Accounting Information Systems, 6th

edition
James A. Hall

COPYRIGHT 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western
are trademarks used herein under license
A Financial Transaction
is...
an economic event that affects the assets and
equities of the firm, is reflected in its
accounts, and is measured in monetary terms.
similar types of transactions are grouped
together into three transaction cycles:
the expenditure cycle,
the conversion cycle, and
the revenue cycle.
Relationship between Transaction Cycles
Each Cycle has Two
Subsystems
Expenditure Cycle: time lag between the two due to credit
relations with suppliers:
physical component (acquisition of goods)
financial component (cash disbursements to the supplier)
Conversion Cycle :
the production system (planning, scheduling, and control
of the physical product through the manufacturing process)
the cost accounting system (monitors the flow of cost
information related to production)
Revenue Cycle: time lag between the two due to credit
relations with customers :
physical component (sales order processing)
financial component (cash receipts)
Manual System
Accounting
Source DocumentsRecords
- used to capture and
formalize transaction data needed for
transaction processing
Product Documents - the result of
transaction processing
Turnaround Documents - a product
document of one system that becomes a
source document for another system
Manual System
Accounting
Journals - a record Records
of chronological entry
special journals - specific classes of
transactions that occur in high frequency
general journal - nonrecurring, infrequent, and
dissimilar transactions
Ledger - a book of financial accounts
general ledger - shows activity for each
account listed on the chart of accounts
subsidiary ledger - shows activity by detail for
each account type
Flow of Economic Events Into
the General Ledger
Accounting Records in a Computer-Based System

EXPLANATION OF
STEPS IN FIGURE:

1. Compare the AR
balance in the balance
sheet with the master file
AR control account
balance.
2. Reconcile the AR
control figure with the AR
subsidiary account total.
3. Select a sample of
update entries made to
accounts in the AR
subsidiary ledger
and trace these to
transactions in the sales
journal (archive file).
4. From these journal
entries, identify source
documents that can be
pulled from their files and
verified. If necessary,
confirm these source
documents by contacting
the customers.
 Audit Trail
Source General Financial
Journal Statements
Document Ledger

Financial General Source

Statements Journal
Ledger Document

Accountants should be able to trace in both directions.

Sampling and confirmation are two common techniques.
 Example of Tracing an Audit Trail
Verifying Accounts Receivable

Accounts Receivable Control Account-General Ledger

Accounts Receivable Subsidiary Ledger

(sum of all customers receivables)

Sales Journal Cash Receipts Journal

Sales Order Deposit Slip

Shipping Notice
Remittance Advice
Computer-Based
Systems
The audit trail is less observable in 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 update
Reference File - contains relatively constant
information used in processing (e.g., tax
tables, customer addresses)
Archive File - contains past transactions for
reference purposes
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
Program Flowcharts
Entity Relationship Diagram
(ERD)
is 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
represents the numerical mapping between
entities:
one-to-one
one-to-many
many-to-many
 Cardinalities
Entity Relationship Entity

Sales- 1 1 Car
Assigned Type
person

1 M
Customer Places Order

M M
Vendor Supply Inventory
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
Data Flow Diagram
Symbols
Entity Data Store
Name Name

N
Process
Description Direction of
data flow
Documents 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 Document Flowcharts

Terminal showing source Calculated batch total

or destination of documents
and reports

Source document or
report
On-page connector

Manual operation
Off-page connector

File for storing source Description of process

documents and or comments
reports

Accounting records
Document flowline
(journals, registers,
logs, ledgers)
Sales Department Credit Department Warehouse Shipping Department

