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Chapter 5

Transaction Cycles and Accounting

Applications

Abel D.
 Organizing Accounting Applications
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 An accounting application is an integral part of the

computerized accounting system.
 It describes a type of application software that
records and processes accounting transactions.
 It functions as an AIS.
 Application of computers in Accounting:
 Recording of all business transactions
 Preparation of various ledger accounts
 Processing the payroll information
 Preparation of trial balance
 Preparation of final accounts
 Processing Modes
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 Transactions are processed either by

 Real-time, or Batch system

Batch processing
 Jobs are gathered and stored until a suitable quantity is
available or specific time period.
 Example; All the orders in a batch are processed
(usually in a large volume) at the same time
 At a convenient time/off peak period
 In a similar way
 Usually without the need for human supervision
 Validation by control/batch total is used
 Cont’d………
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 It is stored on a transaction file.

 The data is verified by being entered a second time by a
different operator.
 Any discrepancies are corrected.
 The transaction file is transferred to the main
computer.
 This may be physically or electronically between
computers.
 Processing begins at a scheduled time – maybe
overnight when the network is not busy dealing with
on-line users.
 Cont’d………
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 Transaction file may be sorted into same sequence as

master file to speed up the processing of the data
 The master file is updated
 Any required reports are produced
 Cont’d…………
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Real-time Processing
 Transactions are processed immediately they occur
using an on-line computer system.
 Each transaction influences the next transaction

 Each transaction must be completed in full before the

next transaction is processed

 For example, ATM transactions use real-time
processing because a cash withdrawal must be
applied to the balance before another withdrawal can
be made
 Cont’d……….
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 Transactions will involve changing master files.

 Example; inserting/modifying/deleting records
 Bank withdrawals, goods returned, money sent
 Transactions are processed as soon as they are received
by the computer system, without delay.
 Data files are updated immediately so that the
transaction can influence any further transactions.
 The state of the system/data is always up-to-date.
 The output can influence the next input (feedback).
 Cont’d………..
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Choice of processing mode

 Many applications use a combination of batch and
interactive processing. Choosing between modes
depends on:
 Does information obtained from the system need to
be up-to-date at all times?
 The scale of the operation - Batch systems well
suited to very high volumes of data, when
economical to have an off-line key-to-disk system for
data entry.
 Cont’d……….
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 Cost - Real-time system is generally more expensive

because of more complex backup and recovery
procedures required to cope with power failures or
breakdowns.
 Computer usage - Batch system can make use of
spare computer capacity overnight or when
computer would otherwise be idle.
 The Revenue Cycle
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Sales Order
1

Credit / Customer
Service REVENUE CYCLE
2 (SUBSYSTEM)
Cash Receipts/
Collections
6

Shipping

Billing/ Accounts
Receivable
4/5
 Cont’d………
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Manual Sales Order Processing

 Begins with a customer placing an order

 The sales department captures the essential details

on a sales order form.
 The transaction is authorized by obtaining credit
approval by the credit department.
 Sales information is released to:

 Billing
 Warehouse (stock release or picking ticket)
 Shipping (packing slip and shipping notice)
 Cont’d………
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 The merchandise is picked from the Warehouse and

sent to Shipping.
 Stock records are adjusted.

 The merchandise, packing slip, and bill of lading are

prepared by Shipping and sent to the customer.
 Shipping reconciles the merchandise received from
the Warehouse with the sales information on the
packing slip.
 Shipping information is sent to Billing. Billing compiles
and reconciles the relevant facts and issues an invoice
to the customer and updates the sales journal.
 Cont’d……….
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 Information is transferred to:

 Accounts Receivable (A/R)

 Inventory Control

 Billing, A/R, and Inventory Control submits summary

information to the General Ledger dept., which then
reconciles this data and posts to the control accounts in
the G/L.
 Cont’d……….
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Manual Cash Receipts Processes

 Customer cheques and remittance advices are received
in the Mail Room.
 Cash Receipts:
 verifies the accuracy & completeness of the cheques
 updates the cash receipts journal
 prepares a deposit slip
 prepares a journal voucher to send to G/L

 A/R posts from the remittance advices to the accounts

receivable subsidiary ledger.
 Periodically, a summary of the postings is sent to
G/L.
 Cont’d……….
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 G/L department:
 Reconciles the journal voucher from Cash Receipts
with the summaries from A/R
 Updates the general ledger control accounts

 The Controller reconciles the bank accounts.

