Objectives

• Broad objectives of transaction cycles

• Types of transactions processed by each of the three transaction cycles
• The basic accounting records used in TPS
• The traditional accounting records and their magnetic equivalents
• Documentation techniques
• Batch and real-time processing and the impact of these technologies
on transaction processing
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.
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)
Relationship between Transaction Cycles
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
Document flowline
Accounting records
(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

New Master
to an archive file)
(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
Batch vs. Real-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.
Uses of Coding in AIS
• Concisely represent large amounts of complex information
that would other wise be unmanageable
• Provide a means of accountability over the completeness of
the transactions processed
• Identify unique transactions and accounts within a file
• Support the audit function by providing an effective audit trail
Sequential Codes
• Represent items in sequential order

• Used to prenumber source documents

• Track each transaction processed

• Identify any out-of-sequence documents

• Disadvantages
• Arbitrary information

• 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

• The basis of the general ledger

• Allows for the easy insertion of new codes within a block

• Don’t have to reorganize the coding structure

• Disadvantage
• Arbitrary information
Group Codes
• Represent complex items or events involving two or more pieces of data using fields
with specific meaning

• For example, a coding scheme for tracking sales might be 04-09-476214-99

• Store: 04, Dept: 09, Item: 476214, Salesperson: 99

• Disadvantage
• Arbitrary information

• overused
Alphabetic Codes
• Used for many of the same purposes as numeric codes

• Can be assigned sequentially or used in block and group coding

techniques

• May be used to represent large numbers of items

• Can represent up to 26 variations per field

• Disadvantage:
• Arbitrary information
Mnemonic Codes
• Alphabetic characters used as abbreviations, acronyms, and other types
of combination

• Do not require users to memorize the meaning since the code itself is
informative – and not arbitrary

• NY = New York; PH – Philippines; JP – Japan

• Disadvantages:
• Limited usability and availability