Advanced ERP Analytics

01 Introduction to
Accounting Information
Systems and ERP
systems
Course Objectives
Theory
• To explain concepts of Accounting Information Systems, ERP systems, and
how they relate to each other
Discussion
• To discuss main challenges and trends of analyzing data with ERP
information systems
Practice
• Be able to apply the acquired knowledge in professional practice
0. Recommended book
0. Introduction
0. Introduction
• Most of you will be users of AIS or ERP systems
• some of you will become managers

• others will become internal and external auditors

• some of you will become consultants

0. Introduction
• Regardless of your role, you will need to
• understand how accounting information systems work

• measure their cost-effectiveness

• assess reliability of system and information

• lead to implementation of new AIS

1. Flow of information
Internal information flow
• The horizontal flow: operations-level tasks with detailed
information about the business transactions
• sales

• material management

• labor

• shipping
1. Flow of information
Internal information flow
• The vertical flow: distributes information downward
from senior managers to junior managers and operations
personnel (instructions, quotas, and budgets)
summarized information flows upward to managers at all
levels (to support planning and control functions)
1. Flow of information
External information flow
• Third flow of information represents exchanges between the
organization and users in the external environment
2. System & Subsystem
• Try to give me some examples of systems …
• Are human body, bicycle, computer or business systems?
• A system is a group of two or more interrelated components or subsystems that
serve a purpose (must be useful)
2. System & Subsystem
What is a subsystem?
• A system is called a subsystem when it is viewed in relation to the larger
system of which it is a part
3. The need for Information System
Why does a company need information system?
• 1st thing that comes to mind is for internal use for efficient management
because:
• Information is a business resource (like capital, raw materials, and labor)

• It is vital to the survival of the contemporary business organization

• But what is more important is to realize that the company is

legal entity, and it needs to provide information to external
entities:
• Taxing authorities, Courts
4. Information system
What is an information system?
• Set of formal procedures by which data are collected, processed into
information, and distributed to users.
• Everything in computer systems is stored in 0s and 1s
4. Information system
What is an information system?
• Input in the information system consists of direct input from a user while
or from a storage (hard drive or cloud) and then processed by a specific
program (procedures)
5. Transactions
Transaction is a business event (unit of work) !
• Financial transactions is an economic event that affects the assets,
liabilities or equities of the organization (reflected in accounts and
measured in monetary terms)
• Nonfinancial transactions are all the other events processed by the
information system (new vendor record, production order, transfer of
material)
6. Accounting Information System
• AIS helps with identification, collection, processing, and
communicating of economic information about a company using a wide
variety of technologies
• Captures and records the financial events (journal entry) based on
companies' transactions (purchase, sale …)
• Distributes transaction information to operations personell to coordinate
many key tasks
7. Management Information System
• MIS processes the information that are beyond capability of AIS
• As organizations grow in size and complexity, specialized functional areas
emerge, requiring additional information for production planning and
control, sales forecasting, inventory warehouse planning, market
research, and so on
• The management information system (MIS) processes nonfinancial
transactions that are not normally processed by traditional AIS
8. AIS vs. MIS
• Accounting Information Systems (AIS)
• Financial transitions (sale, purchasing)
• Nonfinancial transactions that directly affect the processing of financial
transactions (newly added vendor)
• Management Information Systems (MIS)
• Nonfinancial transactions that are not normally processed by traditional AIS
(tracking customer complaints, hiring new employee)
9. AIS transactions
• TPS
• supports daily
business operations
• GL/FRS
• produces financial
statement and
reports
• MRS
• produces special-
purpose reports for
internal use
9. AIS transactions
Assets = Liabilities + Equity

Monday
9. AIS transactions
Did we make any transaction?
Did we change balance sheet?
9. AIS transactions
Assets = Liabilities + Equity

Monday
THE LEFT SIDE ALWAYS EQUALS THE RIGHT SIDE!
9. AIS transactions
Did we make any transaction?
Did we change balance sheet?
9. AIS transactions
Assets = Liabilities + Equity

Tuesday
9. AIS transactions
Did we make any transaction?
Did we change balance sheet?
10. AIS transactions
Assets = Liabilities + Equity

Wednesday
9. AIS transactions
Did we make any transaction?
Did we change balance sheet?
9. AIS transactions
Assets = Liabilities + Equity

Friday
9. AIS transactions
Did we make any transaction?
Did we change balance sheet?
10. Transaction Processing System
TPS as a subsystem of AIS
• Is central to the function of the information system by converting
economic events into financial transactions, recording financial
transactions in the accounting records (journals and ledgers), and
distributing essential financial information to operations personnel to
support their daily operations
• The TPS deals with business events that occur frequently (100s to 1000s
a day)
• To deal efficiently with such volume, similar types of transactions are
grouped together into transaction cycles:
• the expenditure cycle (buy lemons/mangos)
• the conversion cycle (manufacture the lemonade or smoothie)
• the revenue cycle (sell the finished product to the customer)
11. GL/Financial Reporting Systems
GL/FRS as a subsystems of AIS
• are closely related and are generally viewed as a single integrated
system—the GL/FRS
• Most of inputs to the GL portion of the system comes from the
transaction cycles
• The FRS measures and reports the status of financial resources and
the changes in those resources
• this information is primarily for external users (nondiscretionary reporting)
• traditional financial statements (balance sheet, income statement, cash flow) tax
returns, and other legal documents
13. Management Reporting System
MRS as a subsystems of AIS
• provides the internal financial information needed to manage a business
• Managers must deal immediately with many day-to-day business problems, as
well as plan and control their operations (need for up-to-date information in form
of budgets, variance reports, cost-volume-profit analyses …)
• This type of reporting is called discretionary reporting because the organization
can choose what information to report and how to present it
14. AIS & MIS model
14. AIS & MIS model
• Data are facts and have no direct effect on the user
• Information is often defined simply as processed data

