TRANSACTION

PROCESSING
AND FINANCIAL REPORTING
SYSTEMS OVERVIEW

GROUP 6
 TRANSACTION CYCLE
Labor Customers
CASH

CASH
Materials

FG
Physical Plant

EXPENDITURE CYCLE CONVERSION CYCLE REVENUE CYCLE

Subsystems:
-Purchasing or A/P Subsystems:
-Cash Disbursements -Production Planning and Subsystems:
-Payroll Control -Sales Order Purchasing
-Fixed Assets -Cost Accounting Cash Receipts

CASH Finished Goods

ACCOUNTING
RECORDS
Computer-
Manual
Based
Systems
Systems
ACCOUNTING RECORDS
Manual Systems Computer Based Systems
• Documents • Master File
• Source Documents • Transaction File
• Product Documents • Reference File
• Turnaround • Archive File
Documents
• Journals
• Ledgers
DOCUMENTATION
TECHNIQUES
DFD and ER Diagrams

Systems Flowcharts

Program Flowcharts

Record Layout Diagrams

DFD and ER Diagrams

ENTITY Data Store

NAME Name

Process
Description

Direction of Data Flow

RELATIONSHIP BETWEEN ER
DIAGRAMS AND DATA FLOW
DIAGRAMS

• The two diagrams are related through

data; each data store in the DFD
represents a corresponding data entity
in the ER diagram.
DOCUMENTATION
TECHNIQUES
DFD and ER Diagrams

Systems Flowcharts

Program Flowcharts

Record Layout Diagrams

Systems Flowcharts

• A system flowchart is the graphical

representation of the physical relationships
among key elements of a system.
o organizational departments
o manual activities
o computer programs
o hard-copy accounting records
o digital records
FLOWCHARTING MANUAL
ACTIVITIES
1. A clerk in the sales department receives a hard-copy customer
order by mail and manually prepares four hard copies of a sales
order.
2. The clerk sends Copy 1 of the sales order the credit department
for approval. The other three copies and the original customer
order are filed temporarily, pending credit approval.
3. The credit department clerk validates the customer’s order
against hard-copy credit records kept in the credit department.
The clerk signs Copy 1 to signify approval and returns it to the sales
clerk.
4. When the sales clerk receives credit approval, he or
she files Copy 1 and the customer order in the
department. The clerk sends Copy 2 to the warehouse
and Copies 3 and 4 to the shipping department.
5. The warehouse clerk picks the products from the
shelves, records the transfer in the hard-copy stock
records, and sends the products and Copy 2 to the
shipping department.
6. The shipping department receives Copy 2 and the
goods from the warehouse, attaches Copy 2 as a
packing slip, and ships the goods to the customer. Finally,
the clerk files Copies 3 and 4 in the shipping department
LAY OUT THE PHYSICAL AREAS OF
ACTIVITY
• a flowchart reflects the physical system, which is represented as vertical
columns of events and actions separated by lines of demarcation.
TRANSCRIBE THE WRITTEN FACTS INTO VISUAL
FORMAT

• The symbols used for this purpose will be selected from the set presented.
1. A clerk in the sales department receives hard-copy
customer order by mail and manually prepares four hard
copies of a sales order.
2. The clerk sends Copy 1 of the sales order to the
credit department for approval. The other three
copies and the original customer order are filed
temporarily, pending credit approval.

3. The credit department clerk validates the

customer’s order against hard-copy credit records
kept in the credit department. The clerk signs Copy 1
to signify approval and returns it to the sales clerk.
4. When the sales clerk receives credit approval, he or she files
Copy 1 and the customer order in the department. The clerk
sends Copy 2 to the warehouse and Copies 3 and 4 to the
shipping department.
5. The warehouse clerk picks the products from the shelves,
records the transfer in the hard-copy stock records, and sends
the products and Copy 2 to the shipping department.
6. The shipping department receives Copy 2 and the goods
from the warehouse, attaches Copy 2 as a packing slip, and
ships the goods to the customer. Finally, the clerk files Copies 3
and 4 in the shipping department.
BATCH PROCESSING

