TRANSACTION

PROCESSING
AND
FINANCIAL
REPORTING
GROUP 1

SYSTEMS
OVERVIEW
 TRANSACTION CYCLE
La b o r  Customers

           
     S M a te ria ls      S
H
     A H
     A
     C Physical Plant      G      C
     
F

EXPENDITURE CONVERSION CYCLE REVENUE CYCLE

CYCLE
Subsystems:
-Purchasing or A/P Subsystems:
-Cash Disbursements -Production Planning a n d Subsystems:
-Payroll Control -Sales Order Purchasing
-Fixed Assets -Cost Accounti ng Cash Receipts

Finished G oo ds
CAS
H
ACCOUNTING
RECORDS
C o m p ute r
M a nua l - Based
Systems
Syste m
s
ACCOUNTING RECORDS
Manual Systems Computer Based
! Documents !
Systems
! Source Documents !
Master File
! Product Documents !
Transaction File
! Turnaround Reference File
! Archive File
Do c um e nt
s
! Journals
! Ledgers
D UMENTATION
TECHNIQUES
DFD a n d ER Diagrams

Systems Flowcharts

Program Flowcharts

Record Layout

Diagrams
DFD and ER Diagrams

ENTIT Data Store

Y Name
NA M E

Process
De scriptio n

Direction of Data Flow

RELATIONSHIP BETWEEN ER
DIAGRAMS AND DATA FLOW
DIAGRAMS

! The t w o diagrams are related through

d a t a ; e a c h d a t a store in th e DFD
represents a corresponding d a t a
entity in the ER diagram.
D UMENTATI
N TECHNIQUES
DFD a n d ER Diagrams
Systems Flowcharts

Program Flowcharts

Record Layout

Diagrams
Systems Flowcharts

! A system flowchart is the graphical

representation of the physical relationships
a m o n g key elements of a system.
o organizational departments
o m a n u a l activities
o c o m p u t e r programs
o h a r d - co p y a c c o u n t i n g records
o digital records
FLOWCHARTING MANUAL
ACTIVITIES
1.A clerk in the sales d e p a r t m e n t receives a h a r d - c o p y customer
order b y mail a n d manual ly prepares four h a r d copies of a sales
order.
2.The clerk sends C o p y 1 of the sales order the credit d e p a r t m e n t
for approval. The other three copies a n d the original customer
order are filed temporarily, p e n d i n g credit approval.
3.The credit d e p a r t m e n t clerk validates th e customer ’s order
against h a r d - c o p y credit records k e p t in th e credit d e p a r tm e n t.
The clerk signs C o p y 1 t o signify a p pr o va l a n d returns it to the sales
clerk.
1.When the sales clerk receives credit approval, he or
she files C o p y 1 a n d the customer order in the
department. The clerk sends C o p y 2 to the warehouse
a n d Copies 3 a n d 4 to the shipping department.
2.The warehouse clerk picks the products from the
shelves, records the transfer in the hard-copy stock
records, a n d sends the products a n d C o p y 2 to
the shipping department.
3.The shipping d e pa r tm e nt receives C o p y 2 a n d the
goods from the warehouse, attaches C o p y 2 as a
packing slip, a n d ships the goods to the customer. Finally,
the clerk files Copies 3 a n d 4 in the shipping d e p ar tm e nt
LAY OUT THE PHYSICAL AREAS OF
ACTIVITY
!a flowchart reflects the physical system, w hi ch is represented as vertical
columns of events a n d actions separated b y lines of dema rcatio n.
TRANSCRIBE THE WRITTEN FACTS INTO
VISUAL FORMAT

! The symbols used for this purpose will b e selected from t he set presented.
1. A clerk in the sales d ep a r tm e n t receives hard-copy
customer order b y mail a n d manually prepares four
hard copies of a sales order.
 2. The clerk sends C o p y 1 of th e sales order t o th e
credit d e p a r t m e n t for approval. The other three
copies a n d the original customer order are filed
temporarily, p e n d i n g credit approval.

