Chapter 2 Introduction to Transaction o physical component (sales

Processing order processing)

o financial component (cash receipts)
AN OVERVIEW OF TRANSACTION PROCESSING
ACCOUNTING RECORDS
A Financial Transaction is...
 an economic event that affects the assets Manual System Accounting Records
and equities of the firm, is reflected in its Documents
accounts, and is measured in monetary  Source Documents - used to capture and
terms. formulize transaction data needed for
 similar types of transactions are transaction processing
grouped together into three  Product Documents - the result of
transaction cycles: transaction processing
o the expenditure cycle  Turnaround Documents - a product
o the conversion cycle document of one system that becomes a
source document for another system
o the revenue cycle
Journals
Relationship between Transaction Cycles Journals – a record of chronological entry

 special journals - specific classes of

transactions that occur in high frequency
 general journal - nonrecurring, infrequent,
and dissimilar transactions

Ledgers
Ledger – a book of financial accounts

 general ledger – shows activity for each

accounts listed on the chart of accounts
 subsidiary ledger – shows activity by
details for each account type
Each Cycle has Two Primary Subsystems Flow of Information from Economic Event into
 Expenditure Cycle: time lag between the the General Ledger
two due to credit relations with
suppliers:
o physical component
(acquisition of goods)
o financial component (cash
disbursements to the
supplier)
 Conversion Cycle: Accounting Records in a Computer-Based System
o the production system (planning, EXPLANATION OF STEPS IN FIGURE:
scheduling, and control of the
physical product through the 1. Compare the AR balance in the balance
manufacturing process) sheet with the master file AR control
o the cost accounting system account balance.
(monitors the flow of cost 2. Reconcile the AR control figure with
information related to production) the AR subsidiary account total.
 Revenue Cycle: time lag between the two 3. Select a sample of update entries made
due to credit relations with customers: to accounts in the AR subsidiary ledger
 and trace these to transactions in the update
sales journal (archive file).  Reference File - contains relatively
4. From these journal entries, identify constant information used in
source documents that can be pulled processing (e.g., tax tables, customer
from their files and verified. If necessary, addresses)
confirm these source documents by  Archive File - contains past transactions
contacting the customers. for reference purposes

The Audit Trail DOCUMENTATION TECHNIQUES

Documentation in a CB environment is necessary for
many reasons.

Five common documentation techniques:

 Entity Relationship Diagram

 Data Flow Diagrams
 Document Flowcharts
 System Flowcharts
Accountants should be able to trace in both directions.  Program Flowcharts

Sampling and confirmation are two common Data Flow Diagrams and Entity Relationship
techniques. Diagrams
Example of Tracing an Audit Trail Entity Relationship Diagram (ERD)
Verifying Accounts Receivable A documentation technique to represent the
relationship between entities in a system.

The REA model version of ERD is widely used in AIS.

REA uses 3 types of entities:

 resources (cash, raw materials)

 events (release of raw materials into
the production process)
 agents (inventory control clerk,
vendor, production worker)

Cardinalities
Represent the numerical mapping between entities:

 one-to-one
Computer-Based Systems
 one-to-many
 The audit trial is less observable in
 many-to-many
computer- based systems than traditional
manual systems.
 The data entry and computer programs
are the physical trail.
 The data are stored in magnetic files.

Computer Files
 Master File - generally contains
account data (e.g., general ledger and
subsidiary file)
 Transaction File - a temporary file
containing transactions since the last
Data Flow Diagrams (DFD)…
 use symbols to represent the processes,
data sources, data flows, and entities in a
system
 represent the logical elements of the system
 do not represent the physical system

System Flowcharts
 illustrate the relationship among processes
and the documents that flow between them
 contain more details than data flow diagrams
 clearly depict the separation of functions
in a system

Symbol Set for Representing Manual Procedures

Program Flowcharts
Program flowcharts illustrate the logic used in
programs.

