Accounting

Information System
Course Material No. 3

Carmela L. Peduche
Course Instructor
2 REA Approach • NU LAGUNA

REA Approach to Database

Modeling

LEARNING OUTCOMES

Here’s what I will teach you in this course material:

LESSON OUTLINE
 Understand the origins of resources, events, and agents model
 The REA
Approach  Determine the differences between traditional relationship
modeling and REA modeling
Unit Outline
 Developing an
REA Model  Familiarize with the structure and create REA diagram

 Creating an
Enterprise-Wide
REA Model RESOURCES NEEDED

For this lesson, you would need the following resources:

 PowerPoint: AIS CM 03
 Course Module 3
REA Approach to Database Modeling • NU LAGUNA 3

TABLE OF CONTENTS

Pretest 4 The REA Approach

Before you start, try answering the following

questions.
6 Developing an REA Model

1. What are the elements of a database system?

_________________________________________
2. What is the importance of eliminating anomalies and 10 Creating an Enterprise-
Wide REA Model
normalizing tables?

________________________________________
3. How does database systems differ from the flat file 14 Lesson Summary

model?

________________________________________
4. What is the relationship between cardinality and 15 Posttest
association?

________________________________________
5. How does REA database help and support financial 15 Key Terms
accounting and reporting?

________________________________________
References
6. What are the important rules for REA modeling? 16
________________________________________

Key Point
Put a short paragraph that
acts as the summary of the
lesson. Point out its relevance
4 REA Approach • NU LAGUNA

The REA Approach

Previously, accounting was criticized for being too centric on financial

information, that does not typically answer or provide information to other
users. As a result, the REA model was developed to design an accounting
system that can support information requirements of other users in the
production, marketing, or human resource.

THE REA MODEL

The REA model is an accounting framework for modeling the
organization’s critical resources, events, and agents and the relationships
between them. It allows accounting and non-accounting data to be identified,
captured, and stored in a centralized database. As a result, various user views
can be constructed to meet the needs of all users in the organization. For this
lecture, the REA model will still be designed under a relational model
architecture.

Elements of an REA Model

Resources. Economic resources are things of value to the organization, and
are defined as objects that are scarce and under the control of the enterprise.
Resources are used in economic exchanges with trading partners, with a
resulting increase or decrease as result of the exchange.

Events. Events in REA fall under two classes: economic events and support
events. Economic events are those that result to stock flow (see figure above)
or those that result to changes in resources. Support events meanwhile
include control, planning, and management activities. These events do not
result to changes in resource, but are nevertheless related to economic events.
REA Approach to Database Modeling • NU LAGUNA 5

Agents. These could be individuals or departments that participate in or

support economic events, having the discretionary power to use or dispose of
economic resources. Each economic and support event is participated by at
least one internal agent and one external agent.

Duality. Economic events between agents give rise to exchange transactions,

as such, economic events happen in pairs, with one party doing the give
event, and the other, the receive event, as can be seen in the illustration
below:

Note also the duality of economic events need not happen simultaneously, as
there are instances of sale on account, where collection of cash can happen in
weeks or month.
6 REA Approach • NU LAGUNA

Developing an REA Model

Programmers write applications based on the view the user needs to make
or perform a task. As such, in view modeling, entity relationships depict what
the user sees. In the REA approach, semantic modelling is used to construct
the REA diagram, or that which takes into consideration multiple views.

Differences between ER and REA Diagrams

 Programmers develop applications that use entity relationships as
baseline information. In an REA diagram, relationships are
categorized into three classes: resources, entities, and agents, and
constellations by class on the diagram.

 Relationships in ER show cardinality and associations, with static

underlying business phenomena. REA diagrams, meanwhile are
organized from top to bottom within the constellations to focus on the
sequence of events, which results to a better understanding of REA
diagrams during systems development.
 ER diagrams present entity names in a singular noun form. In REA,
resources are events are also named using singular nouns, but events
are given verb names (sell, order, receive).

