ACCOUNTING

INFORMATION SYSTEM

GROUP
ASSIGNMENT

Sep. 12, 2022

Submitted to:
Melak D. (Instructor)
 Group
Assignment

BUSINESS FACULTY
ACCOUNTING AND FINANCE
DEPARTMENT

Prepared by:
Name ID No.
Meron Seifu 0060/19
Selamawit Jebissa 0098/19
Tesfaye Tolcha 0051/19
Tizita Masresha 0031/19
Tomas Adamu 0061/19

September 12, 2022

Submitted to: Section:
Melak D. (Instructor) 4DEA-17
nd
(2 BATCH)
 ACKNOWLEDGEMENT
First and foremost, we would like to thank God the Almighty for
giving us for strengthen us to complete the group assignment
satisfactorily.

Secondly, we would like to show our special gratitude to Mr. Melak D.,
for the immense amount of cooperation and contribution he has
provided in course Accounting Information System.

Thirdly, we would like to thank each other for the feedbacks provided
to each other in completion of the assignment.

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 TABLE OF CONTENTS
Contents Pages

Q1. List down the types of documentation and what is the purpose of documentation? ------------ 1

Q2. Why do accountants need to understand documentation? ----------------------------------------- 1

Q3. What is DFD? And explain the four basic elements of DFD? ------------------------------------- 1

Q4. Why are databases important and what is their advantage? --------------------------------------- 2

Q5. What are the fundamental concepts of database systems such as DBMS, schemas, the data
dictionary, and DBMS languages? -------------------------------------------------------------------------- 3

Q6. What is a relational database, and how does it organize data? ------------------------------------ 4

Q7. What steps are followed to design and implement a database system? --------------------------- 6

Q8. Developing an REA diagram for a specific transaction cycle consists of three steps. Explain
the three steps? -------------------------------------------------------------------------------------------------- 7

Q9. Developing an REA diagram for a specific transaction cycle consists of three steps. Explain
the three steps? -------------------------------------------------------------------------------------------------- 9

A. Revenue cycle -------------------------------------------------------------------------------------- 8

B. Expenditure cycle --------------------------------------------------------------------------------- 8
C. Human resources/payroll cycle ----------------------------------------------------------------- 9
D. Production cycle --------------------------------------------------------------------------------- 10
E. Financing cycle and general ledger reporting system ------------------------------------- 10

Q10. Developing an REA diagram for a specific transaction cycle consists of three steps. Explain
the three steps? ------------------------------------------------------------------------------------------------ 11

References ------------------------------------------------------------------------------------------------------ 13

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 LIST OF FIGURES AND TABLES
LIST OF FIGURES
Figure 1: Database in business ------------------------------------------------------------------ 3
Figure 2: The revenue cycle ---------------------------------------------------------------------- 8
Figure 3: The expenditure cycle ----------------------------------------------------------------- 9
Figure 4: The payroll cycle ---------------------------------------------------------------------- 9
Figure 5: The production cycle -----------------------------------------------------------------10
Figure 6: The general ledger and reporting system ------------------------------------------- 11

LIST OF TABLES
Table 1: Relationship database that shows row, column, primary key, and data field---- 5
Table 2: Table relation -------------------------------------------------------------------------- 5

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 Q1. List down the types of documentation and what is the purpose of
documentation?
There are many types of AIS documentation types or techniques. Some of the AIS documentation
includes:

 Flowcharts exist in two forms; that is, document and system flowcharts.

 Process Map involves the use of diagrams to document business processes.

 Data Flow Diagram (DFD) is mainly used in accounting information systems to development
process particularly to analyze an existing system.

The purpose of documentation includes:

 Documenting and AIS helps organization stakeholders to depict how their accounting and finance
systems work

 It also assists in the training of users

 Documentation process also opens up the possibility of progressive designing of new systems in
the future

 It helps in the control of costs relating to system development and maintenance

 Documented AIS standardizes stakeholder communication

 Documentation also makes AIS auditing easier and efficient

 It also helps in the business processes documentation

 It facilitates an organization’s compliance with regulations

 It establishes accountability and transparency in an organization’s processes, especially those

relating to accounting and finance.