Customer

Customer
Order

Prepare
Sales
Orders

Sales
Order #1
Sales
Sales
Order #1
OrderSales
#1
Order #1

First Stages in Constructing Document Flowchart Showing Areas

of Activity
 Sales Department Credit Department Warehouse Shipping Department
Sales A
Customer
Order #1 Sales
Order2
Customer Sales
Checks
Order Credit Order 4
Credit
Records Sales
Picks Stock
Prepare Records Order3
Goods
Sales
Orders Signed Sales
Order #1
Customer Sales Picks
Order Order2 Goods
Sales
Order #1
Sales
Sales
Order #1
OrderSales
#1 Sales
Order #1 Order 4
Sales
Signed Sales Order3
N Order #1
Sales
Order2 N
Distribute
SO and
File A
Customer
Sales Customer
Order
Signed Sales
Order #1 Order 4
Sales Finished Document Flowchart
Order3
Sales Showing Areas of Activity
N
Order2
System Flowcharts
are used to represent the relationship
between the key elements--input sources,
programs, and output products--of computer
systems
depict the type of media being used (paper,
magnetic tape, magnetic disks, and terminals)
in practice, not much difference between
document and system flowcharts
Systems Flowchart Symbols
Terminal input/
Hard copy
output device

Computer process
Process flow

Real-time
Direct access storage (online)
device connection

Video display
device
Magnetic tape
Sales Department Computer Operations Department Warehouse Shipping Department

Customer
Edit and Credit File
Credit Check
Customer
Order
Sales
Orders

Terminal
AR File
Update
Program
Inventory

First Stages in Constructing System Flowchart Showing

Areas of Activity
Sales Department Computer Operations Department Warehouse Shipping Department

Customer Sales A
Edit and Credit File Order1
Credit Check
Customer Sales
Order Order 3
Picks Stock Sales
Sales Records Order2
Goods
Orders

Terminal
AR File
Update Sales Picks
Program Order1 Goods
Customer Inventory Sales
Order Order2
Sales
Order3

N A
N
Sales Sales
Order 3 Order1
Sales
Order2
Sales
Order1
Customer

Finished System Flowchart Showing All Facts

Translated into Visual Symbols
Program Flowcharts
illustrate the logic used in programs

Program Flowchart Symbols

Terminal start or
Logical process
end operation

Input/output
operation
Decision
Flow of logical
process
Modern Systems versus Legacy
Systems
Modern systems characteristics:
client-server based and process transactions in real time
use relational database tables
have high degree of process integration and data sharing
some are mainframe based and use batch processing
Some firms employ legacy systems for certain
aspects of their data processing.
Accountants need to understand legacy systems.
Legacy systems characteristics:
mainframe-based applications
batch oriented
early legacy systems use flat files for data storage
later legacy systems use hierarchical and network
databases
data storage systems promote a single-user environment
that discourages information integration
Updating Master Files: Primary Keys
(PK) and Secondary Keys (SK)
 Database Backup Procedures
Destructive updates leave no backup.
To preserve adequate records, backup procedures must be
implemented, as shown below:
The master file being updated is copied as a backup.
A recovery program uses the backup to create a pre-
update version of the master file.
Computer-Based
Accounting Systems
Two broad classes of systems:
batch systems
real-time systems
 Batch Processing
A batch is a group of similar transactions that
are accumulated over time and then processed
together.
The transactions must be independent of one
another during the time period over which the
transactions are accumulated in order for batch
processing to be appropriate.
A time lag exists between the event and the
processing.
Batch Processing/Sequential File
Unedited
Sales Keying Transactions
Orders

catches clerical errors

Errors Edit
Run
correct errors and
resubmit
Edited
Transactions

rearranges the transaction data by

Sort key field so that it is in the same
Run sequence as the master file

Transactions

Old Master
(father)
AR

Update changes the values in the master file to

Run reflect the transactions that have occurr

AR

Transactions (eventually transferred to an archive file)

New Master
(son)
 Steps in Batch
Processing/Sequential File
Keystroke - source documents are 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 key
Update Run - changes the value of appropriate
fields in the master file to reflect the transaction
Backup Procedure - the original master
continues to exist and a new master file is created
Advantages of Batch
Processing
Organizations can increase efficiency by
grouping large numbers of transactions into
batches rather than processing each event
separately.
Batch processing provides control over the
transaction process via control figures.
 Real-Time Systems
process transactions individually at
the moment the economic event occurs
have no time lag between the economic
event and the processing
generally require greater resources
than batch processing since they require
dedicated processing capacity; however,
these cost differentials are decreasing
oftentimes have longer systems
development time
Why Do So Many AIS Use
Batch Processing?
AIS processing is characterized by high-
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 time.
This is one reason why batch processing
maybe done using real-time data collection.