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Business Processes & Accounting Systems · Week 01

Business Processes & Accounting Information Systems (AIS)

What a business process is, the three core business processes and Porter's value chain, accounting information and its users, what an AIS is and why it matters, its five components, AIS principles, and internal control.

ITE36224 videos · 112 min📄 Introduction to business processes and accounting infromation system (AIS).pdf

▶Lecture videos

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Accounting Information System (AIS)

Definition of an AIS, its design principles and its components.

00:00Definition: people, records and methods that collect, process and communicate data00:31The AIS is the process that turns transactions into financial statements00:58Principles: control, relevance, compatibility, flexibility, cost–benefit01:33Components: source documents, input devices, processing, storage, output

Introduction to Accounting

What accounting is and who uses accounting information.

00:03Introduction and learning outcomes02:08Definitions of accounting04:02Financial vs management and cost accounting07:08Objectives of accounting10:04Stakeholders and their interests13:05Internal stakeholders: owners, managers, employees15:04External stakeholders: suppliers, lenders, government16:58Forms of business: sole proprietorship, partnership, company18:54Private vs public limited companies20:54Sole proprietorship and partnership: advantages23:49Disadvantages: unlimited liability, transfer, continuity28:37Public limited companies: limited liability, raising capital32:34Company disadvantages: double taxation, regulation

Conceptual Framework

The conceptual framework for financial reporting.

00:03Introduction to the conceptual framework01:48Business entity concept05:59Going concern concept08:13Money measurement concept10:38Historical cost concept13:15Accrual and matching concepts16:08Qualitative characteristics: relevance17:52Materiality18:52Faithful representation21:20Enhancing characteristics: comparability22:41Verifiability (and timeliness)25:03Understandability25:57Elements of financial statements: assets28:25Liabilities30:20Equity31:21Income32:21Expenses

Information Management Systems

Information systems in organisations.

00:04Introduction and learning outcomes02:12Organisations and their departments04:15Data: facts collected and stored05:18Example: data in a sales transaction07:11Information: data organised meaningfully10:09Data set example: from data to information13:56What an organisation is15:53Business processes: repeatable and standardised17:43Decisions made in each business process (HR, finance)21:45Accounting as the language of business22:41What an AIS is (paper, computer, mixed)24:50The six components of an AIS28:43Safeguarding assets and data30:43AIS and the value chain: primary vs support activities33:39Adding value (the ice-cream example)36:35How an AIS adds value

1Business processes

Definition

A business process is a collection of related, structured activities or tasks, done by people or equipment in a specific sequence, that produce a service or product (serving a business goal) for customers.

  • Business processes happen at all organisational levels, and may or may not be visible to customers.
  • They can be modelled as a flowchart (activities with decision points) or a process matrix (activities with rules based on data).
  • Benefits: improved customer satisfaction and agility in reacting to rapid market change.

The three core business processes (Bonnie K. Klamm, 2004)

  1. Acquire & pay for resources
  1. Convert resources into goods/services
  1. Sell goods/services & collect revenue
Process What happens Example transactions
1. Acquire and pay for resources Buy what the business needs and pay for it Raw materials, labour, electricity; purchases, accounts payable, payroll
2. Convert resources Turn inputs into goods or services Production, inventory movements
3. Sell and collect Sell goods or services and collect revenue Sales orders, invoices, accounts receivable, cash receipts

Businesses need information about these processes to make operational decisions, improve efficiency and generate financial reports.

Porter's value chain

Michael Porter's value chain links these processes. Each has financial and non-financial activities that create value for customers.

  • Primary activities: inbound logistics, operations, outbound logistics, marketing and sales, service.
  • Support activities: firm infrastructure (including accounting), HR, technology, procurement.

Typical financial transaction areas:

  • purchasing, production, marketing, personnel
  • accounts payable, accounts receivable
  • fixed assets, inventory

A large organisation has thousands of these activities, which is why a computerised accounting system is important.

🧪 Try it — Follow a business through its three processes

2Accounting information and its users

Accounting information

Information with a monetary association (John F. Nash, 1993), expressed in figures, ratios, percentages or units. It covers transactions with vendors, customers and employees, and is generated by economic events and transactions.

Internal users External users
Management, employees, shareholders (owners) Vendors (suppliers), potential investors, government authorities (tax, regulators), lenders and banks, customers

3What is an Accounting Information System?

Definitions
  • Lecture notes: an AIS is a delivery system for accounting information. It collects, stores, manages, processes, retrieves and reports the financial data generated by business processes.
  • Video (Fundamental Accounting Principles, 22nd ed.): "people, records and methods that collect and process data from transactions and events, organise them in useful forms, and communicate results to decision makers" 00:00.

