This chapter is divided into two major sections. The first section discusses the data processing cycle and its role in organizing business activities and providing information to users. The second section discusses the role of the information system in modern organizations and introduces the concept of an enterprise resource planning (ERP) system. An ERP can integrate all aspects of a company’s operations with its traditional AIS.

Accountants and other system users play a significant role in the data processing cycle. One important AIS function is to process company transactions effectively and efficiently. The operations performed on data to generate meaningful and relevant information are referred to collectively as the data processing cycle. This process consists of four steps: data input, data storage, data processing and information output.

Data input

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. Most business 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.

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.

Source data automation devices capture transaction data in machine-readable form at the time and place of their origin.

The second step in processing input is to make sure captured data are accurate and complete.

Data storage

A company’s data are one of its most important resources. Accountants need to understand how data are organized and stored in an AIS and how they can be accessed. They need to know how to manage data for maximum corporate use.

Cumulative accounting information is stored in general and subsidiary ledgers. A general ledger contains summary-level data for every asset, liability, equity, revenue, and expense account. A subsidiary ledger contains detailed data for any general ledger account with many individual subaccounts. The general ledger account corresponding to a subsidiary ledger is called a control account.

Data in ledgers is organized logically using coding techniques.

Coding is the systematic assignment of numbers or letters to items to classify and organize them.

• Sequence codes: items are numbered consecutively to account for all items.

• Block codes: blocks of numbers are reserved for specific categories of data.

• Group codes: which are two or more subgroups of digits used to code items, are often used in conjunction with block codes.

• Mnemonic codes: letters and numbers are interspersed to identify an item.

A great example of coding is the chart of accounts, which is a list of the numbers assigned to each general ledger account.

Transaction data are often recorded in a journal before they are entered into a ledger. A journal entry shows the accounts and amounts to be debited and credited. A general journal is used to record infrequent or non-routine transactions. Specialized journals record large numbers of repetitive transactions.

An audit trail is a traceable path of a transaction through a data processing system from point of origin to final output, or backwards from final output to the point of origin.

An entity is something about which information is stored, such as employees, inventory items, and customers. Each entity has attributes, or characteristics of interest, that are stored. Each type of entity processes the same set of attributes. The fields containing data about entity attributes constitute a record.

A field within a record is called a data value.

See figure 2.2 page 52 for a visual display.

A file is a group related records. A master file stores cumulative information about an organization. the inventory and equipment master files store information about important organization resources.

A transaction file contains records of individual business transactions that occur during a specific time.

A set of interrelated, centrally coordinated files is referred to as a database.

Data processing

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

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

2. Reading, retrieving or viewing existing data

3. Updating previously stored data

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

Updating done periodically is referred to as batch processing. Batch processing is cheaper and more efficient, but 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.

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.

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. Batch processing and online real time processing are summarized in figure 2.5 on page 55.

Information output

This is the final step in the data processing cycle. 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 three forms of ‘hard copy’: a document, a report or a query response.

Documents are records of transaction or other company data. Some, such as checks or 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 an computer. Eliminating paper documents it dramatically reduced the costs and errors. This has resulted in higher profits and more accurate information.

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 the company. Some reports are produced on regular bases and others are produced on an exception basis to call attention to unusual conditions. The need for reports should be periodically assessed.

A database query is used to provide the information needed to deal with problems and questions that need rapid actions or answers. A user enters a request for a specific piece of information: it is retrieved, displayed or analysed as requested. Repetitive queries are often developed by information systems specialists. One time queries are often developed by users.

The existence of multiple systems creates a lot of problems and inefficiencies. It is difficult to integrate data from the various systems.

Enterprise resource planning (ERP) systems overcome these problems as they integrate all aspects of a company’s operations with a traditional accounting information system. Most large and medium sized organizations use ERP systems to coordinate and manage their data, business processes, and resources. The ERP system collects, processes, and stores data and provides the information managers and external parties need to assess the company.

ERP system uses a centralized database to share information across business processes and coordinate activities. This is important because an activity that is part of one business process often triggers a complex series of activities throughout many different parts if the organization.

ERP systems are modular, with each module using best business practices to automate a standard business process.

Typical ERP modules include:

• Financial (general ledger and reporting system)

• Human resources and payroll

• Order to cash (revenue cycle)

• Purchase to pay (disbursement cycle)

• Manufacturing (production cycle)

• Project management

• Customer relationship management

• System tools

A few advantages of an centralized database (ERP system)

• An ERP provides an integrated, enterprise-wide, single view of the organization’s data and financial situation

• Data input is captured or keyed once

• Management gains greater visibility into every area of the enterprise and greater monitoring capabilities

• The organization gains better access control

• Manufacturing plants receive new orders in real time

• Procedures and reports are standardized across business units

A few disadvantages of the ERP system

• Amount of time required

• Changes to the business process

• Cost

• Complexity

• Resistance