, cash disbursements, credit sales, credit purchases). When non-routine transactions
occur, they are recorded in the general journal.
• 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, and 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.

COMPUTER-BASED STORAGE CONCEPTS

• Following are some computer-based storage concepts that should be understood:
– Entity—something about which information is stored. Example: Students are an entity
in the university.
– Attribute—characteristics of interest with respect to the entity. A student’s GPA is an
attribute of a student.
– Field—the physical space where an attribute is stored.
– Record—the set of attributes stored for a particular instance of an entity, e.g., all the
information stored about student John Doe is John Doe’s record.
– Data Value—the intersection of the row and column, i.e., a particular field for a
particular record.
– File—a group of related records.
– Master File—a file that stores cumulative information about an organization’s entities.
Conceptually similar to a ledger in that (1) the file is permanent; (2) it exists across fiscal
periods; and (3) changes are made to the file to reflect effects of new transactions.
– Transaction File—a file that contains records of individual transactions (events) during a
fiscal period. Similar to a journal in that the files are temporary and maintained for one
period.
– Database—a set of inter-related, centrally coordinated files.

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.

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 • Online, Real-time Processing--Transactions are entered into a computer system as they
occur. The master file is immediately updated with the data from the transaction. Output
is printed or displayed.

INFORMATION OUTPUT

• The final step in the information process is information output.

• This output can be in the form of:
– Documents--Records of transactions or other company data, such as paychecks or
purchase orders. 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--Used by employees to control operational activities and by managers to make
decisions and design strategies. They may be produced on a regular basis, on an
exception basis, or on demand. Organizations should periodically reassess whether each
report is needed.
– Queries--User requests for specific pieces of information. They may be requested
periodically or one time and can be displayed on the monitor (soft copy) or on paper
(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, such as budgets and sales forecasts.
• For management of day-to-day operations, e.g., delivery schedules.
• For control purposes, such as performance reports.
• For evaluation purposes, such as employee error rates.
• With managerial reports, you get what you measure. If you’re not very careful about what you
measure, there can be dysfunctional results, such as managers foregoing needed equipment
maintenance to stay within a budget.

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 an AIS.

SUMMARY OF MATERIAL COVERED

• The basic business activities in which an organization engages, the decisions that need to be
made, and the information required to make those decisions.
• The data processing cycle and its role in organizing business activities and providing information
to users.
• The role of information systems in modern organizations and the notion of enterprise resource
planning systems.

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TEACHING AIDS
• Problems 2.1 and 2.2 provide useful experience with charts of accounts.
• Problem 2.9 provides a good workout on understanding the different business cycles.
• Problem 2.10 helps students internalize the distinction between master and transaction files.
• The following crossword can be used to help students assimilate vocabulary terms.

CHAPTER 2 CROSSWORD PUZZLE

1 2 3

5 6

7 8 9

10

11

12

13 14

15

16 17

18

19

20

www.CrosswordWeaver.com

Across
1 The cycle that involves interactions with customers.
4 The cycle that involves transforming labor and materials into a finished product.
5 Physical space where an attribute is stored.
6 An agreement between two entities to exchange goods or services or any event that can be
measured in economic terms by an organization.
7 A set of inter-related, centrally-coordinated files.
11 Characteristics of interest with respect to an entity.
15 A list of all general ledger accounts used by an organization (3 words).
17 Set of attributes stored for a particular instance of an entity.
18 Something about which information is stored.

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19 A file used to store cumulative information about resources and agents.
20 Contains the summary level information for all accounts (2 words).

Down
2 The cycle that involves interactions with suppliers.
3 The type of ledger that contains detail-level information for accounts.
8 Exists when a transaction can be traced from beginning to end or vice versa (2 words).
9 Type of system in which data is entered into paper journals and ledgers.
10 User requests for specific pieces of information.
12 A particular field for a particular record (2 words).
13 The type of codes that are numbered consecutively.
14 The name given to a general ledger account that is associated with a set of subsidiary accounts.
16 A group of related records.

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CHAPTER 2 CROSSWORD SOLUTION

R E V E N U E S
X P R O D U C T I O N
P B
F I E L D T R A N S A C T I O N
N I
D A T A B A S E D M
I U I A Q
T D A N U
U I A T T R I B U T E S
R T Y A R
E T D L I
S R A C E
E C H A R T O F A C C O U N T S
Q I A N
U L V T
E A F R E C O R D
E N T I T Y L I O
C U L L E D G E R
G E N E R A L L E D G E R

8 Chapter 2: Business Processes