The AIS is the whole process that turns raw transactions into useful information, usually the financial statements 00:31. Designing one means asking: computerised or manual? Who collects the data? How is it compiled?

Why AIS matters

  1. Meet statutory reporting requirements (e.g. annual financial statements, tax returns).
  2. Make reliable financial data available to the parties who need it.
  3. Keep data intact and secure.

Principles to consider when designing an AIS 00:58

Principle Meaning
Control Managers must be able to control and monitor operations: internal controls protect assets and data
Relevance Report useful, understandable, timely information for decisions
Compatibility The system must fit the organisation's activities, people and structure
Flexibility Able to adapt to changes: growth, new regulations, new products
Cost–benefit Benefits must outweigh the costs of the system

AIS as a process: the video's five components 01:33

Source documentsInput devicesInformation processingInformation storageOutput
Stage Examples
Source documents Invoices, receipts, bank statements, purchase orders: the evidence of transactions
Input devices Keyboards, barcode scanners, card machines, mobile apps
Information processing Turning data into information: posting, classifying, summarising, usually electronic
Information storage Databases, cloud storage
Output Reports and financial statements on screen or paper

4The five components of a computerised AIS

Past systems were paper-based and manual. Today almost all are computerised. A computerised AIS has five components (Stephen A. Moscove, 2001):

Component Description
1. People Provide input, monitor processing, interpret output: accountants, auditors, financial analysts, consultants
2. Procedures and instructions The methods for collecting, storing, retrieving, processing data, manual or automated. Today they're coded into the AIS software; staff learn them through documentation and training; they must be followed consistently
3. Data All financial transactions and events: anything that affects the company's finances. Examples: sales orders, customer billing statements, purchase requisitions, vendor invoices, inventory data, payroll, tax. Data must be complete, correct and relevant. Needs a database structure, input screens for different users, and output formats for different needs
4. Software Programs to store, retrieve, process and analyse financial data. Must have quality, reliability and security
5. Hardware Input, processing and output devices: computers, mobile devices, servers, printers, surge protectors, routers, storage media, backup power

AIS software by business size

Size Software
Small Intuit QuickBooks, Sage 50 Accounting
Small to mid-sized SAP Business One
Mid-sized to large Microsoft Dynamics GP, Sage MAS 90 / MAS 200, Oracle PeopleSoft, Epicor Financial Management

Four ways to obtain AIS software:

  1. Buy off-the-shelf software.
  2. Customise existing software for unique needs.
  3. Develop in-house.
  4. Have a third party develop it specifically for the organisation.

Hardware purchase considerations:

  • compatibility with the software
  • cost, speed, storage capacity
  • whether it can be expanded and upgraded

5Internal control & security

An AIS holds the organisation's financial resources, so it must be protected from loss, waste and theft. Internal control ensures reliable information and promotes operational efficiency.

Objectives of internal control (Moscove, 2001)
  1. Safeguarding assets
  2. Checking the accuracy and reliability of accounting data
  3. Promoting operational efficiency
  4. Encouraging adherence to prescribed managerial policies
Everyday internal controls
  • Segregation of duties: the person who approves payments doesn't also record them.
  • Passwords and user rights in the AIS software.
  • Regular backups and bank reconciliations.
  • Pre-numbered invoices and receipts.
Exam focus

Expect:

  • Define a business process and list the three core processes
  • Define accounting information and its users
  • Define AIS and explain its importance
  • Explain the five components (people, procedures, data, software, hardware) with examples
  • The four objectives of internal control
  • The video's AIS design principles (control, relevance, compatibility, flexibility, cost–benefit)

6Quick revision sheet

Concept Remember it as
Business process Structured, sequenced activities producing a product or service for customers
3 core processes Acquire & pay · convert · sell & collect (Klamm 2004)
Value chain Porter; links processes; financial + non-financial activities create value
Accounting information Monetary information: figures, ratios, %, units
Users Internal (management, employees, shareholders) · external (vendors, investors, government)
AIS Collects, stores, manages, processes, retrieves, reports financial data
Importance Statutory reporting · reliable data · secure data
Design principles Control · relevance · compatibility · flexibility · cost–benefit
5 components People · procedures · data · software · hardware (Moscove 2001)
Software QuickBooks/Sage 50 (small) · SAP B1 (SME) · Dynamics GP, PeopleSoft (large)
Internal control Safeguard assets · accurate data · efficiency · adherence to policy

?Self-check quiz

12 questions on this week. Answer them all, then press Check my answers. Your best and latest scores are saved and shown on the subject page.

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