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Organizing information & data flows in business systems.

Using easy to understand figures and discussion, this article provides an overview of the information, data, and transaction flows that occur in a realistic business reformation system. Thus article explains the four major subsystems - cash receipts and disbursements, sales and purchases, financial accounting and budgeting, and manufacturing - that comprise such a system as well as the individual processing modules or applications that actually carry out the system's activities. The focus of this article is on how the parts of a total system fit together to form a functioning whole A business information system is the sum of all the tools, techniques, and procedures used by the business to process data Such a system accepts input data about the business and generates required or desired output information. These tools, techniques, and procedures may be carried out manually or by a computer. Most information systems are made up of component subsystems and applications or modules that are designed to process data in specific areas of business activity. Any business information system can be divided into processing systems of narrower scope which accept input data, process it, and interact with each other to produce output information and files of data.

Components of an Information System

The same fundamental ideas apply to both computer-based systems and to manual systems. Indeed, the component parts of computer-based systems generally parallel those of manual systems since the goals of both are fundamentally the same. It is realistic to view the activities and data of most businesses as falling into four major categories cash inflows and outflows, sales and purchases, financial accounting and budgeting, and manufacturing (cost) accounting. A computer-based information system can then be logically as viewed consisting of four component subsystems that are identifiable and distinguishable, but not isolated from one another. Each of these subsystems processes data from a certain area of business activity, however, each depends upon the other, and reformation must flow between them for the computer-based system to work.

Figure 1 illustrates the conceptual relationships and the logical flow of business information between component subsystems and their application modules. As you examine this figure, consider the following significant points:

1. The entire figure represents a computer-based business reformation system It is composed of four distinct, but interrelated component subsystems which are represented by the large curved shapes.

2. The major components of such an information system are:

a. A cash receipts and disbursements system.

b. A sales and purchases system.

c. A financial accounting/budgeting system.

d. A manufacturing system.

3. Each major component, in turn, consists of specific processing applications or modules which are represented by the rectangular figures. It is these application modules that are the basic braiding blocks of an information system.

4. It is important to note that information flow between modules is absolutely necessary in a computer-based information system. The arrows indicating reformation flow which intersect the curved shapes demonstrate that all systems interact with each other through the modules that make up the systems.

5. The conceptual differences between information systems and accounting systems should become clearer after careful study of Figure 1. Accounting systems process only certain kinds of events, called transactions, because of the basic assumptions on which accounting is based Information systems, on the other hand, are capable of processing any information (i e, more than just accounting transactions) that is useful to management or any other user of the system.

Interdependence of Components

The necessary flow of information between applications makes it unlikely that any individual module, or even any component subsystem, can successfully stand alone or operate independently. Each of these modules provide the necessary "environment" for the other. Many processing applications use the same basic data as input, but require that the data be organized or accessed differently. By the same token, the output of some applications may be used as input for other applications.

This commonality of data needs makes it possible for a business system to create a basic set of data which is available to all processing applications and flexible enough to be referenced by these modules in many different ways. Such a set of data within reach of all processing applications for their use is, of course, a data base Instead of each application organizing and storing all of its own data (which would necessarily result in redundancy and duplication throughout the system), the data base concept extracts data that is common to many application modules and makes it accessible to all. Only with the aid of a computer's speed and memory is this possible, thus, implementation of the data base idea in a manual system is generally not feasible.

Important Characteristics of an Information System

All processing applications of business reformation systems have some important characteristics in common These fundamental ideas can be summarized as follows.

Output reports From each application module some output will be generated to provide information on which decisions can be based or statements to meet the business' reporting requirements Although it is conceivable for a package to produce no printed output, this is not likely to occur very often in business processing. The ability of computer-based systems to provide information which is not available from a manual system is one of the primary reasons for their existence. Timely and useful management reports are one of the significant advantages of an information system.