Creating and Individual REA Diagram

The following are the process of creating REA diagram in a view modelling
process:

1. Identify the event entities

REA Approach to Database Modeling • NU LAGUNA 7

2. Identify the resource entities

3. Identify the agent entities
4. Determine associations and cardinalities between entities

Identify the Event Entities. We must first identify the event entities in the
function being modeled. For example, the view of the salesman of a company
will include revenue generating activities such as:

 VERIFY AVAILABILITY. This is a step which involves verification

of availability of inventory being purchased by the customer. This
activity is a non-economic event, but is essential in answering
customer queries, which leads to better customer service.
 TAKE ORDER. Depending on policies of company on sales
recognition, taking of order could be an economic or non-economic
activity. Economic for brick-and-mortar stores with on hand stocks,
and non-economic if some other activities need to be fulfilled before
goods are shipped.
 SHIP PRODUCT. This is an economic event where inventory is
decreased in favor of revenue.
 RECEIVE CASH. Receipt of cash as form of payment is an economic
event that increases the cash resource.

REA modeling takes into consideration the events in the value chain. The
value chain includes activities that convert resources into revenues.
Accounting activities and paraphernalia are non-value chain activities and
therefore are not captured in the REA, but all transaction details adequately
maintain information required by the Accounting.
8 REA Approach • NU LAGUNA

Identify the Resource Entities. Each economic event is linked to at least

one resource entity whose economic value may be either reduced or
increased by the event. Support activities do not necessarily change the value
of resources. For the above example, verifying the availability of inventory
will not result to a change in value of the resource. However, it is important
that the Verify Availability event is linked to inventory information, and
indicated in the REA Model. Shipment of product, meanwhile will result to a
change in value of resource, by decreasing the number of inventories.

Identify the Agent Entities. Each activity is participated by agents. In the

revenue cycle, the activity is participated by at least one internal and one
external agent. The internal agents include, the customer service clerk
(Verify Availability); sales representative (Take Order); shipping clerk (Ship
Product); and cashier (Receive Cash). Below shows how we can illustrate the
REA diagram where we identify agents tagged as “Employees”, together
with the resources that needs to be linked to the events:

Determine associations and cardinalities within entities. Association is

the nature of relationships between entities and is represented by a line.
Cardinality meanwhile depicts the degree of association between the entities,
or the number of possible occurrences, and can be illustrated in a number of
alternatives, as follows:
REA Approach to Database Modeling • NU LAGUNA 9

In the above illustration, a single occurrence in Entity A is associated with

zero or many occurrences in Entity B. Meanwhile, a single occurrence in
Entity A is associated with one and only one occurrence in Entity A.

CARDINALITY BETWEEN EVENTS AND ENTITIES

Cardinality between the VERIFY AVAILABILITY and TAKE ORDER

entities. Each occurrence of VERIFY AVAILABILITY is due to inquiries
10 REA Approach • NU LAGUNA

made by customers. However, we should note that not all customer inquiries
result to a sale. Meanwhile, TAKE ORDER is an occurrence as a result of
inquiry. Therefore, the cardinality on TAKE ORDER is (0,1) and on TAKE
ORDER is (1,1)

Cardinality between the TAKE ORDER and SHIP PRODUCT Entities.

After receipt of order from the customer, shipment of products do not happen
immediately. Some time may pass before a shipment is made, or there could
be cancellation after the receipt of order. For this reason, on the side of SHIP
PRODUCT, there is a cardinality of (0,1). However, it is safe to assume that
for every shipment, there is a TAKE ORDER event (1,1).

Cardinality between the SHIP PRODUCT and RECEIVE CASH.

Companies may ship multiple products to a customer for each period. How
the customer pays, meanwhile, depends on internal policy. For the
illustration above, it is assumed that a customer may consolidate the invoices
on a single payment.

Cardinality between the CASH and RECEIVE CASH Entities. The above
cardinality shows that cash (a resource) is received from many customers and
kept in a single account.

MANY-TO-MANY ASSOCIATIONS. The REA model showed examples of

M:M associations as follows:

 Verify Availability (0, M) and Inventory (1, M). This arises from the
fact that a customer can inquire about one or many items of
inventory, and each inventory may have been queried zero or many
times in a period.
 Take Order (0, M) and Inventory (1, M). This shows that orders may
involve one or many items, and inventory can never be ordered, or
ordered multiple times in a period.
 Ship Goods (0, M) and Inventory (1,M).

