OVERVIEW OF BUSINESS PROCESSES (STUDY OBJECTIVE 1)

You might wonder how the preceding example relates to accounting information systems. An accounting information system must capture, record, and process all financial transactions. Prior to the implementation of the experimental drive-through order systems, all in-store and drive-through orders were processed through the cash registers at each local McDonald's. When the new, experimental systems were implemented, consider their effects on the system that recorded sales. The new technology had to be configured in such a way that

1. Order details were taken accurately
2. Those details were forwarded to the correct McDonald's location so that the order could be handed to the customer at the drive-through
3. The order data had to be included with McDonald's sales and cash received for the day
4. The correct McDonald's location had to be properly credited with the sale so that the franchise and managers would be given credit for sales they generated

The point of this example is that there are many different ways that sales transactions can be conducted. No matter the form of those business transactions, the accounting information system must identify the transactions to record, capture all the important details of the transaction, properly process the transaction details into the correct accounts, and provide reports externally and internally. Many types of transactions that result from business processes must be captured, recorded, and reported.

A business process is a prescribed sequence of work steps performed in order to produce a desired result for the organization. A business process is initiated by a particular kind of event, has a well-defined beginning and end, and is usually completed in a relatively short period. In the previous example, the business process is the taking and filling of a drive-through order. Organizations have many different business processes, such as completing a sale, purchasing raw materials, paying employees, and paying vendors. Each business process has either a direct or an indirect effect on the financial status of the organization. For example, completing a sale directly increases cash or other assets, while paying employees directly reduces cash or increases liabilities. Purchasing new, efficient equipment also directly affects assets and/or liability accounts; yet this transaction is also expected to indirectly increase sales and assets, as it provides for increased productivity and an expanded customer base. Therefore, we can see why, as business processes occur, the accounting information system must capture and record the related accounting information.

All of the possible business processes would be too numerous to list. However, the four general types of business processes typical in organizations (which will be described in later chapters of this book) are as follows:

1. Revenue processes (Chapter 8)
   1. Sales processes
   2. Sales return processes
   3. Cash collection processes
2. Expenditure processes (Chapters 9 and 10)
   1. Purchasing processes
   2. Purchase return processes
   3. Cash disbursement processes
   4. Payroll processes
   5. Fixed asset processes
3. Conversion processes (Chapter 11)
   1. Planning processes
   2. Resource management processes
   3. Logistics processes
4. Administrative processes (Chapter 12)
   1. Capital processes
   2. Investment processes
   3. General ledger processes

In the example at the beginning of this chapter, the remote drive-though processing is part of the revenue processes. The order-taking combines the sales process and the cash collection process. For a fast food franchise such as McDonald's, these processes are the most visible and obvious to customers. However, there are many other business processes that occur that may not be as apparent to customers.

In addition to revenue processes to sell food to customers and collect the cash, McDonald's must implement some or all of the remaining processes in the preceding list. That is, to sell a Big Mac Extra Value Meal® to a customer, McDonald's must first engage in purchase processes to buy meat, vegetables, buns, soft drinks, and other food items, as well as operating supplies. In addition, it must have payroll processes to pay employees, and fixed asset processes to buy and maintain equipment and other fixed assets. McDonald's must have conversion processes to convert the raw meat, vegetables, and buns into customer products that can be sold.

Also, McDonald's must have capital processes that raise funds to buy capital assets, and investment processes to manage and invest any extra cash flow. Finally, McDonald's needs general ledger processes to ensure that all transactions are recorded into the appropriate general ledger accounts and that financial information is reported to external and internal users. For example, each sale to a customer must be recorded as a sale, and the results of the sale must eventually be posted to the general ledger accounts of cash and sales.

The purpose here of reviewing these processes is not to cover the entire set of details, but to emphasize that there must be prescribed work steps in every area. Employees, work steps, and transaction recording systems must be established in any organization to ensure that business processes occur and that any accounting effects of those processes are captured and recorded. For example, employees who work the cash register must be trained to apply company policies for customer payment (such as cash and credit cards accepted, but no personal checks). As these employees perform their work steps, the system in place should be capturing the relevant accounting information. In the case of McDonald's, the cash register captures the in-store sales data, including the items sold, price paid, sales tax, and date of sale. The cash registers are connected to a computer system that feeds the sales and cash data to corporate headquarters so that management reports can be created and external financial statements can be prepared at the end of the period.

In addition, organizations implement internal control processes into their work steps to prevent errors and fraud. Internal controls are the set of procedures and policies adopted within an organization to safeguard its assets, check the accuracy and reliability of its data, promote operational efficiency, and encourage adherence to prescribed managerial practices. For example, McDonald's probably requires that at the end of every day, a manager close each cash register and reconcile the cash in the register to the recorded total sold at that register. This is an internal control process to prevent and detect errors in cash amounts and to discourage employees from stealing cash. Reconciliation of cash to cash register records is a business process designed to control other processes. Thus, we begin to see that the accounting information system has many components, as explained further in the next section.