3. The credit d e p a r t m e n t clerk validates the

customer ’s order against h a r d - c o p y credit records
kept in the credit d ep ar tme nt. The clerk signs C o p y 1
t o signify a p p r o v a l a n d returns it t o th e sales clerk.
 4. When the sales clerk receives credit approval, he or she files
C o p y 1 a n d the customer order in the department. The clerk
 sends C o p y 2 to the warehouse a n d Copies 3 a n d 4 to the
 shipping department.
 5. The warehouse clerk picks the products from the shelves,
 records the transfer in the hard- copy stock records, a n d sends
the products a n d C o p y 2 to the shipping department.
6. The shipping d e p ar tm e nt receives C o p y 2 a n d the goods
from the warehouse, attaches C o p y 2 as a packing slip, a n d
 ships the goods to the customer. Finally, the clerk files Copies 3
a n d 4 in the shipping department.
BATCH PROCESSING

! Batch processing permits the efficient

m a n a g e m e n t of a large volume of transactions.
! A b a t c h is a g r o u p of similar transactions (such
as sales orders) that are a c c u m u l a t e d over time
a n d then processed together 
Our e x a m p l e is b a s e d o n a sales order system with the following facts:
1. A clerk in the sales d e p a r t m e n t receives a customer order b y mail a n d
enters th e information into a c o m p u t e r terminal th a t is netw o rked t o a
centralized c o m p u t e r p r o g r a m in th e c o m p u t e r operations d e p a r tm e n t .
The original customer order is filed in th e sales d e p a r tm e n t. Facts 2, 3,
a n d 4 relate to activities that o c cu r in the c o m p u t e r operations
department.
 2. A c o m p u t e r p r o g r a m edits the transactions, checks the customer ’s
credit b y referencing a credit history file, a n d produces a transaction file
of sales orders.
3. The sales order transaction file is then processed b y a n u p d a t e
p r o g r a m th a t posts the transactions t o corresponding records in AR a n d
inventory files.
!  4. Finally, the u p d a t e p r o g r a m produces three h a rd copies of th e
 sales order. C o p y 1 is sent t o th e warehouse, a n d Copies 2 a n d 3 are
 sent t o th e shipping d e p a rtme n t.
!  5. O n receipt of C o p y 1, th e w arehouse clerk picks the products from
the shelves. Using C o p y 1 a n d th e warehouse personal c o m p u t e r
(PC), the clerk records the inventory transfer in the digital stock
 records th a t are ke p t o n the PC. Next, the clerk sends the physical
inventory a n d C o p y 1 t o the shipping d e p a rtme n t.
! 6. The shipping d e p a r t m e n t receives C o p y 1 a n d the g o o d s from the
warehouse. The clerk reconciles th e g o od s with Copies 1, 2, a n d 3
a n d attaches C o p y 1 as a p a c k i n g slip. Next, th e clerk ships the g o od s
(with C o p y 1 a t t a c h e d ) to the customer. Finally, the clerk records the
 shipment in th e h a rd -co p y shipping log a n d files Copies 2 a n d 3 in the
 shipping de p a rtm e nt.
D UMENTATI
N TECHNIQUES
DFD a n d ER Diagrams
Systems Flowcharts

Program Flowcharts

Record Layout

Diagrams
Program Flowcharts

! Accountants sometimes use

program flowcharts to verify
the correctness of progr am
logic.
D UMENTATI
N TECHNIQUES
DFD a n d ER Diagrams
Systems Flowcharts

Program Flowcharts

Record Layout

Diagrams
Record Layout Diagrams

! Record l a yo ut diagrams are used t o reveal the internal structure of t h e records t h at

constitute a file or d a t a b a s e table.
 COMPUTER-BASED
ACCOUNTING
SYSTEMS
BATCH SYSTEMS VS. REAL-TIME
SYSTEMS
Disting uishing BATCH REAL TIME
Feature
Info rm a tion Lag exists b e t w e e n time w h e n the Processing takes p l a c e
time fr a m e economic w h e n th e e c o n o m i c
ev en t occurs a n d w h e n it is event
recorded. occurs.
Resources Generally, fe w er resources (e.g., More resources are
hardware, required th a n for
p ro g ra m m i n g, training) b a t c h processing.
are required.
O p e ra tiona l Certain records are processed All records pertaining to
efficiency after th e the event are
e ve n t t o a v o i d operational processed immediately
delays.
ALTERNATIVE DATA
PROCESSING

APPROACHE
S
LEGACY SYSTEMS
VS. MODERN
SYSTEMS
L e g a c y systems Modern systems
! mainframe-based applications; ! t end to b e client-server
(network)– based a n d process
t end to b e b a t c h oriented;
transactions in real time.
!