VIEW INTEGRATION: CREATING AN ENTERPRISE-WIDE REA MODEL

The view integration process involves the following steps:

1. Consolidate the individual models

2. Define the primary keys, foreign keys, and attributes
3. Construct the physical database and produce user views
REA Approach to Database Modeling • NU LAGUNA 11

Consolidate the Individual Models. In this discussion, we will be assuming

an entity under the merchandising concern. As such its transactions include
selling (revenue cycle) and incurring expenses (expenditure cycle). Below
show the procedures of each transaction.

 Purchases and Cash Disbursement Procedure.

o Order Product Entity is an event where there is commitment
to buy. This comes with a corresponding economic event in
the future where the inventory resource increases. The
association between Supplier and Order Product is (1:M) as
there is only one supplier, and the supplier may receive zero
to many orders during a period.
o Receive Product is the economic event where an increase is
resources (inventory). This process involves counting,
inspecting, transporting products to warehouse, and updating
of inventory records.
o Disburse Cash is the other half of the economic exchange
where a decrease in resources (cash) happens as a result of
payment.

 Payroll Procedures includes two economic events: Get Time and

Disburse Cash
o Get Time involves the daily capturing of the time worked by
employees and involves the passage of time. A zero
cardinality exists since workers may take a leave, and as such
no information can be obtained by the supervisor.
o Disburse Cash involves the distribution of cash to the
employee for services rendered.
12 REA Approach • NU LAGUNA

 Merge Individual REA Diagram

o Merging the diagrams includes the consolidation of redundant
events and entities. Some entities are duplicated for clarity
and to avoid crossing lines.

Define Foreign Primary Keys, Foreign Keys, and Attributes. After

constructing the data model, next comes the designing of the relational
database tables, which involves determining the primary keys, assigning
foreign keys and defining attributes of the tables. For each valid entity in the
REA, comes a separate table. For the above REA, the following tables will
be required:

 Internal agents will be collapsed into a single employee table

 Two external and unique agents (Customer and Supplier) will require
a separate table
 Two resources (Inventory and Cash) will require two separate tables
 The eight events will each require a table
REA Approach to Database Modeling • NU LAGUNA 13

 The five M:M relations represented in the diagram will each require
a linking table

In determining the primary keys and attributes, the database designer selects
the key that logically and uniquely defines the non key attributes in the table.
The degree of association between primary keys meanwhile, determines how
the foreign keys will be assigned. The rules for foreign keys are as follows:

 1:1 Associations. One side of the association typically have a

minimum cardinality of zero. The primary key of the table with the
1:1 cardinality is embedded as a foreign key in the table with a null
value.
 1:M Association. The primary key of the 1 side is embedded in the
table of the M side, as in Verify Availability, Take Order, and Ship
Product.
 M:M Associations. Tables in M:M cannot accept embedded foreign
keys, which results to creation of 1:M associations.
When all anomalies are non-existent, all non-key variables are dependent on
a primary key, that is when a table can be classified as normalized.
Databases, however, are non-static, as need of users evolve over time, and
constant review of attributes must be performed.
14 REA Approach • NU LAGUNA

Construct Physical Database and Produce User Views. Once all tables are
normalized, populated with data, and initialized, it is not the task of the
system administrator to allow and restrict user access to data. The resulting
database will support the needs and operations of a wide range of users.

Accounting reports can include:

 Total Sales
 Accounts Receivable
 Cost of Goods Sold
 Inventory
Management Report can include any catered information depending on the
management issued at hand.

REA and Value Chain Analysis

The value chain is a series of activities that add value to products or services
as it goes along the activities. REA has assisted in the value chain analysis by
providing support to the users in the conduct of their activities. The REA has
provided the organization with the following advantages:

 REA has allowed managers to focus on the key events of economic

events and identify non-value adding activities that can be
eliminated.
 Storage of both financial and non-financial data in a common
database that reduced redundancy
 Detailed information has allowed the data to be useful to a wide
range of users.
 REA model has provided data that is relevant, timely, and accurate.