• Batch processing permits the efficient

management of a large volume of transactions.
• A batch is a group of similar transactions (such as
sales orders) that are accumulated over time
and then processed together
Our example is based on a sales order system with the following facts:
1. A clerk in the sales department receives a customer order by mail and
enters the information into a computer terminal that is networked to a
centralized computer program in the computer operations department.
The original customer order is filed in the sales department. Facts 2, 3,
and 4 relate to activities that occur in the computer operations
department.
2. A computer program edits the transactions, checks the customer’s
credit by referencing a credit history file, and produces a transaction file
of sales orders.
3. The sales order transaction file is then processed by an update
program that posts the transactions to corresponding records in AR and
inventory files.
• 4. Finally, the update program produces three hard copies of the
sales order. Copy 1 is sent to the warehouse, and Copies 2 and 3 are
sent to the shipping department.
• 5. On receipt of Copy 1, the warehouse clerk picks the products from
the shelves. Using Copy 1 and the warehouse personal computer
(PC), the clerk records the inventory transfer in the digital stock
records that are kept on the PC. Next, the clerk sends the physical
inventory and Copy 1 to the shipping department.
• 6. The shipping department receives Copy 1 and the goods from the
warehouse. The clerk reconciles the goods with Copies 1, 2, and 3
and attaches Copy 1 as a packing slip. Next, the clerk ships the goods
(with Copy 1 attached) to the customer. Finally, the clerk records the
shipment in the hard-copy shipping log and files Copies 2 and 3 in the
shipping department.
DOCUMENTATION
TECHNIQUES
DFD and ER Diagrams

Systems Flowcharts

Program Flowcharts

Record Layout Diagrams

Program Flowcharts

• Accountants sometimes use

program flowcharts to verify the
correctness of program logic.
DOCUMENTATION
TECHNIQUES
DFD and ER Diagrams

Systems Flowcharts

Program Flowcharts

Record Layout Diagrams

Record Layout Diagrams

• Record layout diagrams are used to reveal the internal structure of the records that
constitute a file or database table.
 COMPUTER-BASED
ACCOUNTING SYSTEMS
BATCH SYSTEMS VS. REAL-TIME
SYSTEMS
Distinguishing BATCH REAL TIME
Feature
Information Lag exists between time when the Processing takes place
time frame economic when the economic
event occurs and when it is event
recorded. occurs.
Resources Generally, fewer resources (e.g., More resources are
hardware, required than for batch
programming, training) are processing.
required.
Operational Certain records are processed All records pertaining to
efficiency after the the event are processed
event to avoid operational delays. immediately
ALTERNATIVE DATA
PROCESSING
APPROACHES
LEGACY SYSTEMS VS.
MODERN SYSTEMS
Legacy systems Modern systems
• mainframe-based applications; • tend to be client-server (network)–
based and process transactions in
• tend to be batch oriented;
real time.
• early legacy systems use flat files for
data storage, but hierarchical and • Unlike their predecessors, modern
network databases are often systems store transactions and
associated with later-era legacy master files in relational database
systems. tables. A major advantage of
database storage is the degree of
process integration and data
sharing that can be achieved.
UPDATING MASTER FILES FROM
TRANSACTIONS
• Whether batch or real-time processing is being used, updating a master file record
involves changing the value of one or more of its variable fields to reflect the effects of
a transaction.
• The update procedure in this example involves the following steps:
1. A sales order record is read by the system.
2. ACCOUNT NUMBER is used to search the AR master file and retrieve the
corresponding AR record.
3. The AR update procedure calculates the new customer balance by adding the
value stored in the INVOICE AMOUNT field of the sales order record to the
CURRENTBALANCE field value in the AR master record.
4. Next, INVENTORY NUMBER is used to search for the corresponding record in the
inventory master file.
5. The inventory update program reduces inventory levels by deducting the QUAN-TITY
SOLD value in a transaction record from the QUANTITY ON HAND field value in the
inventory record.
6. A new sales order record is read, and the process is repeated.
UPDATING MASTER FILES FROM TRANSACTIONS
DATABASE BACKUP PROCEDURES
DATABASE BACKUP PROCEDURES
BATCH PROCESSING USING REAL-TIME
DATA COLLECTION
• Key steps in the process are:
1. The sales department clerk captures customer sales data pertaining to the item(s)
being purchased and the customer’s account.
2. The system then checks the customer’s credit limit from data in the customer record
(account receivable subsidiary file) and updates his or her account balance to
reflect the amount of the sale.
3. Next, the system updates the quantity-on-hand field in the inventory record
(inventory subsidiary file) to reflect the reduction in inventory. This provides up-to-
date information to other clerks as to inventory availability.
4. A record of the sale is then added to the sales order file (transaction file), which is
processed in batch mode at the end of the business day. This batch process records
each transaction in the sales journal and updates the affected general ledger
accounts.
BATCH PROCESSING USING REAL-TIME
DATA COLLECTION
REAL-TIME PROCESSING