Interaction with other packages The transfer of data between applications (sometimes called interface) exists to reduce duplication and redundancy in an reformation system. The capabilities of computer systems make this kind of interchange between modules relatively easy to carry out as compared to manual systems It is unusual to find an individual computer-based module that is not made more efficient by accepting some organized and (at least) partially processed data from another module. By the same token, almost all modules generate some data which can be used by other applications in the system.

Inquiry and response capability. Given the inherent advantages of speed and memory possessed by computers, much of the benefit of computer-based systems is lost if critical pieces of information are not available on request from the system. The immediate availability of up-to-date information by direct inquiry to the system is one of the most significant advantages of computer systems.

Data organization into files. The concepts of file, record, and data-item are essential to every computer-based application. Since the computer does not have intuition, judgment, or reasoning powers, the organization of input data must follow a known logical design. This logical design most often results in each module having access to a permanent master file which is updated with each processing run by a file of current activity. Although other types of files are sometimes necessary, the basic concept of master and transaction files is common to all applications.

Data Organization and Input

To generate output reports the computer system must have access to certain input data, and this data must be organized so that processing can be done efficiently. The input data to any system can be thought of as falling into three categories.

Constant or Report Files. Relatively permanent data may be used over and over as input to a application module, but this data is not altered by the processing that takes place and is changed externally only occasionally. This data may consist of constants, such as tax rates and limits, exemption amounts, deduction percentages, and so on, or headings and titles to be used in output reports such as financial statements.

There are two basic approaches to accomplishing this type of constant data input. The simplest approach is to maintain a different computer program for each set of constants or report to be printed, and to make headings, titles, subtotal, and total format a part of the program. This approach does, however, require that the program be changed if a change in permanent data or report format is desired. The other basic approach to handling permanent data makes it possible to change this data almost at will without the necessity for altering the computer programs of a system. It involves the creation of a permanent input file which specifies the constant data to be used or the headings, titles, subtotal, and total format for each output report. Such a file is often called a constant data or report format file or report writer file.

Master Files. Semipermanent data of a cumulative nature may be input, then processed and changed by the processing (this is usually called updating), and then become output to be updated again in later processing. An example of this type of input data are the balances in general ledger accounts. General ledger data is kept in a file and at the end of each period the account balances are updated for all of the transactions (increases and decreases) that occurred during the period. The ending balances in each account would then be stored and become input to the next period's transaction processing. All business processing modules require at least one file of this kind of data. Files of this type are called master files.

Transaction Files. Current data pertaining to activity of the present period must be processed and then may or may not be stored in its raw form. This current data represents the basis for the updating of cumulative (master) files. An example, consistent with the master file discussed above, would be the accounting transactions that take place during a time period whose effect must ultimately be reflected in general ledger balances. All business processing involves this type of data input because without current activity no processing would be necessary. Files of current activity data are called current or transaction files.

Now that we have an overview of the important characteristics and relationships in a business information system, the remaining sections will discuss the component subsystems that make-up the total system.

The Cash Receipts and Disbursements Subsystem

The processing applications of this system are probably the best-known computer-based modules. They are usually the first processing applications to be computerized because they are relatively easy to convert and represent highly visible activity areas for most businesses.

Accounts Receivable and Accounts Payable

The cash receipts and disbursements subsystem stands between (in an information flow sense) the other major component subsystems. The accounts receivable and accounts payable applications receive input from the sales and purchases subsystem and provide output to that system. Since accounts receivable are affected by both sales and cash receipts, and accounts payable are affected by purchases and cash disbursements, this interaction is not surprising. In addition, the receivables and payables modules produce essential transaction processing information for inclusion in the general ledger by the financial accounting/budgeting subsystem.


