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
Records
Source Documents - 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
Records
Journals - a record 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 Document
Ledger

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 occurred

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.