LESSON SUMMARY

The REA model has been used to specify and design accounting information
systems that serves the needs of all users of an organization. This diagram
consists of resources, events, and agents.
 REA Approach to Database Modeling • NU LAGUNA 15

Each event in REA is linked in at least one resource and at least two agents,
which also represent the need for duality in the fulfillment of transactions.
The steps in REA modelling includes identifying the event that needs to be
modelled, identify the resource changed by the event, identify the
participating agents, and determining the associations and cardinalities
between entities.
REA helps the organization in gaining economic advantage by assisting in
the value chain.

KEY TERMS

Agents Give event support events view modelling

Associations REA diagram user view
Cardinalities receive event value chain
Events resources view integration

POSTTEST

Directions: Fill in the blank with the letter corresponding to your answer.

_______ 1. The concept of duality states that the REA diagram must consist of
a. Two agents c. two events
b. Two entities d. all of the above

_______ 2. Each economic event in REA diagram is always

a. Linked to at least 2 resources c. Linked to economic event
b. Linked to two external agents d. Linked to a support event

_______ 3. Which of the following events is least likely to be modelled in a REA diagram?
a. Customer inquiries c. Accounts payable
b. Sales to a customer d. Cash

_______ 4. Which of the following is not a value adding activity in the safekeeping of goods?
a. Handling and transport c. Patrolling
b. Tagging d. Quality Control

_______ 5. Which of the following will require a separate table in the database?
a. 1:1 c. M:M
b. 1:M d. all of the above
16 REA Approach • NU LAGUNA

REFERENCES

Hall. (2016). Accounting Information System/ c2016

Stair. (2015). Information Systems Essentials/ c2015
Hurt. (2016). Accounting Information System/ c2016
Romney (2015). Accounting Information System/ c2015
Accounting
Information System
Course Material No. 4

Carmela L. Peduche
Course Instructor
2 Accounting Information System • NU LAGUNA

Enterprise Resource Systems

LEARNING OUTCOMES

Here’s what I will teach you in this course material:

LESSON OUTLINE
 Understand the general functionality and key elements of an ERP
 Enterprise
System
Resource
Planning  Understand the various aspects of ERP configurations
Unit Outline
 System  Understand the purpose of data warehousing as a tool, and
Configurations recognize issues related to the design, maintenance, and operation
of a data warehouse.
 Data
Warehousing  Be aware of risk and determine how enterprises mitigate risks
though internal control
 Associated Risks,
Internal Control
and Audit
Implications RESOURCES NEEDED

For this lesson, you would need the following resources:

 Course Module 4
Enterprise Resource Planning • NU LAGUNA 3

TABLE OF CONTENTS

Pretest 4 Enterprise Resource

Planning
Before you start, try answering the following
questions.
5 System Configurations

1. What are the key elements of a database

management system?

_________________________________________ 7 Data Warehousing

2. How does the REA model affect the design of

system applications?

________________________________________ 7 Associated Risks and

Internal Control
3. How does association and cardinality affect the
processing of transactions?

________________________________________ 8 Lesson Summary

4. Differentiate OLTP and OLAP?

________________________________________
5. What is the importance of a data warehouse design 9 Posttest
to the database?

________________________________________
6. To what risks are ERP systems exposed to? 9 Key Terms

________________________________________

9 References

Key Point
Put a short paragraph that
acts as the summary of the
lesson. Point out its relevance
4 Accounting Information System • NU LAGUNA

Enterprise Resource Planning

During our previous discussions, we discussed the foundations of

information systems including the models and concepts on its architecture.
This time, we will be discussing the tool which has become a result of
various integrations made by programmers and analysts to achieve business
competency using information – the ERP.
ERP was a term coined by Gartner Group. The objective of ERP is to
combine key processes of the organization such as order entry,
manufacturing, procurement, accounts payable, payroll and human resources.
Information on these key functions were merged into a single database that
facilitates the sharing of information and improvement of communications
across the organization.
ERP was able to ensure that there is a seamless flow of information
across the organization by eliminating redundancies in the processing of
information and providing standardized processes and operational database.

