ACS-1803 Introduction to Information Systems. Functional Area Systems. Lecture 4

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1 ACS-1803 Introduction to Information Systems Instructor: David Tenjo Functional Area Systems Lecture 4 1 Overview Overview of Functional Areas in the organization Functional Area: Accounting Accounting Information Systems The GL system Accounting Basics Accounting Transactions and Terminology Accounting System implementation 2 1

2 Functions in an organization Major functions of a business: Manufacturing Marketing Finance / Accounting Human Resources non-manufacturing: distribution (wholesale), retail, service 3 Functional Area Systems Cross-Organizational information systems that are designed to support a specific functional area 4 2

3 Functional Area Information Systems System Description Examples Functional Area? Used for managing, controlling, and auditing the financial resources of the organization Used for Managing, controlling, and auditing the Human Resources of the organization Used for Managing new product development, distribution, pricing, promotional effectiveness, sales forecasting Used for managing, controlling, and auditing production and operations resources Inventory Management System Accounts payable Expense Accounts Cash Management Payroll Processing Recruiting Learning Management Systems Benefits Management Employee Termination Workforce Planning Market Research New Product Development Promotion and Advertising Pricing and Sales Analysis Product location Inventory Management Cost and quality tracking Materials and resource planning CMS Resource Utilization 5 Information for functional areas of the organization 6 3

4 ACS Fall 2015 Functional Area Systems 7 Baseline Accounting and Business Transaction Cycles 8 4

5 Transaction Cycle Process Begins with capturing data about a transaction Ends with an information output, such as financial statements Two Major transaction Cycle Processes: 9 Accounting Transaction Cycle The revenue cycle: involves activities of selling goods or services and collecting payment for those sales. The expenditure cycle: involves activities of buying and paying for goods or services used by the organization. 10 5

6 Copyright 2014 Pearson Education. All Rights Reserved. Accounting Transaction Cycles 11 Diagram for Sales Cycle Activities Flow Chart: Swimlane: 12 6

7 Copyright 2014 Pearson Education. All Rights Reserved. Copyright 2014 Pearson Education. All Rights Reserved. Understanding the Accounting Process Model for a Customer/Sales Transaction Let s examine the baseline accounting process for a customer/ sales transaction within a company: Company: ExpressoCoffee Customer places and online order ExpressoCoffee processes the order The order shipment is confirmed and sent to ExpressoCoffee s warehouse which fulfils the order, ships the product and notifies Accounting Accounting generates the invoice and sends to the customer How do we design the accounting/sales system to manage this business process? 13 Customer Module: Process Order BPMN Example 14 7

8 Copyright 2014 Pearson Education. All Rights Reserved. Copyright 2014 Pearson Education. All Rights Reserved. Accounting Transaction Cycles: Expenditure 15 Purchasing Cycle 16 8

9 Copyright 2014 Pearson Education. All Rights Reserved. Copyright 2014 Pearson Education. All Rights Reserved. Accounting Process Model for a Purchase Order Transaction Examine the baseline accounting process for a purchase order transaction within a company: Company: ExpressoCoffee ExpressoCoffee creates a purchase order for the supplier The order shipment is confirmed and sent to ExpressoCoffee s warehouse which receives the order into inventory The warehouse generates a receiving report and updates Accounting Accounting receives the bill from the supplier and matches to the receiving report processes bill 17 Purchase Orders FlowChart 18 9

10 Copyright 2014 Pearson Education. All Rights Reserved. Copyright 2014 Pearson Education. All Rights Reserved. Purchase orders Swimlane 19 Receive Items 20 10

11 Copyright 2014 Pearson Education. All Rights Reserved. Process Bill 21 Functional Area Systems: Accounting An accounting system monitors/documents the operations of the aspects of business operations accountability for the assets/liabilities of the enterprise the determination of the results of operations leading to the computation of comprehensive income, the financial reporting aspects of business operations. Evidence of financial transactions must be contained in one main accounting system that is capable of producing (at least) two main financial statements that are required for a business: the balance sheet and the income statement

12 Accounting Information System (AIS) An AIS Collects and processes transaction data and Disseminates the information to interested parties 23 AIS AIS helps managers answer questions such as: How much, and what kind of debt is outstanding? Were sales higher this period than last? What assets do we have? What were our cash outflows and inflows? Did we make a profit last period? 24 12