Purchasing agent receives a daily report listing raw material inventory

items that are at low levels.
After receiving valuable information, the agent decides to place
orders for more inventory.
15. Information Generation
• Information generation is the process of compiling, arranging and
formatting of data to present as useful information to final users
• Information should be
• On time up to date for actions it supports
• Accurate: must be free from errors
• Complete: no essential information should be missing
• Summarized: aggregated based on users’ needs (not too brief not too long)
15. Information Generation
15. Information Generation
15. Information Generation
• Information technology (IT)
• the computers and electronic devices store, retrieve, transmit, and manipulate
data

• Information overload
• more information than a human mind can absorb and process (decline in decision-
making quality)

• Value of information
• the benefit provided by information less the cost of producing it.
15. Information Generation
• A business process is a set of related, coordinated, and structured
activities and tasks that are performed by a person, a computer, or a
machine, and that help accomplish a specific organizational goal
• To make effective decisions:
• organizations must decide what decisions they need to make, what information they
need to make the decisions, and how to gather and process the data needed to
produce the information

• data gathering and processing is often tied to the basic business processes in an
organization
15. Information Generation
15. Information Generation
• Expenditure cycle activities
15. Information Generation
• Production cycle activities
15. Information Generation
Revenue cycle activities
15. Information Generation
• HR cycle activities
15. Information Generation
• Financing cycle activities
15. Information Generation
• Value of Information represents:
• benefits provided by information are bigger than costs for obtaining the information
16. Organizational segmentation
• Segmentation by business function is the most common method of
organizing (let’s assume a manufacturing firm that uses materials, labor,
financial capital, and information)
17. Organizational segmentation
18. Centralize vs. Decentralized DPM
• Centralized data processing model is done by one or more large
computers housed at a central site or in cloud that serve users throughout
the organization
(one database for all the financial and nonfinancial transactions)
18. Centralize vs. Decentralized DPM
• Distributed data processing model (DDP) divides the IT function into
small information processing units (IPUs) that are distributed to end users
and placed under their control.
(many databases for according to organizational units)
19. Information systems evolution
Five models from legacy to modern systems
• At the beginning there were only “Manual Processes”
• First information systems used “Flat-file databases”
• After development of SQL in 70s, IS moved to “Relational
databases”
• Incorporation of REA model developed in 80s (resources, events,
agents)
• Modern approach is to use integrated ERP systems
19. Information systems evolution
Manual Processes:
• Oldest and most traditional form of accounting systems (physical
events, resources, and personnel)

• Never used in practice today (but it is useful to study the manual process
model before mastering computer-based systems)
19. Information systems evolution
Flat-file databases:
• Associated with so-called “legacy systems”
• Flat-file model describes an environment in which individual data files are
not related to other files
• The data redundancy contributes to three significant problems in the flat-
file environment:
• data storage (data is stored more than once)

• data updating (need for changing multiple files)

• currency of information (hard to keep data accurate and relevant)

19. Information systems evolution
Relational databases:
• This approach centralizes the organization’s data into a common
database that is shared by other users
Single source of truth!
• Access to the data resource is controlled by a database management
system (DBMS) which is a special software system that is programmed to
know which data elements each user is authorized to access
• Helps eliminate redundancy !!!
19. Information systems evolution
Relational databases:
19. Information systems evolution
REA model
• Is an accounting framework for modeling an organization’s critical:
• Resources: assets of the organization (objects that are both scarce and under control
of the company)

• Events: phenomena that affect changes in resources (resulting from production,

exchange, consumption, and distribution)

• Agents: individuals or departments that participate in an economic event (from

outside or inside the organization)

• Once specified, both accounting and nonaccounting data about these

entities can be identified, captured, and stored in a relational
database
19. Information systems evolution
ERP systems:
• Are complex information systems based on SQL and REA model that
enable organizations to automate and integrate their key
business processes
• ERP breaks down traditional functional barriers by:
• by facilitating data sharing, information flows
• and the introduction of common business practices among all organizational
users
19. Information systems evolution
ERP systems:
Common ERP modules include:
• Financial Accounting
• Sales and Distribution
• Purchasing
• Inventory Management
• Asset Management
• Human Resources
• Plant Maintenance Production
• Planning Quality Management
• Industry-Specific Solutions
20. Relational Databases
An example of relational database structure
https://youtu.be/HXV3zeQKqGY (not required but recommended)
20. Relational Databases
Database represents a model of how business works
22. System architecture
Information system architecture: 2 Tier system
22. System architecture
Information system architecture: 3 Tier system