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HAPTER 2

Overview of Business Processes

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INTRODUCTION

Questions to be addressed in this chapter include:

What are the basic business processes in which an organization engages?

What decisions must be made to undertake these processes?
What information is required to make those decisions?

What role does the data processing cycle play in organizing business processes and providing information to users?
What is the role of the information system and enterprise resource planning in modern organizations?

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INFORMATION NEEDS AND BUSINESS PROCESSES

Businesses engage in a variety of processes, 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
Paying vendors

Each activity requires different types of decisions.

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INFORMATION NEEDS AND BUSINESS PROCESSES

Businesses engage in a variety of processes, 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
Paying vendors

Each decision requires different types of information.

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INFORMATION NEEDS AND BUSINESS PROCESSES

Types of information needed for decisions:

Some is financial
Some is nonfinancial
Some comes from internal sources
Some comes from external sources

An effective AIS needs to be able to integrate information of different types and from different sources.

By improving business processes leading to efficient production, Toyota has become the largest automobile manufacturer in the world, a title held by General Motors for almost 100 years.

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INTERACTION WITH EXTERNAL AND INTERNAL PARTIES

The AIS interacts with external parties, such as customers, vendors, creditors, and governmental agencies.

AIS

External

Parties

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INTERACTION WITH EXTERNAL AND INTERNAL PARTIES

The AIS also interacts with internal parties such as employees and management.

AIS

Internal

Parties

External

Parties

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INTERACTION WITH EXTERNAL AND INTERNAL PARTIES

The interaction is typically two way, in that the AIS sends information to and receives information from these parties.

AIS

Internal

Parties

External

Parties

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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

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BUSINESS CYCLES

The business transaction cycle is a process that:

Begins with capturing data about a transaction.
Ends with an information output, such as financial statements.

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BUSINESS CYCLES

Many business processes are paired in give-get exchanges.
Basic exchanges can be grouped into five major transaction cycles:

Revenue cycle
Expenditure cycle
Production cycle
Human resources/payroll cycle
Financing cycle

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BUSINESS CYCLES

Many business processes are paired in give-get exchanges.
The basic exchanges can be grouped into five major transaction cycles:

Revenue cycle
Expenditure cycle
Production cycle
Human resources/payroll cycle
Financing cycle

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REVENUE CYCLE

The revenue cycle involves interactions with your customers.
You sell goods or services and get cash.

Give

Goods

Get

Cash

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BUSINESS CYCLES

Many business processes are paired in give-get exchanges.
The basic exchanges can be grouped into five major transaction cycles:

Revenue cycle
Expenditure cycle
Production cycle
Human resources/payroll cycle
Financing cycle

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EXPENDITURE CYCLE

The expenditure cycle involves interactions with your suppliers.
You buy goods or services and pay cash.

Give

Cash

Get

Goods

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BUSINESS CYCLES

Many business processes are paired in give-get exchanges.
The basic exchanges can be grouped into five major transaction cycles:

Revenue cycle
Expenditure cycle
Production cycle
Human resources/payroll cycle
Financing cycle

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PRODUCTION CYCLE

In the production cycle, raw materials and labor are transformed into finished goods.

Give Raw

Materials &

Labor

Get

Finished

Goods

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BUSINESS CYCLES

Many business processes are paired in give-get exchanges.
The basic exchanges can be grouped into five major transaction cycles:

Revenue cycle
Expenditure cycle
Production cycle
Human resources/payroll cycle
Financing cycle

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HUMAN RESOURCES/�PAYROLL CYCLE

The human resources cycle involves interactions with your employees.
Employees are hired, trained, paid, evaluated, promoted, and terminated.

Give

Cash

Get

Labor

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BUSINESS CYCLES

Many business processes are paired in give-get exchanges.
The basic exchanges can be grouped into five major transaction cycles:

Revenue cycle
Expenditure cycle
Production cycle
Human resources/payroll cycle
Financing cycle

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FINANCING CYCLE

The financing cycle involves interactions with investors and creditors.
You raise capital (through stock or debt), repay the capital, and pay a return on it (interest or dividends).

Give

Cash

Get

cash

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BUSINESS CYCLES

Thousands of transactions can occur within any of these cycles.
But there are relatively few types of transactions in a cycle.