ERP CORE APPLICATIONS

Functionality of ERP falls into two broad groups which includes core
applications and business analysis.

Core Applications or Online Transactions Processing (OLTP). These are

applications that support the day-to-day activities of the business, which can
Enterprise Resource Planning • NU LAGUNA 5

include sales, distribution, business planning, production planning, shop floor

control and logistics, verification of product availability and the likes.
Business planning can his consist of forecasting, production planning, and
simulation activities which help the management decide and control
resources.

ONLINE ANALYTICAL PROCESSING (OLAP)

OLAP is a decision support tool that allows the management to extract real
time information that allows for timely decisions needed to improve
performance and achieve competitive advantage.
This includes decision support, modeling, information retrieval, ad hoc
reporting and analysis, and what-if analysis. Usually, these tools can be
purchased individually or with specialized bolt on packages, or developed in
house.

ERP System Configurations

Let us not try to determine different configurations allowed under ERP.

Server Configurations. Most ERP follow the client server model, which is a
form of topology where users access data through a server. There are two
basic architectures under this:

 Two-Tier Model. This server handles both application and database

duties and uses LAN (local area networks) applications to restrict
access to the persons within the organizations.
6 Accounting Information System • NU LAGUNA

 Three-Tier Model. In this server, the application and database are

separated, so WANs (wide area network), needs to be used to ensure
connectivity of all users. This is what is being applied in typical large
ERP systems.

OLTP versus OLAP Servers. OLTP typically consist of large information

consisting of relatively simple transactions as it captures day-to-day
transactions. OLAP in summary are characterized as online transactions that:

 Access very large amounts of data (several years sales data)

 Analyze the relationships among many types of business elements
such as sales, products geographic regions, and marketing channels
 Involves aggregated data such as sales volumes, budgeted dollars, and
dollars spent
 Presents data according to segments
 Involves complex calculations among data elements such as expected
profit
 Respond quickly to user request so they can pursue analytical thought
process without being stymied by system delays
OLAP meanwhile allows the analysis of complex data relationships through
the following:

 Consolidation or the aggregation of roll-up of data; for example, sales

of different branches can be rolled up according to region.
 Drill down permits disaggregating data to reveal the underlying
details that explain certain phenomena.
Enterprise Resource Planning • NU LAGUNA 7

 Slicing and dicing enables the user to determine data from different
viewpoints.

Database Configuration. ERP systems consist of thousands of database

tables associated with processes in the ERP. Database can be accessed by
users upon setting switches on what can be accessed.

Bolt On Software. The ERP cannot provide an answer to all the needs of an
entity, thus bolt-on software provided by third party vendors are being
bought to provide additional support to processes. Usually bolt on software
are endorsed by the ERP provider.

Data Warehousing

Since data are generated from the company’s processes there is a need for
this data to be stored. A data warehouse is a relational or multidimensional
database that may consume gigabytes or terabytes. The department that
maintains this is called the data mart.

Data warehousing involves extracting, converting, and standardizing an

organization’s operational data from ERP and legacy systems and loading it
into the data warehouse. Data stored for many years, when the organization,
deem necessary may make use of this information to see patterns in a process
called data mining.

Storage of information has allowed managers to optimize business

performance by using the information for future decisions.

The essential stages of the warehousing process include the following:

 Modeling data for the data warehouse

 Extracting data from operational databases
 Cleansing extracted data
 Transforming data into a warehouse model
 Loading the data into the data warehouse database

Risks, Internal Control & Audit

Risks Associated with ERP Implementation

 Big Bang versus Phased in Implementation
8 Accounting Information System • NU LAGUNA

The implementation of ERP can make changes to the organization

through the adoption of technology in daily processes. Big Bang is
method by which ERP is implemented across the organization
beginning on day one. This is risky due to threats on opposition and
difficulty in adoption. Phased in approach, however, provides an
alternative by making the implementation a portion-by-portion
process.
 Opposition to changes in business culture.
 Choosing the wrong ERP. ERP is expensive and thus needs planning
before a purchase is made. The company should consider its fitness
for use and its scalability, or its ability to handle increasing
transactions.
 Choosing the wrong consultant
 High costs and cost overruns
 Disruption to operations

