CHAPTER 2 Accounting Records

Introduction to Transaction Processing • Accounting records are documents, journals or

ledgers used in transaction cycles.
AN OVERVIEW OF TRANSACTION PROCESSING
• The most common financial transactions are MANUAL SYSTEMS
economic exchanges with external parties. • Documents
• These include the sale of goods or services, the • Source documents are documents that
purchase of inventory, the discharge of financial capture and formalize transaction data
obligations, and the receipt of cash on account needed for processing by their respective
from customers. transaction cycles.
• Financial transactions are common business • Product documents are documents
events that occur regularly. that result from transaction processing.
• Turnaround documents are product
TRANSACTION CYCLES documents of one system that become
• The Expenditure Cycle source documents for another system.
o The expenditure cycle is the
acquisition of materials, property, and Creation of a Source Document
labor in exchange for cash (cash
transactions). Time lag between
components due to credit relationship
with suppliers (credit transactions)
o physical component (acquisition of
goods)
o financial component (cash
disbursements to the supplier)
• The Conversion Cycle
o The conversion cycle provides value
added through its products or services
(conversion cycle).
o The production system (planning,
scheduling, and control of the physical A Product Document
product through the manufacturing
process)
o The cost accounting system
(monitors the flow of cost information
related to production)
• The Revenue Cycle
o The revenue cycle receives revenue
from outside sources
o Time lag between components due to
credit relationship with customers (credit
transactions).
o It is the cycle composed of sales order
processing and cash receipts.

Relationship Between Transaction Cycles A Turnaround Document

 • A journal is a record of a chronological entry. Relationship between the Subsidiary Ledger and
o Special journals are used to record the General Ledger
specific classes of transactions that occur
in hi h fre uency.
o A is often used to denote
certain types of special journals.
§ For example, the payroll journal
is often called the payroll
register.
o General journal is used to record
nonrecurring, infrequent, and dissimilar
transactions.
o Journal vouchers replaces the
traditional general journal.
§ These are also used for
accounting journal entries into
an accounting system for the
purposes of making corrections
or adjustments to the accounting
data.
§ For control purposes, all JVs
should be approved by the
appropriate designated
authority.
• A ledger is a book of accounts that reflects the THE AUDIT TRAIL
financial effects of the firm’s transactions after • An audit trail is a set of accounting records that
they are posted from the various journals. trace transactions from their source documents to
o GENERAL LEDGERS contain account the financial statements.
information in highly summarized control • An audit trail is of utmost importance in the
accounts. conduct of a financial audit.
o SUBSIDIARY LEDGERS contain details • The external auditor’s responsibility involves, in
for each 0f the individual accounts that part, the review of selected accounts and
constitute a particular control account. transactions to determine their validity, accuracy,
• Together the accounting records provide an and completeness.
audit trail for tracing account balances
contained in the financial statements back to the DIGITAL ACCOUNTING RECORDS
source documents and events that created them. • Modern accounting systems store data in four
o Important in the conduct of a financial types of digital computer files:
audit. o A master file contains account data.
o A transaction file is a temporary file
Sales Order Recorded in a Sales Journal that holds transaction records that will be
used to change or update data in a
master file.
o A reference file is a file that stores the
data used as standards for processing
transactions.
o An archive file is a file that contains
records of past transactions that are
Flow of Information from the Economic Event to retained for future reference. It forms an
the General Ledger important part of the audit trail.
• The Digital Audit Trail
o These are less observable than those
between hard-copy documents, but they
still exist.
Digital Accounting Records in a Computer-Based user files affected by a change in status;
System may result in decisions based on
outdated information.
• Task-Data Dependency
o Task-data dependency is a user’s
inability to obtain additional information
as his or her needs change. This is the
effect of user’s information set
constrained by the data user possess and
controls
• Flat Files Limit Data Integration
o Files structured in the view of the primary
user (single user view model), may not
be useful to other users, thus preventing
data integration (e.g. accounting data
according to standards); Separate files
are difficult to integrate across multiple
users; options