! early legacy systems use flat files

for d a t a storage, but hierarchical ! Unlike their predecessors, modern
a n d network databases are often systems store transactions a n d
associated with later-era l egac y master files in relational dat a bas e
systems. tables. A major a d v a n t a g e of
dat abase storage is the degree of
process integration a n d d a t a
sharing that c a n b e achieved.
UPDATING MASTER FILES FROM
TRANSACTIONS
! Whether b a t c h or real-time processing is b e i n g used, u p d a t i n g a master file r ecor d
involves c h a n g i n g t he v a l u e of one or more of its variable fields t o reflect the effects of
a transaction.
! The u p d a t e p r o c e d u r e in this e x a m p l e involves t he following steps:
1. A sales order r e co r d is r e a d b y t h e system.
2. ACCOUNT NUMBER is used t o search t h e AR master file a n d retrieve t h e
corresponding AR record.
3. The AR u p d a t e p r o c e d u r e c a l c u l a t e s t h e n e w customer b a l a n c e b y a d d i n g
t h e value stored in t he INVOICE AMOUNT field of the sales order r ecord t o the
CURRENTBALANCE field value in t he AR master record.
4. Next, INVENTORY NUMBER is used t o search for t h e corresponding record in t h e
inventory master file.
5. The inventory u p d a t e p r o g r a m reduces inventory levels b y d e d u c t i n g t h e QUAN-TITY
SOLD v a l u e in a transaction record from t he QUANTITY O N HAND field v a l u e in the
inventory record.
6. A n e w sales order r ecord is read, a n d t h e process is r e p e a t e d .
UPDATING MASTER FILES FROM
TRANSACTIONS
DATABASE BACKUP PROCEDURES
DATABASE BACKUP PROCEDURES
BATCH PROCESSING USING REAL-
TIME DATA COLLECTION
! Key steps in t he process are:
1. The sales d e p a r t m e n t clerk captures customer sales d a t a p er t a in i ng t o t h e
item(s) b e i n g purchased a n d t he customer ’s a c c o u n t .
2. The system t h e n ch ec ks t h e customer ’s c r e d i t limit from d a t a in t h e customer record
( a c c o u n t r ec ei v ab le subsidiary file) a n d u p d a t e s his or her a c c o u n t b a l a n c e t o
reflect t he a m o u n t of t he sale.
3. Next, t h e system u p d a t e s t h e q u a n t i t y - o n - h a n d field in t h e inventory record
(inventory subsidiary file) t o reflect the reduction in inventory. This provides up-to-
d a t e information t o other clerks as t o inventory availability.
4. A r ecord o f t h e sale is t h e n a d d e d t o t h e sales order file (transaction file), w h i c h is
processed in b a t c h m o d e a t t h e e n d of t he business d a y. This b a t c h process records
e a c h transaction in the sales journal a n d updates the a ff e c t e d general ledger
accounts.
BATCH PROCESSING USING REAL-
TIME DATA COLLECTION
REAL-TIME PROCESSING

! Real-time systems process the entire transaction as it occurs. For

exampl e, a sales order proces e d b y th e system in Figure 6.32
c a n b e c a p t u r e d , filled, a n d shipped th e same d a y. Such a
system has m a n y potential benefits, including i m p ro ve d
productivity, r e d u c e d inventory, increased inventory turnover,
de cr e a se d lags in customer billing, a n d e n h a n c e d customer
satisfaction. Because transaction information is transmitted
digitally, physical source d o cu m e n ts c a n b e eli minated or greatly
reduced.
REAL-TIME PROCESSING
DATA CODING SCHEMES