Implications to Internal Control and Auditing

 Transaction Authorization
 Segregation of duties
 Supervision
 Accounting records
 Independent verification
 Access Controls
o Traditional access control models
o Role based access control leading to creation of unnecessary
roles
 Contingency planning

LESSON SUMMARY

This chapter defined the ERP and differentiated OLTP and OLAP
applications. This is followed by the discussion of ERP configurations that
can be considered by the client.
Data warehousing was also introduced as a tool that can help the business in
the future by helping the organization detect patterns over a period of time.
Enterprise Resource Planning • NU LAGUNA 9

Lastly, the risks associated with the purchase of the ERP was discussed so
that this may be considered if the company elect to purchase the software.
Audit points of the ERP are also noted.

KEY TERMS

Big Bang Closed database architecture OLAP

Bolt on Software Core applications OLTP
Changed data capture Data warehouse Role based access control
Client server model Enterprise Resource Planning Tier model

POSTTEST

Directions: Brainstorm with your group on the following activity.

1. The Philippine Information System market is populated with both internationally and locally
developed ERPs.
a. Research and name at least five global ERP systems and determine the standard features
offered by the system.
b. Similarly, research and name at least five local ERP systems and determine the standard
features offered by the system.
c. Differentiate global and local systems according to the following:
i. Standard Features
ii. Configurations available for a manufacturing, merchandising, and service type
business.
iii. System requirements before implementation
iv. Risk management
v. Auditability

REFERENCES

Hall. (2016). Accounting Information System/ c2016

Stair. (2015). Information Systems Essentials/ c2015
Hurt. (2016). Accounting Information System/ c2016
Romney (2015). Accounting Information System/ c2015
Accounting
Information System
Course Material No. 5

Carmela L. Peduche
Course Instructor
2 PUT YOUR COURSE TITLE HERE • NU LAGUNA

Introduction to Transaction
Processing

LEARNING OUTCOMES

Here’s what I will teach you in this course material:

LESSON OUTLINE
 Understand the objectives of transaction cycles
 Transaction
Processing  Recognize the different types of transactions processed in each
transaction cycle
Unit Outline
 Documentation
Techniques  Know the accounting records used in transaction processing
systems
 Computer-Based
Accounting  Be familiar with the different coding schemes used in accounting
Systems information systems

 Data Coding
RESOURCES NEEDED
Schemes

For this lesson, you would need the following resources:

 Course Module 5
AIS • NU LAGUNA 3

TABLE OF CONTENTS

Pretest 4 Transaction Processing

Before you start, try answering the following

questions.
7 Documentation Techniques

1. What basic modules are included in an ERP

package? What accounting process has modules?

_________________________________________ 9 Computer Based

Accounting Systems
2. What are the infrastructure required by an ERP?

________________________________________
3. What transaction cycle exist in all business? 10 Data Coding Schemes

________________________________________
4. What are the distinguishing factors between the
physical and financial components of the transaction 12 Lesson Summary
cycle?

________________________________________
5. What are the major accounting documents of an 12 Posttest
entity?

________________________________________
6. Why is audit trail important? 12 Key Terms

________________________________________

13 References

Key Point
Put a short paragraph that
acts as the summary of the
lesson. Point out its relevance
4 PUT YOUR COURSE TITLE HERE • NU LAGUNA

Overview of Transaction Processing

Previously, we discussed the different systems and the enterprise resource

planning software. Such systems could record both financial and non-
financial transaction. In this chapter, we will be focusing on the financial
transactions and how it is captured in the system.

TRANSACTION CYCLES
The following relates to the transactions that happens in most firms:

The Expenditure Cycle. Before a company can generate profits, he first

acquires materials, property, and labor in exchange for cash, or credit. The
system takes into perspective the physical component and financial
component, which is the receipt of goods and payment of cash, respectively.
Below shows the modules in systems concerned with expenses:

 Purchases/ Accounts Payable System

 Cash Disbursement System
 Payroll System
 Fixed Asset System
AIS • NU LAGUNA 5

The Conversion Cycle. This is the cycle in a manufacturing company that

monitors the conversion of raw materials into finished goods in the
production. This is being closely followed by cost accounting.