Q2. Why do accountants need to understand documentation?

Systems professionals and accountants must understand the documentation and charts that describe
accounting systems. Such documentation allows the accountant to analyze and understand the procedures
and processes of a business process and the systems that capture and record accounting data.

Q3. What is DFD? And explain the four basic elements of DFD?
Data flow diagrams are used to graphically represent the flow of data in a business information system.
DFD describes the processes that are involved in a system to transfer data from the input to the file storage
and reports generation.

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Data flow diagrams can be divided into logical and physical. The logical data flow diagram describes flow
of data through a system to perform certain functionality of a business. The physical data flow diagram
describes the implementation of the logical data flow.

All data flow diagrams include four main elements: entity, process, data store and data flow.

External Entity – Also known as actors, sources or sinks, and terminators, external entities produce
and consume data that flows between the entity and the system being diagrammed. These data flows are
the inputs and outputs of the DFD. Since they are external to the system being analyzed, these entities are
typically placed at the boundaries of the diagram. They can represent another system or indicate a
subsystem.

Process – An activity that changes or transforms data flows. Since they transform incoming data to
outgoing data, all processes must have inputs and outputs on a DFD. This symbol is given a simple name
based on its function, such as “Ship Order,” rather than being labeled “process” on a diagram. In Gane-
Sarson notation, a rectangular box is used and may be labeled with a reference number, location of where
in the system the process occurs and a short title that describes its function. Processes are typically
oriented from top to bottom and left to right on a data flow diagram.

Data Store – A data store does not generate any operations but simply holds data for later access. Data
stores could consist of files held long term or a batch of documents stored briefly while they wait to be
processed. Input flows to a data store include information or operations that change the stored data. Output
flows would be data retrieved from the store.

Data Flow – Movement of data between external entities, processes and data stores is represented with
an arrow symbol, which indicates the direction of flow. This data could be electronic, written or verbal.
Input and output data flows are labeled based on the type of data or its associated process or data store,
and this name is written alongside the arrow.

Q4. Why are databases important and what is their advantage?

Advantages of database include:
 Reduced data redundancy

 Reduced updating errors and increased consistency

 Greater data integrity and independence from applications programs

 Improved data access to users through use of host and query languages

 Improved data security

 Reduced data entry, storage, and retrieval costs

 Facilitated development of new applications program

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 Figure 1: Database in business

Q5. What are the fundamental concepts of database systems such as

DBMS, schemas, the data dictionary, and DBMS languages?
DBMS-Data Base Management System

DBMS is a collection of programs that enables users to create and maintain a database. It provides an
environment that is both convenient and efficient to use.

Database + DBMS = Database System

Applications of DBMS

 Banking- All transactions

 Airlines- Reservations, schedules

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  Universities- Registrations, grades

 Sales- Customers, products, purchase

 Manufacturing- Production, inventory, orders, supply chain

Data Dictionary

A data dictionary contains metadata i.e data about the database. All well-designed database will include
a data dictionary.

DBMS checks the data dictionary every time the database is accessed.

There are two types of data dictionaries.

1. ACTIVE (integrated data dictionary)

2. PASSIVE(non-integrated data dictionary)

Levels of Abstraction

1. View Level — Application programs hide details of data types.

2. Logical Level — Describes data stored in the database and relationships among the data.

3. Physical Level — Describes how a recorded stored.

Data Independence

Data independence is the ability to make changes to data characteristics without having to make changes
to the programs that access the data. It’s important because of the savings in time and potential errors
caused by reducing modifications to data access software.

 Logical Data Independence - Protection from changes in the logical structure of data

 Physical Data Independence - Protection from changes in the physical structure of data

Data Language

 DDL stands for Data Definition Language. It is used to define database structure or pattern.
 It is used to create schema, tables, indexes, constraints, etc. in the database.
 Using the DDL statements, you can create the skeleton of the database.
 Data definition language is used to store the information of metadata like the number of tables and
schemas, their names, indexes, columns in each table, constraints, etc.