13 Transaction Processing Systems for Accounting Order entry, Accounts Receivable, Accounts payable, purchasing and receiving, Inventory, Fixed Assets All those information systems support the accounting operation. 25 Accounting Terminology Event Transaction Account Real Account Nominal Account Ledger Journal Posting Trial Balance Adjusting Entries Financial Statements Closing Entries 26 13

14 Debits and Credits An Account shows the effect of transactions on a given asset, liability, equity, revenue, or expense account Double-Entry accounting system (two-sided effect) Recording done by debiting (at least) one account, and crediting another Debits ALWAYS must equal credits 27 Debits and Credits Account An arrangement that shows the effect of transactions on an account. Debit = Left Credit = Right An Account can be illustrated in a T-Account form. Account Name Debit / Dr. Credit / Cr

15 Debits and Credits If Debit entries are greater than Credit entries, the account will have a debit balance. Debit / Dr. Account Name Credit / Cr. Transaction #1 Transaction #3 $10,000 $3,000 Transaction #2 8,000 Balance $15, Debits and Credits If Credit entries are greater than Debit entries, the account will have a credit balance. Account Name Debit / Dr. Credit / Cr. Transaction #1 $10,000 $3,000 Transaction #2 8,000 Transaction #3 Balance $1,

16 Debits and Credits Normal Balance Debit Normal Balance Credit Debit / Dr. Liabilities Credit / Cr. Normal Balance Debit / Dr. Assets Credit / Cr. Chapter 3-24 Equity Debit / Dr. Credit / Cr. Normal Balance Normal Balance Chapter 3-23 Debit / Dr. Expense Credit / Cr. Chapter 3-25 Debit / Dr. Revenue Credit / Cr. Normal Balance Normal Balance Chapter 3-27 Chapter Debits and Credits Summary Balance Sheet Income Statement Asset = Liability + Equity Revenue - Expense = Debit Credit 32 16

17 Basic Accounting Equation Relationship among the assets, liabilities and stockholders equity of a business: The equation must be in balance after every transaction. For every Debit there must be a Credit. 33 Corporate Ownership Structure Balance Sheet Assets = Liabilities + Stockholders Equity Common Stock stockholders) (Investment by Retained Earnings (Net income retained in business) Dividends Net income or Net loss (Revenues less expenses) Income Statement Statement of Retained Earnings The Balance Sheet is a report that shows what the company owns (Assets) and how it got the money for what it owns (Liabilities i.e. borrowing/ owing) plus Stockholders Equity (i.e. Investments, Retained Earnings) 34 17

18 Accounting System Process The General Ledger is a component of Financial Accounting Software and existing the form of an electronic database. 35 Accounting Processes 1. Journalizing 2. Posting 3. Trial Balance 4. Adjusting Entries 5. Adjusted Trial Balance 6. Preparing Financial Statements 36 18

19 1. Journalizing General Journal a chronological record of transactions. Journal Entries are recorded in the journal. General Journal Date Account Title Ref. Debit Credit Jan. 3 Cash ,000 Common stock , Building ,000 Note payable , Posting Posting the process of transferring amounts from the journal to the General Ledger accounts. Date General Journal Account Title Ref. Debit Credit Jan. 3 Cash ,000 GJ1 Common stock 100,000 General Ledger Cash Acct. No. 100 Date Explanation Ref. Debit Credit Balance Jan. 3 Sale of stock GJ1 100, ,

20 Post transactions to ledgers Ledgers are used to summarize the financial status of individual accounts (balance) The GL contains summary-level data for every asset, liability, equity, revenue, and expense account of an organization. A subsidiary ledger contains subaccounts e.g. Accounts Receivable, Inventory, accounts payable The general ledger account corresponding to a subsidiary ledger is called Control Account A control account contains the total amount for all individual accounts in the subsidiary ledger. 39 Ledgers 40 20

21 Chart of accounts List of all general ledger accounts used by an organization. It is important that the chart of accounts contains sufficient detail to meet the information needs of the organization Trial Balance Trial Balance a list of each account and its balance; used to prove equality of debit and credit balances. Acct. No. Account Debit Credit 100 Cash $ 140, Accounts receivable 35, Inventory 30, Building 150, Accounts payable $ 60, Note payable 150, Common stock 100, Retained earnings 400 Sales 75, Cost of goods sold 30,000 $ 385,000 $ 385,