The Revenue Cycle. This is the processing of generating cash or receivables

through sales generating activities, and includes the following:

 Sales order processing

 Cash receipts

ACCOUNTING RECORDS
Manual Systems. In this section, we will first describe the records used in
transaction cycles, and afterwards determine its electronic counterpart.

 Documents provide evidence of an economic event and is the basis

of processing transactions.
o Source Documents captures the origin of transaction in a
particular transaction cycle. Examples include sales order,
purchase order, timecard, and the likes.
o Product Documents are the resulting documents after
processing a transaction, such as sales invoice sent to a
customer or the pay slip.
o Turnaround Documents are the documents that serves as the
output of one system and becomes the source document of
another. Example is as follows:
 Purchase request made by the requesting department
 Purchase order made by the Procurement based on the
purchase request
 Journals show the chronological occurrence of activities.
o Special Journals are used to record high volume, specific
transactions such as sales and cash payments. Special journals
are used as it is more practicable than recording voluminous
sales transactions.
6 PUT YOUR COURSE TITLE HERE • NU LAGUNA

o Register is the term used to name special journals or could

imply to be a log for uniform transactions.
o General Journal are used for non-recurring and unique
transactions, as well as closing journal entries.
 Ledgers capture the effects of transactions upon posting.
o General Ledger summarizes the organization’s accounts by
capturing the effects of the transactions.
o Subsidiary Ledger shows the components of the general
ledger.

The Audit Trail. The audit trail is used by auditors in verifying transactions.
This trail is traced from source documents to the financial statements.
Transactions are selected by the auditor for completeness, validity, and
accuracy.

Computer Based Systems

Types of Files
o Master File contains the account data. Included in this is the
general ledger and the subsidiary ledger.
o Transaction File are temporary files that are used to update
data on the master file. Examples are sales orders, inventory
receipts, and cash receipts.
AIS • NU LAGUNA 7

o Reference File are the standards for processing transaction.

Examples include tax table, price lists, customer credit file,
suppliers’ list, and all other file the details of which is
captured when making processing transactions.
o Archive File are records of past transactions maintained for
future reference.

The Digital Audit Trail. Digital audit trail should also allow the tracing of
transactions. The only difference of which is the format and medium to
which the transactions are recorded. Like in manual systems however,
supporting documents should match the transaction, and registers should
match the ledger record.

Documentation Techniques

Documentation is a skill important for accountants due to the vast

information handled and the need for a systematic visualization of the
system.

DATA FLOW DIAGRAMS AND ENTITY RELATIONSHIP DIAGRAMS

Data Flow Diagram. This model uses symbols to represent entities,
processes, data flows, and data stores that pertain to a system. This is labeled
with descriptive verbs to depict action.

Entity Relationship Diagram. This diagram represents relationship between

entities, events, and agents using associations and cardinality.
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Relationship between ER Diagram and Data Flow Diagram. DFD

represent system processes and ER shows the data affected by the system.
When reconciled, these two diagrams are related through data.

SYSTEM FLOWCHARTS
System flow chart is a graphical representation of physical relationships
among key elements of a system. The elements can include company
departments, documents, and database.

Flowcharting Manual Activities. The flowchart represents the activities

undertaken in a selected process. Auditors prepare a flowchart of processes to
assess control and detect lapses. Below are the rules in the preparation of the
flowchart:

1. The flowchart should be labeled to clearly identify the system it

represents.
2. The correct symbols should be used to represent the various entities
in the system.
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3. All symbols on the flowchart should be labeled.

4. Lines should have arrowheads to clearly show the process flow and
sequence of events.
5. If complex processes need additional explanation for clarity, a text
description should be included on the flowchart or in an attached
document referenced by a flowchart.