Q6. What is a relational database, and how does it organize data?

A relational database is a type of database that stores and provides access to data points that are related to
one another. Relational databases are based on the relational model, an intuitive, straightforward way of
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representing data in tables. In a relational database, each row in the table is a record with a unique ID
called the key. The columns of the table hold attributes of the data, and each record usually has a value for
each attribute, making it easy to establish the relationships among data points.

Relational database systems use a model that organizes data into tables of rows (also
called records or tuples) and columns (also called attributes or fields). Generally, columns represent
categories of data, while rows represent individual instances.

Let's use a digital storefront as an example. Our database might have a table containing customer
information, with columns representing customer names or addresses, while each row contains data for
one individual customer.

Table 1: Relationship database that shows row, column, primary key, and data field

These tables can be linked or related using keys. Each row in a table is identified using a unique key,
called a primary key. This primary key can be added to another table, becoming a foreign key. The
primary/foreign key relationship forms the basis of the way relational databases work.

Returning to our example, if we have a table representing product orders, one of the columns might
contain customer information. Here, we can import a primary key that links to a row with the information
for a specific customer.

Table 2: Table relation

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This way, we can reference the data or duplicate data from the customer information table. It also means
that these two tables are now related.

Q7. What steps are followed to design and implement a database system?
The design process consists of the following steps:

 Determine the purpose of your database

This helps prepare you for the remaining steps.

 Find and organize the information required

Gather all of the types of information you might want to record in the database, such as product name and
order number.

 Divide the information into tables

Divide your information items into major entities or subjects, such as Products or Orders. Each subject
then becomes a table.

 Turn information items into columns

Decide what information you want to store in each table. Each item becomes a field, and is displayed as a
column in the table. For example, an Employees table might include fields such as Last Name and Hire
Date.

 Specify primary keys

Choose each table’s primary key. The primary key is a column that is used to uniquely identify each row.
An example might be Product ID or Order ID.

 Set up the table relationships

Look at each table and decide how the data in one table is related to the data in other tables. Add fields to
tables or create new tables to clarify the relationships, as necessary.

 Refine your design

Analyze your design for errors. Create the tables and add a few records of sample data. See if you can get
the results you want from your tables. Make adjustments to the design, as needed.

 Apply the normalization rules

Apply the data normalization rules to see if your tables are structured correctly. Make adjustments to the
tables, as needed.

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Q8. Developing an REA diagram for a specific transaction cycle consists of
four steps. Explain the three steps?
Step 1. Identify the Event Entities
The first step in developing an REA model is to identify the event entities in the function being modeled.
The events in this revenue cycle example can be identified as the value-added actions that Apex
employees take. These entities include Verify Availability, Take Order, Ship Product, and Receive Cash.
An REA model must, at a minimum, include the two economic events that constitute the give and receive
activities that reduce and increase economic resources in the exchange. In addition, it may include support
events, which do not change resources directly. We will next examine each identified event above to
determine whether it should be classified an economic event or a support event.

Step 2. Identify the Resource Entities

The next step in creating the REA diagram is to identify the resources that are impacted by the events
selected to be modeled. Each economic event in an REA model must be linked to at least one resource
entity whose economic value will be either reduced or increased by the event. Support events are also
related to resources but do not effect a change in the resource value.

Step 3. Identify the Agent Entities

Each economic event entity in an REA diagram is associated with at least two agent entities. One of these
is an internal agent and the other is an external agent. The external agent associated with all four events in
an XYZ company is Customer. In addition, four internal agents are associated with the four events:

1. The customer services clerk, who participates in the Verify Availability event.

2. The sales representative, who participates in the Take Order event.

3. The shipping clerk, who participates in the Ship Product event.

4. The cash receipts clerk, who participates in the Receive Cash event.

Step 4. Determine Associations and Cardinalities between Entities

This section assumes familiarity with these topics, which are only briefly reviewed. Association is the
nature of the relationship between two entities, as the labeled line connecting them represents. Cardinality
(the degree of association between the entities) describes the number of possible occurrences in one entity
that are associated with a single occurrence in a related entity. Four basic forms of cardinality are possible:
zero or one (0,1), one and only one (1,1), zero or many (0,M), and one or many (1,M).