The payroll application is interesting because it represents the closest thing to a stand-alone module in business systems. Payroll applications can and sometimes do exist as the sole computerized area of business activity, since no input from other areas may be necessary for the module to work. However, as business activity becomes more complex and sales or other activity-related variables become important factors in the determination of compensation, data from the sales and purchases subsystem may become either very desirable or absolutely necessary input to the payroll package. The most common example of this type of situation is a company with a large sales payroll where sales pay is based primarily on commissions. Here, input from a sales analysis module is essential to payroll since, at the very least, a breakdown of sales by salesperson is needed for the payroll calculation. Also, payroll processing does generate output information to be included in the general ledger.

The Sales and Purchases Subsystem

These modules represent the point of original data entry into the information system for many important transactions and events. As such, there is significant information flow among the individual modules which make up the sales and purchases subsystem as well as between these modules and those of the cash receipts and disbursements and manufacturing subsystems. In addition, there is limited one-way information flow from this system to the financial accounting system.

Order Processing and Inventory Management

The sales and purchases subsystem interacts significantly with the cash receipts and disbursements subsystem. There is an 'important pairing of packages between these component systems. Order processing and accounts receivable combine to process data on sales and cash receipts, while inventory management and accounts payable combine to process data on purchases and cash disbursements. For example, sales invoice summary information is passed from order processing, where these invoices are created, to accounts receivable so that the customer master file can be updated.

At the same time, information on the status of individual customer accounts can be returned to order, processing to aid in sales order and credit granting decisions. Similarly, accounts payable receives purchase invoice summaries from inventory management, where they are created, in order to update the vendor master file and returns vendor activity breakdowns which aid in making purchasing decisions.

Sales Analysis

Sales analysis is the only application of the sales and purchases subsystem which directly interacts with the financial accounting/budgeting system. Data from order processing and inventory management are ultimately included in the general ledger, but only after being processed and summarized by the cash receipts and disbursements subsystem. Output from sales analysis, however, is incorporated into the budgeting function directly, so that detailed comparisons of performance by product, territory, salesperson, customer, or other basis can be readily made. Also, this sales analysis output provides a sound basis for the preparation or revision of future financial budgets. Sales analysis by salesperson can also be used in the calculation of payroll where compensation is based on commissions. Because most detailed data on sales and collections is processed and stored in accounts receivable, important information flow also takes place between sales analysis and accounts receivable.

Components of a Financial Accounting/Budgeting System

In many ways, this is the most basic of the processing systems. It is designed to handle the bookkeeping and accounting cycle events for a business, from recording transactions to the production of period-end external financial statements, and reports on the comparison of actual results to budgeted (expected) figures.

General Ledger

The cash receipts and disbursements system provides input to the general ledger application of the financial accounting/budgeting system. This is necessary because the accounts receivable, accounts payable, and payroll applications provide much of the data necessary for the creation of the cash receipts and cash disbursements journals, as well as the sales and purchases journals. Direct system input (i.e., not from other modules) to the general ledger module would involve those transactions and data that are not handled by the other processing applications. These transactions would usually be those found in the company's general journal. Periodically, a listing is produced of all general ledger accounts and beginning balances, together with a summary of the increase and decrease activity in each account and the resulting ending balances. A trial balance could then be produced and, at the end of each period, the traditional accounting financial statements can be produced according to any format specified by the system user.

In addition, detailed listings of all transactions together with posting references can be produced so that an audit trail of all activity through the system in either direction can be established.

Control and Budgeting

An important part of a financial accounting/budgeting system is the control aspect. Budgeting is an vital part of any control system and can be accomplished as an extension of financial statement preparation. The master budget for a business consists of a projected income statement (sometimes called a profit plan), a statement of projected cash needs (a cash budget), and a projected balance sheet. These pro forma reports constitute a formal statement of expectations for the future as well as the standard or benchmark against which actual results will be compared. The financial accounting system can produce budgeted statements in the same format as actual period-end financial statements so that departures from expected results in any important revenue, expense, or other category can be disclosed by the system and highlighted for management analysis and action.