! Within the context of transaction

processing, d a t a c o d i n g involves creating
simple numerical or alphabetical codes
to represent complex e c o n o m i c
p h e n o m e n a that facilitate efficient d a t a
processing.
A SYSTEM WITHOUT CODES
! The ne g a ti ve effects of this a p p r o a c h m a y b e seen in m a n y parts
of th e organization:
1. Sales staff. Properly identifying the items sold requires the
transcription of large amounts of detail o n to source documents.
Apart from the time a n d effort involved, this tends to p r o m o te
clerical errors a n d incorrect shipments.
2. Warehouse personnel. Locating a n d picking g o od s for shipment
are i m p e d e d a n d shipping errors will likely result.
3. A c co u n ti n g personnel. Postings t o ledger accounts will require
searching through the subsidiary files using lengthy
descriptions as the key. This will b e painfully slow, a n d postings
t o th e w r o n g accounts will b e c o m m o n .
A SYSTEM WITH CODES

! uses of d a t a c o d i n g in AIS are to:

1. Concisely represent large amounts of complex
information that would otherwise b e unmanageable.
2. Provide a means of accountability over the
completeness of the transactions processed.
3. Identify unique transactions a n d accounts
within a file.
4. Support the audit function b y providing a n effective
audit trail.
SEQUENTIAL
CODES
MEANING ADVANTAGE(S) DISADVANTAGE(S)

represent items in some ! sup p o rts the ! c a rry no info rm a tion

sequential order (pre- reconciliation of a co n te nt b e y o n d their
n u mb e ri n g of source b a t c h of transactions, order in th e sequence.
documents.) ! it a le rts m a na g e m e nt to ! d iffic ult to c ha ng e .
the possibility of a ! In a p p lica tions w he re
missing or m i sp l a ce d record types must b e
transaction. g r o u p e d together
logically a n d w h ere
additions a n d
deletions o c c u r
regularly, this c o d i n g
sch e m e is
inappropriate.
 BLOCK CODES
MEANING ADVANTAGE(S) DISADVANTAGE(S)

!a va ria tion o n ! a llow s fo r the inse rtion o f ! the info rm a tion c o nte nt
seq ue ntia l n e w codes within a of the block c o d e is not
c o d i n g th a t partly bl ock with- o u t h a v i n g readily a p p a r e n t .
remedies the t o reorganize th e entire
disadvantages just c o d i n g structure.
described
!use d to re p re se nt
w ho le
classes of items b y
restricting e a c h class to
a specific r a n g e
within the c o d i n g
sch e m e
!the c o nstruc tio n o f a
chart of accounts.
 GROUP CODES
MEANING ADVANTAGE(S) DISADVANTAGE(S)

! a re use d to re p re se nt ! facilitate the !c la ssific a tio n

co m pl e x items or events representation of large to o l
involving tw o or m o re amounts of diverse
pieces of related d a t a . data.
! allow c o m p l e x d a t a
!The c o d e c o nsists structures to b e
of represented in a
zones or fields that hierarchical form
possess specific ! permit detailed analysis a n d
meaning. reporting bot h within a n
item class a n d across
different classes of items.
ALPHABETIC
CODES
MEANING ADVANTAGE(S) DISADVANTAGE(S)

! m a y b e a ssig ne d ! c a p a c i t y to represent ! d iffic ulty ra tiona lizing the

sequentially (in large numbers of items is m e an i n g of codes that
a l p h a b e t i c a l order) increased dramatically have been
or m a y b e used in through the use of sequentially as- signed
b l o ck a n d g r o u p pure a l ph a b e ti c codes ! use rs te nd to ha ve
c o d i n g techniques. or a l p h a b e t i c difficulty sorting records
characters e m b e d d e d that are c o d e d
within numeric codes alphabetically.
(a l p h a n um e ri c codes)
 MNEMONIC CODES
MEANING ADVANTAGE(S) DISADVANTAGE(S)

! a lp ha b e tic c ha ra c ters in ! does not require the ! lim ite d a b ility to

th e fo rm of acronyms user to memorize represent items within
a n d other combinations meaning; the c o d e itself a class.
th a t c o n v e y mean i ng. conveys a high d e g r e e
of information a b o u t
the item th a t is b e i n g
represented.
 THE GENERAL
LEDGER
! A SYSTEM
HUB CONNECTED TO THE
OTHER SYSTEMS OF THE FIRM THROUGH SPOKES
OF INFORMATION FLOWS
THE GENERAL LEDGER
SYSTEM
THE JOURNAL VOUCHER