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BUSINESS CYCLES

EXAMPLE: In the revenue cycle, the basic give-get transaction is:

Give goods
Get cash

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BUSINESS CYCLES

Other transactions in the revenue cycle include:

Handle customer inquiries
Take customer orders
Approve credit sales
Check inventory availability
Initiate back orders
Pick and pack orders
Ship goods
Bill customers

Update sales and Accts Rec. for sales
Receive customer payments
Update Accts Rec. for collections
Handle sales returns, discounts, and bad debts
Prepare management reports
Send info to other cycles

Note that the last activity in any cycle is to send information to other cycles.

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BUSINESS CYCLES

Click on the buttons below if you wish to see the transactions that occur in the other cycles:

Expenditure

Cycle

Human Res./

Payroll Cycle

Production

Cycle

Financing

Cycle

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BUSINESS CYCLES

Transactions in the expenditure cycle:

MAJOR GIVE-GET:
Give cash; get goods or services
OTHER TRANSACTIONS
Requisition goods and services
Process purchase orders to vendors
Receive goods and services
Store goods
Receive vendor invoices

Update accounts payable for purchase
Approve invoices for payment
Pay vendors
Update accounts payable for payment
Handle purchase returns, discounts, and allowances
Prepare management reports
Send info to other cycles

Back

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BUSINESS CYCLES

Transactions in the HR/payroll cycle:

MAJOR GIVE-GET:
Give cash; get labor
OTHER TRANSACTIONS
Recruit, hire, and train employees
Evaluate and promote employees
Discharge employees
Update payroll records

Pay employees

Process timecard and commission data
Prepare and distribute payroll

Calculate and disburse tax and benefit payments
Prepare management reports
Send info to other cycles

Back

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BUSINESS CYCLES

Transactions in the production cycle:

MAJOR GIVE-GET:
Give labor and raw materials; Get finished goods
OTHER TRANSACTIONS
Design products
Forecast, plan, and schedule production
Requisition raw materials
Manufacture products

Store finished goods
Accumulate costs for products
Prepare management reports
Send info to other cycles

Back

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BUSINESS CYCLES

Transactions in the financing cycle:

MAJOR GIVE-GET:
Give cash; get cash
OTHER TRANSACTIONS
Forecast cash needs
Sell securities to investors
Borrow money from lenders

Pay dividends to investors and interest to lenders
Retire debt
Prepare management reports
Send info to other cycles

Back

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BUSINESS CYCLES

Every transaction cycle:

Relates to other cycles.
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.
Provides data to the general ledger and reporting system.

General Ledger

and Reporting

System

Revenue

Cycle

Expenditure

Cycle

Production

Cycle

Human Res./

Payroll Cycle

Financing

Cycle

Finished Goods

Funds

Data

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The Expenditure Cycle

Gets funds from the financing cycle.
Provides raw materials to the production cycle.
Provides data to the general ledger and reporting system.

General Ledger

and Reporting

System

Revenue

Cycle

Expenditure

Cycle

Production

Cycle

Human Res./

Payroll Cycle

Financing

Cycle

Funds

Raw

Mats.

Data

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The Production Cycle:

Gets raw materials from the expenditure cycle.
Gets labor from the HR/payroll cycle.
Provides finished goods to the revenue cycle.
Provides data to the general ledger and reporting system.

General Ledger

and Reporting

System

Revenue

Cycle

Expenditure

Cycle

Production

Cycle

Human Res./

Payroll Cycle

Financing

Cycle

Raw

Mats.

Data

Finished Goods

Labor

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The HR/Payroll Cycle:

Gets funds from the financing cycle
Provides labor to the production cycle.
Provides data to the general ledger and reporting system.

General Ledger

and Reporting

System

Revenue

Cycle

Expenditure

Cycle

Production

Cycle

Human Res./

Payroll Cycle

Financing

Cycle

Labor

Funds

Data

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The Financing Cycle:

Gets funds from the revenue cycle.
Provides funds to the expenditure and HR/payroll cycles.
Provides data to the general ledger and reporting system.

General Ledger

and Reporting

System

Revenue

Cycle

Expenditure

Cycle

Production

Cycle

Human Res./

Payroll Cycle

Financing

Cycle

Funds

Data

Funds

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The General Ledger and Reporting System:

Gets data from all of the cycles.
Provides information for internal and external users.