Batch Processing. Batch processing is an efficient management of data

where similar transactions are grouped together or accumulated over time
and processed together for operational efficiency and better control. Batch
processing should be balances in such a way that it is not too small that it
defeats the purpose of batches, nor too big that error detection can be too
difficult.

Flowcharting Computer Processes. When computer and manual process is

employed by a process, special attention must be made on the symbols to be
used:

Program Flowchart. Program flowchart shows relationship between

computer programs, files they use, and outputs they produce. Since
programmer code using a language that may not be understandable to all, the
program flowchart will show the logic behind the codes.

Record Layout Diagrams. This diagram shows how the database is

structured, and aids in detection of file location.

Computer Based Accounting Systems

DIFFERENCES BETWEEN BATCH AND REAL TIME SYSTEMS

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Information Time Frame

 Batch systems accumulate data before record which results to a time

lag between the date of transaction and date of record.
 Real time systems allow transactions to be processed individually the
moment the event occurs.

Resources

 Batch systems demand fewer resources and has simpler and shorter
development.
 Real time systems require dedicated processing capacity and 24/7
support.

Operational Efficiency

 Batch systems increases efficiency as it eliminates unnecessary

activities by doing the job once for every group of similar
transactions
 Real time systems create operational inefficiencies due to the need to
transact each individual activity.

Data Coding Schemes

Data coding involves the creation of simple numeric or alphabetic codes to

represent economic phenomena that facilitate efficient data processing.
Firms who sell many inventories may be selling some items with similar
attributes. Not being able to assign codes to each inventory may result to
errors, may take up too much space, and takes time to record due to difficulty
in finding an item. Assigning codes to each item ensures that all items are
accounted for, identified, and more manageable.

Numeric and Alphabetic Coding Schemes

 Sequential Codes represent items in either ascending or descending

order and is applicable to prenumbering of auditable documents such
as invoice, official receipt, etc.
 Advantages
o Supports reconciliation of batch transactions
o Missing documents are easily identified
o Easier tracing of documents
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 Disadvantages
o Sequential schemes are difficult to change
o No other relationship is determinable except for the
sequence
 Block Codes is the variation of sequential that aims to eliminate the
disadvantages. This is applicable in the formulation of chart of
accounts.
 Advantages
o Allows insertion and reorganization
 Disadvantages
o No other meaning can be inferred from the codes
assigned
 Group Codes represent related data with numeric group codes. Codes
assigned can have assigned meanings.
 Advantages
o Facilitates the representation of a large amount of data
o Allow complex data structures to be represented in
hierarchical form
o Permits details analysis of the contents of the class of
items
 Disadvantages
o Data can be overused and linked because it can be
done
o May result to high costs due to increased storage costs,
errors, and processing time
 Alphabetic Codes are used the same way as numeric codes
 Advantages
o Can represent large numbers of items
 Disadvantages
o Codes does not have any meaning
o It is more difficult to arrange
 Mnemonic Codes makes use of acronyms and combinations that
convey meaning, such as in course codes.
 Advantages
o No meaning behind codes needs to be memorized as
the code itself is the meaning
 Disadvantages
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o Limited in application
o Can easily be exhausted

LESSON SUMMARY

Transaction processing is a vital information provider for financial reporting

and internal management reporting and day to day functions.

Most firms have three cycles of activity namely the revenue cycle, the
expenditure cycle, and the conversion cycle.

Both manual and computerized processing can arrive at a specific output and
can leave an audit trail.

Documentation is important for users to easily detect the location of files or

determine the flow of processed or understand the logic behind transactions.

KEY TERMS

Audit Trail Conversion Cycle Expenditure Cycle Master file

Batch Data Flow Diagram Group Code Mnemonic Codes
Block Code Data model Journal Program Flowchart
Chart of Account Entity Relationship Ledger Real-Time Systems

POSTTEST

Directions: Flow Chart.

Assess the enrollment process at National University and create a flow chart representing its step-by-step
process. Evaluate and Identify lapses in control.
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REFERENCES

Hall. (2016). Accounting Information System/ c2016

Stair. (2015). Information Systems Essentials/ c2015
Hurt. (2016). Accounting Information System/ c2016
Romney (2015). Accounting Information System/ c2015