Program Flowchart Symbols

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

 are used to represent the relationship
between the key elements--input sources, Batch Processing
programs, and output products--of computer  A batch is a group of similar transactions
systems that are accumulated over time and then
 depict the type of media being used processed together.
(paper, magnetic tape, magnetic disks,  The transactions must be independent of
and terminals) one another during the time period over
 in practice, not much difference which the transactions are accumulated in
between document and system order for batch processing to be
flowcharts appropriate.
Symbol Set for Representing Computer Processes  A time lag exists between the event and
the processing.

Steps in Batch Processing/Sequential File

  Keystroke - source documents are Modern Systems versus Legacy Systems
transcribed by clerks to magnetic tape for
processing later
 Edit Run – identifies clerical errors in the
batch and places them into an error file
 Sort Run - places the transaction file in the
same order as the master file using a
primary  Modern systems characteristics:
key o client-server based and
 Update Run – changes the value of process transactions in real
appropriate fields in the master file to time
reflect the transaction o use relational database tables
 Backup Procedure - the original master o have high degree of process
continues to exist and a new master integration and data sharing
file is created
o some are mainframe based and
Advantages of Batch Processing use batch processing
 Organizations can increase efficiency by  Some firms employ legacy systems for
grouping large numbers of transactions certain aspects of their data processing.
into batches rather than processing each o Accountants need to understand
event separately. legacy systems.
 Batch processing provides control over  Legacy systems characteristics:
the transaction process via control o mainframe-based applications
figures. o batch oriented
o early legacy systems use flat files
Real-Time Systems… for data storage
 process transactions individually at o later legacy systems use
the moment the economic event hierarchical and network
occurs databases
 have no time lag between the economic o data storage systems promote a
event and the processing single- user environment that
 generally require greater resources than discourages information integration
batch processing since they require
dedicated processing capacity; however, Record Structures for Sales, Inventory,
these cost differentials are decreasing and Accounts Receivable Files
 oftentimes have longer systems development
time

Database Backup Procedures

 Destructive updates leave no backup.

 To preserve adequate records, backup
Alternative Data Processing Approaches procedures must be implemented, as shown
 below:  Disadvantage:
o The master file being updated is o arbitrary information
copied as a backup.
o A recovery program uses the backup Group Codes
to create a pre-update version of  Represent complex items or events
the master file. involving two or more pieces of data using
fields with specific meaning
Why Do So Many AIS Use Batch Processing?
 For example, a coding scheme for tracking
 AIS processing is characterized by high
sales might be 04-09-476214-99, meaning:
volume, independent transactions, such are
recording cash receipts checks received in the
mail.
 The processing of such high-volume checks
can be done during an off-peak computer  Disadvantages:
time. o arbitrary information
 This is one reason why batch processing o overused
maybe done using real-time data collection.
Alphabetic Codes
DATA CODING SCHEMES  Used for many of the same purposes as
Uses of Coding in AIS numeric codes
 Can be assigned sequentially or used in
 Concisely represent large amount of complex
block and group coding techniques
information that would otherwise be
 May be used to represent large
unmanageable
 Provide a means of accountability over numbers of items
the completeness of the transactions o Can represents up to 26 variations
processed per field
 Identify unique transactions and  Disadvantage:
account within a file o arbitrary information
 Support the audit function by providing an Mnemonic Codes
effective audit trial
 Alphabetic characters used as abbreviation,
Numeric and Alphabetic Coding Schemes acronyms, and other types of combinations
 Do not require users to memorize the
Sequential Codes meaning since the code itself is informative
 Represent items in sequential order – and not arbitrary
 Used to prenumber source documents
o NY = New York
 Track each transaction processed  Disadvantages:
 Identify any out-of-sequence documents limited usability and availability
 Disadvantages:
o arbitrary information
o hard to make changes and insertions

Block Codes
 Represent whole classes by assigning each
class a specific range within the coding
scheme
 Used for chart of accounts
o The basis of general ledger
 Allows for the easy insertion of new
codes within a block
o Don’t have to reorganize the
coding structure