General Ledger

and Reporting

System

Revenue

Cycle

Expenditure

Cycle

Production

Cycle

Human Res./

Payroll Cycle

Financing

Cycle

Information for

Internal & External Users

Data

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BUSINESS CYCLES

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.
The implementation of each transaction cycle can differ significantly across companies.

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BUSINESS CYCLES

However the cycles are implemented, it is critical that the AIS be able to:

Accommodate the information needs of managers.
Integrate financial and nonfinancial data.

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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.

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TRANSACTION PROCESSING:�THE DATA PROCESSING CYCLE

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.

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TRANSACTION PROCESSING:�THE DATA PROCESSING CYCLE

The data processing cycle consists of four steps:

Data input
Data storage
Data processing
Information output

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TRANSACTION PROCESSING:�THE DATA PROCESSING CYCLE

The data processing cycle consists of four steps:

Data input
Data storage
Data processing
Information output

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DATA INPUT

The first step in data processing is to capture the data.
Usually triggered by a business activity.
Data is captured about:

The event that occurred.
The resources affected by the event.
The agents who participated.

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DATA INPUT

A number of actions can be taken to improve the accuracy and efficiency of data input:

Turnaround documents.

EXAMPLE: The stub on your telephone bill that you tear off and return with your check when you pay the bill.
The customer account number is coded on the document, usually in machine-readable form, which reduces the probability of human error in applying the check to the correct account.

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DATA INPUT

A number of actions can be taken to improve the accuracy and efficiency of data input:

Turnaround documents.
Source data automation.

Capture data with minimal human intervention.
EXAMPLES:

ATMs for banking.
Point-of-sale (POS) scanners in retail stores.
Automated gas pumps that accept your credit card.

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DATA INPUT

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.

How do these improve the accuracy and efficiency of data input?

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DATA INPUT

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.

What does it mean if a document number is missing in the sequence?

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DATA INPUT

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.

What does it mean if there are duplicate document numbers?

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DATA INPUT

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.
Verify transactions.

EXAMPLE: Check for inventory availability before completing an online sales transaction.

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TRANSACTION PROCESSING:�THE DATA PROCESSING CYCLE

The data processing cycle consists of four steps:

Data input
Data storage
Data processing
Information output

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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.

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DATA STORAGE

Ledger

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.

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DATA STORAGE

Ledger

Following is an example of a ledger account for accounts receivable:

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DATA STORAGE

Ledger
General ledger

The general ledger is the summary level information for all accounts. Detail information is not kept in this account.

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DATA STORAGE

Ledger
General ledger

Example: Suppose XYZ Co. has three customers. Anthony Adams owes XYZ $100. Bill Brown owes $200. And Cory Campbell owes XYZ $300. The balance in accounts receivable in the general ledger will be $600, but you will not be able to tell how much individual customers owe by looking at that account. The detail isn’t there.

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DATA STORAGE

Ledger
General ledger
Subsidiary ledger

The subsidiary ledgers contain the detail accounts associated with the related general ledger account. The accounts receivable subsidiary ledger will contain three separate

t-accounts—one for Anthony Adams, one for Bill Brown, and one for Cory Campbell.

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DATA STORAGE

Ledger
General ledger
Subsidiary ledger

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.

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DATA STORAGE

Ledger
General ledger
Subsidiary ledger
Coding techniques

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
Group codes

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DATA STORAGE

Ledger
General ledger
Subsidiary ledger
Coding techniques

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.
There are no duplicated numbers, which would suggest errors or fraud.

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DATA STORAGE

Ledger
General ledger
Subsidiary ledger
Coding techniques

When block codes are used, blocks of numbers within a numerical sequence are reserved for a particular category.
EXAMPLE: The first three digits of a Social Security number make up a block code that indicates the state in which the Social Security number was issued:

001–003 New Hampshire
004–007 Maine
008–009 Vermont

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DATA STORAGE

Ledger
General ledger
Subsidiary ledger
Coding techniques

When group codes are used, two or more subgroups of digits are used to code an item.
EXAMPLE: The code in the upper, right-hand corner of many checks is a group code organized as follows:

Digits 1–2 Bank number
Digit 3 Federal Reserve District
Digits 4–7 Branch office of Federal Reserve
Digits 8–9 State

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DATA STORAGE

Ledger
General ledger
Subsidiary ledger
Coding techniques

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
Ensure employee acceptance

Make sure it’s consistent with:

The company’s organization structure
Other divisions of the organization

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DATA STORAGE

Ledger
General ledger
Subsidiary ledger
Coding techniques
Chart of accounts

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 this chart is an important AIS issue, as it must contain sufficient detail to meet the organization’s needs.