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 Q9. Explain the following in detail
A. Revenue cycle
The revenue cycle is a method of defining and maintaining the processes used for the completion of an
accounting process for recording revenue generated from services or products provided by the company,
which include the accounting process of tracking and recording transaction from the beginning, normally
which starts from receiving an order from the customer or entering in agreement with the customer,
delivering an order to customer and end with getting payment from the customer.

Figure 2: The revenue cycle

B. Expenditure cycle
The expenditure cycle is the set of activities related to the acquisition of and payment for goods and
services. These activities include the determination of what needs to be purchased, purchasing activities,
the receipt of goods, and payments to suppliers. Much of the input to the expenditure cycle comes from
the sales cycle, where purchasing requirements are driven by the volume and type of customer orders.

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Figure 3: The expenditure cycle

C. Human resources/payroll cycle

The human resources management (HRM)/ payroll cycle is a recurring set of business activities and
related data processing operations associated with effectively managing the employee workforce. The
more important tasks include the following: recruiting and hiring new employees, training, job
assignment, compensation (payroll), performance evaluation, and discharge of employees due to voluntary
or involuntary termination.

Figure 4: The payroll cycle

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D. Production cycle
The production cycle is comprised of all activities related to the conversion of raw materials into finished
goods. The cycle has several distinct components, involving the design of products, their incorporation
into a production schedule, manufacturing activities, and a cost accounting feedback loop.

These four areas are usually managed by four different departments – the engineering, materials
management, production, and accounting departments, respectively.

Figure 5: The production cycle

E. Financing cycle and general ledger reporting system

General ledger and financial reporting system is an information system that translates financial events
collected by the TPS into permanent financial information; as well as, store, report and communicate such
information to management and other users.

A general ledger represents the record-keeping system for a company’s financial data, with debit and
credit account records validated by a trial balance. It provides a record of each financial transaction that
takes place during the life of an operating company and holds account information that is needed to
prepare the company’s financial statements. Transaction data is segregated, by type, into accounts for
assets, liabilities, owners’ equity, revenues, and expenses.

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Figure 6: The general ledger and reporting system

Q10. Information Output of AIS can serve a variety of purposes, explain

its purpose?
The outputs of AIS include:
1. Financial statements
Financial statements provide a snapshot of a corporation's financial health, giving insight into its
performance, operations, and cash flow. Financial statements are essential since they provide information
about a company's revenue, expenses, profitability, and debt.
2. Trial balance
The main purpose of a trial balance is to ensure that the lists of credit and debit entries in a general ledger
are mathematically correct.
3. Chart of accounts
A chart of accounts (COA) is a financial, organizational tool that provides an index of every account in an
accounting system. This provides an insight into all the financial transactions of the company. Here, an
account is a unique record for each type of asset, liability, equity, revenue and expense.
4. Variance analysis
Variance analysis is used to assess the price and quantity of materials, labor and overhead costs. These
numbers are reported to management. While it's not necessary to focus on every variance, it becomes a
signaling mechanism when a variance is salient.

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5. Final budget document
A budget helps create financial stability. By tracking expenses and following a plan, a budget makes it
easier to pay bills on time, build an emergency fund, and save for major expenses such as a car or home.
Overall, a budget puts a person on stronger financial footing for both the day-to-day and the long term.
6. Sales tax remittance slips
A remittance letter is a document sent by a customer, which is often a financial institution or another type
of firm, to a creditor or supplier along with payment to briefly explain what the payment is for so that the
customer's account will be credited properly.
7. Payroll stubs
Pay stubs and pay slips are used to provide employees with an accurate record of their hours and wages.
This allows them to track everything related to their pay and ensure the amount they've received, and paid
in tax, is correct.

 In general, the purpose of the AIS is to gather, record, process, store, summarize, and
communicate information about an organization.

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