 Cont’d……….
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Automating the Revenue Cycle

 Authorizations and data access can be performed
through computer screens.
 There is a decrease in the amount of paper.

 The manual journals and ledgers are changed to disk or

tape transaction and master files.
 Input is still typically from a hard copy document and
goes through one or more computerized processes.
 Processes store data in electronic files (the tape or disk)
or prepare data in the form of a hardcopy report.
 Cont’d……….
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 Revenue cycle programs can include:

 Formatted screens for collecting data
 Edit checks on the data entered
 Instructions for processing and storing the data
 Security procedures (passwords or user IDs)
 Steps for generating and displaying output
 The documents and the files used as input sources
must contain the data necessary to generate the output
reports.
 Cont’d………..
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Reengineering Sales Order Processing Using Real-

Time Technology
 Manual procedures and physical documents are

replaced by interactive computer terminals.

 Real time input and output occurs, with some master
files still being updated using batches.
 Real-time - entry of customer order, printout of
stock release, packing slip & bill of lading; update of
credit file, inventory file, and open sales orders file
 Batch - printout of invoice, update of closed sales
order, A/R and general ledger control account
 The Expenditure Cycle
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Purchase Requisition Purchasing

1 2

PROCUREMENT CYCLE
(SUBSYSTEM)
Receiving/
Cash Disbursements Inspection
3
5

Accounts Payable
4
 Cont’d……….
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Manual Purchases System

 Begins in Inventory Control when inventory levels
drop to reorder levels
 A purchase requisition (PR) is prepared and copies to
sent to Purchasing and Accounts Payable (A/P)
 Purchasing prepares a purchase order (PO) for each
vendor and sends copies to Inventory Control, A/P,
and Receiving
 Upon receipt, Receiving counts and inspects the goods.
 A receiving report is prepared and copies sent to the
raw materials storeroom, Purchasing, Inventory
Control, and A/P.
 A/P eventually receives copies of the PR, PO,
receiving report, and the supplier’s invoice.
 Cont’d………
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 A/P reconciles these documents, posts to the

purchases journal, and records the liability in the
accounts payable subsidiary ledger.
 A/P periodically summarizes the entries in the
purchases journal as a journal voucher which is sent to
the General Ledger (G/L) department.
 A/P also prepares a cash disbursements voucher and
posts it in the voucher register.
 G/L department:
 Posts from the accounts payable journal voucher to
the general ledger
 Reconciles the inventory amount with the account
summary received from inventory control
 Cont’d………
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Manual Cash Disbursements System

 Periodically, A/P searches the open vouchers payable
file for items with payments due:
 A/P sends the voucher and supporting documents
to Cash Disbursements
 A/P updates the accounts payable subsidiary ledger
 Cash Disbursements:
 Prepares the cheque
 Records the information in a cheque register (cash
disbursements journal)
 Returns paid vouchers to A/P, mails the cheque to
the supplier
 Cont’d……….
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 G/L department receives:

 The journal voucher from cash disbursements
 A summary of the accounts payable subsidiary
ledger from A/P
 The journal voucher is used to update the general
ledger.
 The accounts payable control account is reconciled
with the subsidiary summary.
 Cont’d………
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Computer-Based Accounting Systems

 CBAS technology can be viewed as a continuum with
two extremes:
 Automation - use technology to improve efficiency
and effectiveness
 Reengineering – use technology to restructure
business processes and firm organization
 Cont’d……….
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Levels of Automating and Reengineering Ordering