The analysis of departures from budget (variances) and the subsequent corrective action decisions that results from the analysis is management control. Of course, the computer cannot perform these functions, but the computer-based financial accounting system can, as a matter of course, provide the information that makes these actions possible. Simultaneously, a master budget of pro forma statements that will serve as the benchmark for the following period can be generated.

The Manufacturing Subsystem

To this point we have discussed business information systems suitable for service or merchandising environments. This section will expand the discussion to consider manufacturing operations. Computer-based manufacturing modules are predominantly internal, management information oriented and their addition can add significantly to the size and complexity of the information system.

When computerized manufacturing modules are in use management hopes to accomplish at least the following:

1. reduce the amount of materials and component inventory on hand as well as the amount of work in process inventory.

2. increase productivity.

3. reduce late and incorrect shipments.

4. decrease indirect labor costs which result from poor routing and scheduling.

Product Data Management

This application accumulates semipermanent data about the various products manufactured by a company. The data collected are created and used by a number of departments including accounting, production, engineering, quality control, and others. As the number of departments collecting and using this information increases so does the potential for errors. By accumulating this information in one place and making it accessible to all departments, the accuracy of the information is improved and the costs of maintaining it are reduced. The data stored for each product by this application might consist of 1) a description of each of the materials and components used in the manufacturing process, 2) the sequence of operations necessary for the manufacturing process, 3) a description of the equipment and facilities used in the manufacture, and 4) certain master file product or item information.

Production Costing

The production costing module assists management in planning and controlling the production process. As manufacturing activity is completed and reported, files are updated which can then be used to print reports showing the status of work in process and the cost of any or all products. This module tells management 1) if the production process is on schedule, 2) if there are cost efficiencies or cost overruns, and 3) the current workload level for each defined work center. This helps management schedule additional work for underworked areas and reschedule work away from overworked areas. The net effect is to increase cost efficiencies and adherence to schedules which will satisfy customer demand.

Material Requirements Planning

The MRP module produces a master production schedule based on actual sales as accumulated by the order processing module and on forecasted sales from the budgeting module. Based on the bills of material, MRP determines the quantity of materials, subassemblies, and other component items needed to meet the forecasted demand. This calculated amount is then compared to inventory on hand and inventory on order to determine necessary management actions. The MRP module will advise management whether to reorder certain items, cancel orders for items no longer needed, or to make no changes to the ordering plans. The objective of this application is to increase efficiency by improving productivity and customer service, while keeping inventory levels at the minimum necessary to meet demand.

Production Monitoring

This application assists management in controlling material and labor costs and provides data to update inventory, payroll, and production costing. Data may be entered as activities occur or accumulated and entered in batch format from a display station at a later time.

As data are entered, the application categorizes it, for example, as labor data or inventory data. Employee time and attendance data records are sent to payroll for the processing of paychecks. The inventory data are checked for reasonableness, formatted into output reports and used to update inventory management and production costing. Inventory management receives information on receipts and issues of goods.


The component subsystems and application modules discussed have some important characteristics in common. Each subsystem and module we have discussed has exhibited the following attributes:

1. Output reports of varying form, content, and frequency.

2. Interfaces (the exchange of information) with other modules.

3. Inquiry and response (interactive) capability.

4. Data organization into files.

5. Use of terminals (work stations) to input data, initiate processing, and receive output.

Figure 2, shown below, summarizes these characteristics of business information systems by presenting an overview of the transaction (completed accounting events) flow and data (non-transaction information) flow through the systems.


Paul Hooper, MBA, Ph D, is Professor of Accounting at the University of Delaware John Page, MBA, Ph D, u Associate Professor of Accounting at Tulane University Hooper and Page are coauthors of several previous articles in professional journals and of the book ACCOUNTING AND INFORMATION SYSTEMS, 4th Edition and 4th International Edition, published by Prentice Hall.
COPYRIGHT 1997 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1997 Gale, Cengage Learning. All rights reserved.

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Author:Hooper, Paul; Page, John
Publication:The National Public Accountant
Date:Nov 1, 1997
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