! The source of input t o the general ledger is th e journal voucher,

! A journal voucher, w h i c h c a n b e used t o represent summaries of
similar transactions or a single u n i q u e transaction, identifies th e
financial amounts a n d a ff e c t e d general ledger (GL) accounts.
! Routine transactions, adjusting entries, a n d closing entries
are all e n ter e d into the GL via journal vouchers. Because a
responsible m a n a g e r must a p p r o v e journal vouchers, they offer
a d e g r e e of control against unauthorized GL entries.
THE JOURNAL VOUCHER

! The source of input t o the general ledger 

THE GLS DATABASE
! General Ledger Master File
-the principle file in the GLS d a t a b a s e

! General Ledger History File

-has the same format as the GL master 

! Journal Voucher File

-the total collection of the journal vouchers processed in the
current period.
THE GLS DATABASE
! Responsibility Center File
-contains the revenues, expenditures, a n d other
resource utilization d a t a for e a c h responsibility
center in the organization.
! Budget Master File
-contains b u d g e t e d amounts for revenues,
expenditures, a n d other resources for
responsibility centers.
 THE FINANCIAL
REPORTING
SYSTEM
! THE LAW DICTATES MANAGEMENT’S
RESPONSIBILITY FOR PROVIDING STEWARDSHIP
INFORMATION TO EXTERNAL PARTIES. THIS
REPORTING OBLIGATION IS MET VIA THE FRS.
FINANCIAL REPORTING
PROCEDURES
1. C a p t u r e t h e transaction
2. Record in special journal
3. Post t o subsidiary ledger 
4. Post t o ge neral ledger 
5. Prepare th e unadjusted trial b a l a n c e
6. M a k e adjusting entries
FINANCIAL REPORTING
PROCEDURES
1. Journalize a n d post adjusting entries.
2. Prepare the adjusted trial b a l a n c e
3.Prepare the financial statements
10.Journalize a n d post the closing entries
11.Prepare the post-closing trial b a l a n c e
 XBRL—

REENGINEERING
FINANCIAL
!THE INTERNET STANDARD
SPECIFICALLY DESIGNED FOR BUSINESS
REPORTING
REPORTING AND INFORMATION
EXCHANGE.
XML

! m e t a l a n g u a g e for describing m a r k u p la nguages

XBRL

!an XML-based l a n g u a g e that was

designed to provide the financial
community with a standardized m e t h o d
for preparing, publishing, a n d
automatically exchanging financial
information, including financial
statements of publicly held companies.
1. SELECT AN XBRL TAXONOMY
! Taxonomies are classification schemes that
are
compliant with XBRL specifications to
accomplish a specific information e x c h a n g e
or
reporting objective such as filing with th e SEC.
2. CROSS-REFERENCE EACH
ACCOUNT
DATA TO XBRL TAXONOMY ELEMENTS
4. STORED TAG AS DEPICTED BY
THE TAXONOMY ELEMENT
FIELD
THE CURRENT STATE OF XBRL
REPORTING
• Since O c to b e r 2005, U.S. banking regulators h av e required
quarterly “call reports” to b e filed in XBRL. This requirement
impacts more than 8,000 banks.
• In April 2005, the SEC b e g a n a voluntary financial reporting
program that allows registrants to supplement their required
filings with exhibits using XBRL.
• In September 2006, the SEC anno unce d its n e w electronic
reporting system to receive XBRL filings. The n e w system is
called IDEA, short for interactive d a t a electronic application.
CONTROLLING THE FRS
The potential risks to the FRS include:
1. A defective audit trail.
2. Unauthorized access to the general ledger.
3. GL accounts that are out of b a l a n c e with subsidiary
accounts.
4. Incorrect GL a c c o u n t balances because of
unauthorized or incorrect journal vouchers.
COSO INTERNAL CONTROL
ISSUES
! Transaction Authorization
! Segregation of Duties
1. H ave record-keeping responsibility for special journals or
subsidiary ledgers.
2. Prepare journal vouchers.
3. Have custody of physical assets

!Access Controls
!Accounting Records
!Independent Verification
INTERNAL CONTROL IMPLICATIONS
OF XBRL

! Ta xon om y Creation
! Ta xon om y M a p p i n g Error 
! Va li d a t io n of Instance Documents
QUIZ