• Real-time systems process the entire transaction as it occurs. For

example, a sales order processed by the system in Figure 6.32
can be captured, filled, and shipped the same day. Such a
system has many potential benefits, including improved
productivity, reduced inventory, increased inventory turnover,
decreased lags in customer billing, and enhanced customer
satisfaction. Because transaction information is transmitted
digitally, physical source documents can be eliminated or greatly
reduced.
REAL-TIME PROCESSING
DATA CODING SCHEMES

• Within the context of transaction

processing, data coding involves creating
simple numerical or alphabetical codes to
represent complex economic phenomena
that facilitate efficient data processing.
A SYSTEM WITHOUT CODES
• The negative effects of this approach may be seen in many parts
of the organization:
1. Sales staff. Properly identifying the items sold requires the
transcription of large amounts of detail onto source documents.
Apart from the time and effort involved, this tends to promote
clerical errors and incorrect shipments.
2. Warehouse personnel. Locating and picking goods for shipment
are impeded and shipping errors will likely result.
3. Accounting personnel. Postings to ledger accounts will require
searching through the subsidiary files using lengthy descriptions
as the key. This will be painfully slow, and postings to the wrong
accounts will be common.
A SYSTEM WITH CODES
• uses of data coding in AIS are to:
1. Concisely represent large amounts of complex
information that would otherwise be unmanageable.
2. Provide a means of accountability over the
completeness of the transactions processed.
3. Identify unique transactions and accounts within a file.
4. Support the audit function by providing an effective
audit trail.
SEQUENTIAL CODES
MEANING ADVANTAGE(S) DISADVANTAGE(S)

represent items in some •supports the •carry no information

sequential order (pre- reconciliation of a batch content beyond their
numbering of source of transactions, order in the sequence.
documents.) •it alerts management to •difficult to change.
the possibility of a •In applications where
missing or misplaced record types must be
transaction. grouped together
logically and where
additions and deletions
occur regularly, this
coding scheme is
inappropriate.
BLOCK CODES
MEANING ADVANTAGE(S) DISADVANTAGE(S)

•a variation on sequential •allows for the insertion of •the information content

coding that partly new codes within a of the block code is not
remedies the block with- out having to readily apparent.
disadvantages just reorganize the entire
described coding structure.
•used to represent whole
classes of items by
restricting each class to
a specific range within
the coding scheme
•the construction of a
chart of accounts.
GROUP CODES
MEANING ADVANTAGE(S) DISADVANTAGE(S)

•are used to represent • facilitate the •classification tool

complex items or events representation of large
involving two or more amounts of diverse
pieces of related data. data.
• allow complex data
•The code consists of structures to be
zones or fields that represented in a
possess specific hierarchical form
meaning. • permit detailed analysis and
reporting both within an item
class and across different
classes of items.
ALPHABETIC CODES
MEANING ADVANTAGE(S) DISADVANTAGE(S)

•may be assigned • capacity to represent •difficulty rationalizing the

sequentially (in large numbers of items is meaning of codes that
alphabetical order) or increased dramatically have been sequentially
may be used in block through the use of pure as- signed
and group coding alphabetic codes or •users tend to have
techniques. alphabetic characters difficulty sorting records
embedded within that are coded
numeric codes alphabetically.
(alphanumeric codes)
MNEMONIC CODES
MEANING ADVANTAGE(S) DISADVANTAGE(S)

•alphabetic characters in • does not require the •limited ability to

the form of acronyms user to memorize represent items within a
and other combinations meaning; the code itself class.
that convey meaning. conveys a high degree
of information about the
item that is being
represented.
GENERAL LEDGER
SYSTEM
GENERAL LEDGER SYSTEM
THE JOURNAL VOUCHER

• The source of input to the general ledger is the journal voucher,

• A journal voucher, which can be used to represent summaries of
similar transactions or a single unique transaction, identifies the
financial amounts and affected general ledger (GL) accounts.
• Routine transactions, adjusting entries, and closing entries are all
entered into the GL via journal vouchers. Because a responsible
manager must approve journal vouchers, they offer a degree of
control against unauthorized GL entries.
THE JOURNAL VOUCHER
 THE GENERAL
LEDGER SYSTEM
ØA HUB CONNECTED TO THE
OTHER SYSTEMS OF THE FIRM THROUGH SPOKES
OF INFORMATION FLOWS
THE GENERAL LEDGER SYSTEM
THE JOURNAL VOUCHER