File Structures
• Digital file structures and storage techniques vary
widely among transaction processing systems.
• Some structures are effective at processing all
records in large master files.
• Some file structures are better for directly
locating and processing a single record in a large
file.
• The legacy systems are large mainframe
systems implemented in the late 1960s through
the 1980s.
THE DATABASE MODEL
THE FLAT-FILE MODEL • The database model is a symbolic model of the
• The flat-file model is an environment in which structure of, and the associations between, an
individual data files are not related to other files. organization’s data entities.
• There are three significant problems in the flat- • The database management system (DBMS)
file environment: data storage, data updating, is a software system that controls access to the
and currency of information. data resource.
• Data Capture and Storage • The most striking difference between the
o Data storage is an efficient information database model and the flat-file model is the
system that captures and stores data pooling of data into a common database that all
only once and makes this single source organizational users share.
available to all users who need it.
Organizations must incur the costs of Database Model
multiple collection and storage
procedures.
• Data Updating
o Data updating is the periodic updating of
data stored in the files of an organization.
Changes or additions must be performed
multiple times which adds significantly to
the task and cost of data management.
• Currency of Information
o Currency of information is a problem
associated with the flat-file model
because of its failure to update all the
Documentation Techniques Data Flow Diagram of Purchases System
• Visual images convey vital system information
more effectively and efficiently than words.
• Accountants use system documentation
routinely, as both systems designers and
auditors.
• Five basic documentation techniques are: data
flow diagrams, entity relationship diagrams,
system flowcharts, program flowcharts, and
record layout diagrams.

DATA FLOW DIAGRAMS AND ENTITY

RELATIONSHIP DIAGRAMS
• Data Flow Diagrams
• The data flow diagram (DFD) is the
use of a set of symbols in a diagram to
represent the processes, data sources,
data flows, and process sequences of a
current or proposed system. Relationship between ER Diagrams and DFDs
• It is used extensively by systems analysts • DFDs and ER diagrams document different
to represent the logical elements of the system aspects but are related.
system but does not depict the physical • DFDs model systems processes and ER diagrams
system model system data.
• Entity Relationship Diagrams • Each data store in a DFD is represented as an
• An entity relationship (ER) diagram is entity in a corresponding ER diagram (e.g.
a documentation technique used to diagram 2-17)
represent the relationship among data
entities in a system. Entity Relationships Diagram Symbols
• Cardinality (degree of relationship is
the numeric mapping between entities
such as one-to-one (1:1), one-to-many
(1:M), and many-to-many (M:M).
• A data model is the blueprint for what
ultimately will become the physical
database.

Data Flow Diagram Symbol Set

Data Model

SYSTEM FLOWCHARTS
• System flowchart
o It is used to show (graphical
representation) of the physical
relationship between the key elements—
input sources, programs, and output
products—of computer systems or
 departments, manual activities, Program Flowchart Symbols
computer programs, hard-copy and
digital accounting records.
o Also describe the physical computer
media being employed.
o Shows the processing of a single
transaction only.
• Flowcharting Manual Activities
o Lay out the physical area of activity.
o Transcribe the written facts into visual RECORD LAYOUT DIAGRAMS
format. • Record layout diagrams are used to reveal the
• Flowcharting Computer Processes internal structure of the records that constitute a
o Transcribe the written facts into visual file or database table. The layout diagram usually
format. shows the name, data type, and length of each
attribute (or field) in the record.
Symbol Set for Representing Manual Procedures • Detailed data structure information is needed for
such tasks as identifying certain types of system
failures, analyzing error reports, and designing
tests of computer logic for debugging and
auditing purposes.

Record Layout Diagram for Customer File

Transaction Processing Models

• Alternative transaction processing models fall
Symbol Set for Representing Computer Processes broadly into two types: (1) batch processing and
(2) real-time processing.
• Batch processing involves gathering transactions
into groups or batches, resulting into time lag,
and then processing the entire batch as a single
event.
• Real-time processing systems process individual
transactions continuously as they occur.
• Many systems incorporate both real-time and
batch processing features.