22 4. Adjusting Entries Revenues Recorded in the period in which they are earned. Expenses Recognized in the period when they are incurred Adjusting entries - needed to ensure that the revenue recognition and matching principles are followed. 43 Classes of Adjusting Entries Prepayments 1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed. Accruals 3. Accrued Revenues. Revenues earned but not yet received in cash or recorded. 2. Unearned Revenues. Revenues received in cash and recorded as liabilities before they are earned. 4. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded

23 5. Adjusted Trial Balance Shows the balance of all accounts, after adjusting entries, at the end of the accounting period Preparing Financial Statements Financial Statements are prepared directly from the Adjusted Trial Balance. Balance Sheet Income Statement The Balance Sheet is a report that shows what the company owns (Assets) and how it got the money for what it owns (Liabilities i.e. borrowing/ owing) plus Stockholders Equity (i.e. Investments, Retained Earnings) at a single moment in time. The Income Statement is a report that shows the company s revenues and expenses during a particular period in time

24 6. Preparing Financial Statements Assume the following Adjusted Trial Balance Balance Sheet Adjusted Trial Balance Debit Credit Cash $ 140,000 Accounts receivable 35,000 Building 190,000 Note payable $ 150,000 Common stock 100,000 Retained earnings 38,000 Dividends declared 10,000 Sales 185,000 Interest income 17,000 Cost of goods sold 47,000 Salary expense 25,000 Depreciation expense 43,000 $ 490,000 $ 490,000 Balance Sheet Assets Cash $ 140,000 Accounts receivable 35,000 Building 190,000 Total assets $ 365,000 Liabilities Note payable 150,000 Stockholders' equity Common stock 100,000 Retained earnings 115,000 Total liab. & equity $ 365, Preparing Financial Statements Assume the following Adjusted Trial Balance Income Statement Adjusted Trial Balance Debit Credit Cash $ 140,000 Accounts receivable 35,000 Building 190,000 Note payable $ 150,000 Common stock 100,000 Retained earnings 38,000 Dividends declared 10,000 Sales 185,000 Interest income 17,000 Cost of goods sold 47,000 Salary expense 25,000 Depreciation expense 43,000 $ 490,000 $ 490,000 Income Statement Revenues: Sales $ 185,000 Interest income 17,000 Total revenue 202,000 Expenses: Cost of goods sold 47,000 Salary expense 25,000 Depreciation expense 43,000 Total expenses 115,000 Net income $ 87,

25 Journalizing Posting Trial balance Adjusting Entries Adjusted Trial Balance Financial Statements 49 Computerized Accounting System A computerized General Ledger may operate on its own, with no connections to any subsystems; it may be installed on its own, but connected to other subsystems such as Order Entry, Accounts Receivable, etc., which are also installed as separate modules; A G/L system could be internally integrated with the other closely related subsystems. In the last case, the entire, integrated system is installed at once. Very popular computerized accounting systems include SAGE 50 (formally Simply Accounting), SAGE 300 ERP (formally ACCPAC), and Microsoft Dynamics GP (Great Plains) 50 25

26 Computerized Accounting System Sage 50 This is an integrated accounting package for small to medium businesses, usually with only one division. Because it is smaller, and relatively inexpensive, it is an integrated package with a General Ledger, Order Entry (basic), A/R, Invoicing, and also Purchasing, A/P, Inventory, and Payroll. Sage 300 ERP This is usually for mid to larger sized businesses. The General Ledger System stands on its own. One can also purchase an Accounts Receivable System, and Accounts Payable System, and Inventory System etc.. One can connect them all, to create an integrated system. 51 Other Finance and Accounting solutions for Businesses 52 26

27 Computerized Accounting System There are two main preparatory steps in using accounting software after it is removed from the box (on a CD). 1. Installing the system: (a computing function). Copying the software to the computer s hard disk and getting it ready to run. 2. Initializing the system: (an accounting function). Entering specifics on the Company into the system so as to make it ready for day-to day use. This would involve: entering particulars on the Company (e.g. name address) and most importantly, identifying each account (card) by name and by code number for all the Company s assets, liabilities, equities, revenues, and expenses. The latter is called establishing the Chart of Accounts. 53 Computerized Accounting System The system balances have to be entered for each account (unless the business is starting from scratch on the date of initialization). If the General Ledger is to be connected to other subsystems, the current status of receivables, payables, inventory, etc, will have top be entered into such systems. Note: when a business says it has a computerized accounting system, it may be talking of only the computerized General Ledger or an integrated Accounting Information System (AIS), with the General Ledger at the centre (see conceptual model diagram)

28 Computerized Accounting System 55 28

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