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DATA STORAGE

Ledger
General ledger
Subsidiary ledger
Coding techniques
Chart of accounts

Table 2-4 in your textbook contains the chart of accounts for S&S.

What is the account number for federal unemployment taxes payable?
What is the account number for cost of goods sold?
What is the range of account numbers for expenses?
With this chart of accounts, can S&S easily distinguish the costs they incur for automobile insurance from the costs for health insurance?

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DATA STORAGE

Ledger
General ledger
Subsidiary ledger
Coding techniques
Chart of accounts
Journals

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
Closing entries

A special journal is used to record routine transactions. The most common special journals are:

Cash receipts
Cash disbursements
Credit sales
Credit purchases

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DATA STORAGE

Ledger
General ledger
Subsidiary ledger
Coding techniques
Chart of accounts
Journals
Audit trail

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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DATA STORAGE

Now that we’ve learned some storage terminology, let’s return to the data storage process.
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 credited.

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DATA STORAGE

If you took a principles of financial accounting class, you probably worked with journals that looked something like this:

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DATA STORAGE

You may not have gotten much experience with special journals, but in most real-world situations, journal entries really work like this.

Entries are originally made in the general journal only for:

Non-routine transactions
Summaries of routine transactions

Routine transactions are originally entered in special journals. The most common special journals are:

Credit sales
Cash receipts
Credit purchases
Cash disbursements

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DATA STORAGE

Let’s work through an example with a special journal. In this case we’ll use the sales journal.

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DATA STORAGE

On December 1, a sale is made to Lee Co. for $800. Lee Co. was sent Invoice No. 201.

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DATA STORAGE

The general ledger account number for accounts receivable is No. 120. Lee Co. was about the 122^nd customer, so their subsidiary account number is 120-122.

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DATA STORAGE

The next sale on December 1 was made to May Co. for $700.

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DATA STORAGE

The third and final sale on December 1 was made to DLK Co. for $900.

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DATA STORAGE

Suppose the company making these sales posts transactions at the end of each day. Consequently, at day’s end, they will post each individual transaction to the accounts receivable subsidiary ledger:

An $800 increase in accounts receivable (debit) will be posted to Lee Co.’s subsidiary account (120-122).
A $700 debit will be posted to May Co.’s subsidiary account (120-033).
A $900 debit will be posted to DLK Co.’s subsidiary account (120-111).

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DATA STORAGE

Then a summary journal entry must be made to the general journal. The sales for the period are totaled. In this case, they add up to $2,400.

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DATA STORAGE

The “120/502” that appears beneath the total indicates that a summary journal entry is made in the general journal with a debit to accounts receivable (120) and a credit to sales (502).

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DATA STORAGE

The entries in the general journal are periodically (or automatically) posted to the general ledger. The $2,400 debit to accounts receivable will be posted to the accounts receivable control account, and the $2,400 credit will be posted to the general ledger account for sales.

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DATA STORAGE

From time to time, the subsidiary account balances will be added up, and this sum will be compared to the balance of the control account.
What does it mean if they aren’t equal?

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DATA STORAGE

Review so far:

When routine transactions occur, they are recorded in special journals.
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.
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.

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DATA STORAGE

Click the button below if you wish to go through a summary of the remaining steps in the accounting cycle:

See Remainder

Of

Accounting Cycle

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DATA STORAGE

The rest of the story:

As transactions occur, they are recorded in journals and then posted to ledgers.
But that’s not the end of the story.
At the end of each accounting period, we complete the process by carrying out the following steps.

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DATA STORAGE

Using the balances in the general ledger, prepare a trial balance.

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DATA STORAGE

Prepare the end-of-period adjusting entries.

Record in journal
Post to ledger

Make an adjusted trial balance.
Using the numbers in the adjusted trial balance, prepare an income statement.
Prepare closing entries.
Prepare:

Statement of stockholders’ equity
Balance sheet
Statement of cash flows

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