Characteristic Differences between Batch and

Real-Time Processing
PROGRAM FLOWCHARTS
• A program flowchart is a diagram providing a
detailed description of the sequential and logical
operations of the program.
• Every program represented in a system flowchart
should have a supporting program flowchart that
describes its logic.
• The connector lines between the symbols
establish the logical order of execution.
DIFFERENCES BETWEEN BATCH AND REAL-TIME
SYSTEMS
• Information Time Frame
o Batch systems are systems that
assemble transactions into groups for
processing.
 o Real-time systems are systems that • Deadlock or “wait” is a state that occurs
process transactions individually at the between sites when data are locked by multiple
moment the economic event occurs. sites that are waiting for the removal of the locks
• Resources from the other sites.
o Generally fewer required with a batch •
system. Batch Processing with Real-Time Data Collection
• Operational Efficiency
o Batch processing of noncritical accounts
eliminates unnecessary activities at
critical points in the process.
• Efficiency versus Effectiveness
o Designer must consider the trade-off
between efficiency and effectiveness.

UPDATING MASTER FILES FROM TRANSACTIONS

• Updating a master file record involves changing
the value of one or more of its variable fields to
reflect the effects of a transaction (batch and
real-time).
• Master file backup procedures - standard
procedures to maintain file integrity in the event
that:
o An update program error corrupts the
master file being updated.
o Undetected transaction errors result in
corrupted balances.
o A disaster physically destroys current
master files.
• If the current master file becomes corrupted or is
destroyed, corporate IT professionals can retrieve REAL-TIME PROCESSING
the most current backed-up file from the • Real-time systems process the entire transaction
archives. as it occurs.
• Real-time processing is well suited to systems
Record Structures for Sales, Inventory, and that process lower transaction volumes and those
Accounting Receivable Files that do not share common records.
• Terminals at distributed sites throughout the
organization are used for receiving, processing,
and sending information on the status of current
transactions.

Real-Time Processing of Sales Orders

BATCH PROCESSING USING REAL-TIME DATA

COLLECTION
• A popular data processing approach, particularly
for large operations, is to digitally capture and
process aspects of the transaction at the source
as they occur, and process other aspects of the
transaction in batch mode.
Data Coding Schemes o ADVANTAGES – allow insertion of new
• Data coding involves creating simple numeric or code within a block
alphabetic codes to represent complex economic o DISADVANTAGES – information content
phenomena that facilitate efficient data of the code is not apparent
processing. • Group Codes
o Group codes are used to represent
A SYSTEM WITHOUT CODES complex items or events involving two or
• Business organizations process large volumes of more pieces of related data.
transactions that are similar in their basic o For example, a coding scheme for
attributes. tracking sales might be 04-09-476214-
• Uncoded entry takes a great deal of recording 99, meaning:
space, is time-consuming to record, and is o ADVANTAGES
obviously prone to many types of errors. § Facilitates representation of
large amounts of diverse data.
A SYSTEM WITH CODES § Allows complex data to be
• Advantages of data coding in AIS are: logically represented.
o Concisely representing large amounts of § Permits detailed analysis and
complex information that would reporting.
otherwise be unmanageable. o DISADVANTAGES
o Providing a means of accountability over § Overuse which can increase
the completeness of the transactions costs and linking of unrelated
processed. data.
o Identifying unique transactions and • Alphabetic Codes
accounts within a file. o Alphabetic codes are alphabetic
o Supporting the audit function by characters assigned sequentially.
providing an effective audit trail. o These are used for many of the same
purposes as numeric codes.
Data Coding Scheme (E.g. Chart of Accounts) o These may use sequential, block or group
coding techniques.
o ADVANTAGES: Alphanumeric codes
are codes that allow the use of pure
alphabetic characters embedded within
numeric codes. These dramatically
increase the capacity to represent large
numbers of items.
o DISADVANTAGES: It is difficult to
rationalize the meaning of the codes and
they tend to be difficult for users to sort.
• Mnemonic Codes
o Mnemonic codes are alphabetic
characters in the form of acronyms and
other combinations that convey meaning.
NUMERIC AND ALPHABETIC CODING SCHEMES o Common application is the two code
• Sequential Codes state abbreviations or college course
o Sequential codes are codes that coding (in combination with numeric
represent items in some sequential order codes).
(ascending or descending). o ADVANTAGES: Codes convey a high
o ADVANTAGES – support reconciliation of degree of information.
batch transactions o DISADVANTAGES: Limited ability to
o DISADVANTAGES – carry no information represent items within a class.
beyond their order; difficult to change
• Block Codes
o A numeric block code is a coding
scheme that assigns ranges of values to
specific attributes such as account
classifications.
o A chart of accounts is a listing of an
organization’s accounts showing the
account number and name.