 Computer generates PR

 Purchases manually generates PO

 Computer generates PO (no PR needed)

 PO not sent until manually reviewed

 Computer-generated PO is automatically sent without
manual review
 Electronic Data Interchange (EDI)

 Computer-to-computer communication without PO

 Cont’d………
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Expenditure Cycle Database

 Master Files

 Supplier (vendor) master file

 Accounts payable master file
 Merchandise inventory master file
 Transaction and Open Document Files

 Purchase order file

 Open purchase order file
 Supplier’s invoice file
 Open vouchers file
 Cash disbursements file
 Cont’d………
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Computer-Based Purchases
 A Data Processing dept. performs routine accounting
tasks.
 Purchasing - a computer program identifies inventory
requirements
 The following methods are used for authorizing and
ordering inventories:
 ALT1: the system prepares POs and sends them to
Purchases for review, signing, and distributing
 ALT2: the system distributes POs directly to the
vendors and internal users, bypassing Purchases
 ALT3: the system uses electronic data interchange
(EDI) & electronically places the order without POs
 Cont’d……….
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 Other tasks performed automatically by the computer:

 Updates the inventory subsidiary file from the
receiving report
 Calculates batch totals for general ledger update
 Closes the corresponding records in the open PO
file to the closed PO file
 Validates the voucher records against valid vendor
files
 Cont’d………
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Computer-Based Cash Disbursements

 Tasks performed automatically by the computer:

 The system scans for vouchers currently due

 Prints cheques for these vouchers
 Records these cheques in the cheque register
 Batch totals are prepared for the general ledger
update procedure
 Cont’d………
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Manual Authorization Computer-Based Authorization

Controls Controls
 Purchases of inventory  Authorizations are automated.

should be authorized  Fixed Programmed decision rules

by the Inventory  Automating inventory in EDI and
Control department not JIT
 Faulty inventory model can lead to
by purchasing agents
over or under purchasing
 A/P authorizes the  Cash disbursements automate
payments of bills, not cheque printing and signing.
the cash disbursements  Programming logic must be flawless
clerk, who writes the  Automated signing only below a
cheques dollar threshold
 Cont’d……..
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Manual Segregation of Computer-Based

Functions Segregation of Functions
 Custody of the inventory,  Extensive consolidation by

by the Warehouse must be the computer of tasks

separate from record traditionally segregated
keeping for the assets.  Computer programs
 Custody of the asset, cash, authorize and process
by Cash Disbursements purchase orders
must be kept separate  Computer programs
from recordkeeping for authorize and issue
the asset by A/P. cheques to vendors
 Cont’d……….
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Manual Supervision Computer-Based Supervision

 Supervision is of  Automation leads to collapsing
highest importance in of the traditional segregation of
the Receiving duties.
department, where the  Requires greater supervision

inventory arrives and is  Supervision takes on new

logged in by a receiving aspects as technology advances.
clerk. Need to  Electronic monitoring

minimize:  Supervision becomes more

 Failures to properly
difficult as the workplace
inspect the assets becomes more sophisticated.
 Employees may have advanced
 Theft of the assets IT training
 General Ledger and Reporting System
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 The general ledger and reporting system (GLARS)

includes the processes in place to update general ledger
accounts and prepare reports that summarize results of
the organization’s activities.
 The information must be organized to meet the needs
of internal and external users.
 The basic activities in the GLARS are:
 Update the general ledger
 Post adjusting entries
 Prepare financial statements
 Produce managerial reports
 Cont’d……….
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 One of the primary functions of GLARS is to collect

and organize data from:
 Each of the accounting cycle subsystems, which
provide summary entries related to the routine
activities in those cycles.
 The treasurer, who provides entries with respect to
non-routine activities such as transactions with
creditors and investors.
 The budget department, which provides budget
numbers.
 The controller, who provides adjusting entries.
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Questions?

Thank you!