Ø The source of input to the general ledger

THE GLS DATABASE
• General Ledger Master File
-the principle file in the GLS database

• General Ledger History File

-has the same format as the GL master

• Journal Voucher File

-the total collection of the journal vouchers processed in the
current period.
THE GLS DATABASE
• Responsibility Center File
-contains the revenues, expenditures, and other
resource utilization data for each responsibility
center in the organization.
• Budget Master File
-contains budgeted amounts for revenues,
expenditures, and other resources for
responsibility centers.
 THE FINANCIAL
REPORTING SYSTEM
ØTHE LAW DICTATES MANAGEMENT’S
RESPONSIBILITY FOR PROVIDING STEWARDSHIP
INFORMATION TO EXTERNAL PARTIES. THIS
REPORTING OBLIGATION IS MET VIA THE FRS.
FINANCIAL REPORTING
PROCEDURES
1. Capture the transaction
2. Record in special journal
3. Post to subsidiary ledger
4. Post to general ledger
5. Prepare the unadjusted trial balance
6. Make adjusting entries
FINANCIAL REPORTING
PROCEDURES
7. Journalize and post adjusting entries.
8. Prepare the adjusted trial balance
9. Prepare the financial statements
10.Journalize and post the closing entries
11.Prepare the post-closing trial balance
 XBRL—
REENGINEERING
FINANCIAL REPORTING
ØTHE INTERNET STANDARD
SPECIFICALLY DESIGNED FOR BUSINESS
REPORTING AND INFORMATION
EXCHANGE.
XML

• metalanguage for describing markup languages

XBRL

Øan XML-based language that was

designed to provide the financial
community with a standardized method for
preparing, publishing, and automatically
exchanging financial information, including
financial statements of publicly held
companies.
1. SELECT AN XBRL TAXONOMY
ØTaxonomies are classification schemes that are
compliant with XBRL specifications to
accomplish a specific information exchange or
reporting objective such as filing with the SEC.
2. CROSS-REFERENCE EACH
ACCOUNT
3. MAPPING THE ORGANIZATION’S
INTERNAL
DATA TO XBRL TAXONOMY ELEMENTS
4. STORED TAG AS DEPICTED BY
THE TAXONOMY ELEMENT FIELD
THE CURRENT STATE OF XBRL
REPORTING
• Since October 2005, U.S. banking regulators have required
quarterly “call reports” to be filed in XBRL. This requirement
impacts more than 8,000 banks.
• In April 2005, the SEC began a voluntary financial reporting
program that allows registrants to supplement their required
filings with exhibits using XBRL.
• In September 2006, the SEC announced its new electronic
reporting system to receive XBRL filings. The new system is
called IDEA, short for interactive data electronic application.
CONTROLLING THE FRS
The potential risks to the FRS include:
1. A defective audit trail.
2. Unauthorized access to the general ledger.
3. GL accounts that are out of balance with subsidiary
accounts.
4. Incorrect GL account balances because of
unauthorized or incorrect journal vouchers.
COSO INTERNAL CONTROL
ISSUES
ØTransaction Authorization
ØSegregation of Duties
1. Have record-keeping responsibility for special journals or
subsidiary ledgers.
2. Prepare journal vouchers.
3. Have custody of physical assets
ØAccess Controls
ØAccounting Records
ØIndependent Verification
INTERNAL CONTROL IMPLICATIONS
OF XBRL

ØTaxonomy Creation
ØTaxonomy Mapping Error
ØValidation of Instance Documents
QUIZ
 a. Represent items in some sequential order (pre-
numbering of source documents.)
1. Data coding schemes
b. Advantage is it does not require the user to memorize
2. A System without Codes meaning.
3. A System with Codes c. Concisely represent large amounts of complex
4. Sequential Codes information that would otherwise be unmanageable.

5. Block Codes d. A variation on sequential coding that partly remedies

the disadvantages just described
6. Group Codes
e. Creating simple numerical or alphabetical codes to
7. Alphabetic Codes represent complex economic phenomena
8. Mnemonic Codes f. used to represent complex items or events involving two
or more pieces of related data.
g. Disadvantages are: sales staff. Warehouse personnel
and accounting personnel.
h. may be assigned sequentially or may be used in block
and group coding techniques.