MODULE 1:

Accounting Information Systems (AIS) Overview

Accounting Information Systems

Elden T. Vergara
Lecturer
 Learning Objectives:
This lesson aims to help the student:
- Simplify the business transaction cycle through
the use of flowcharts.
- Contrast the manual against the computer-based
accounting systems.
 LESSON 2:

The Transaction Processing System

Accounting Information Systems

Elden T. Vergara
Lecturer
Overview of Transaction Processing
- Transaction Processing System (TPS) applications process financial transactions.
Illustration 2-1: RELATIONSHIP AMONG TRANSACTION CYCLES

Labor
Customers

Materials

Finished Goods
Cash

Cash
Physical
Plant

Expenditure Cycle Conversion Cycle Revenue Cycle

Subsystems Subsystems Subsystems

Purchasing/Accounts Payable Production Planning and Control Sales Order Processing

Cash Disbursements Cost Accounting Cash Receipts
Payroll
Fixed Assets

Finished
Goods

Cash
The Expenditure Cycle
- Business activities begin with the acquisition of materials, property, and labor in
exchange for cash.
physical component – the acquisition of the goods
financial component – the cash disbursement to the supplier

Purchases/accounts payable system:

- This system recognizes the need to acquire physical inventory (such as raw
materials) and places an order with the vendor. When the goods are received, the
purchases system records the event by increasing inventory and establishing an
account payable to be paid at a later date.
Cash disbursements system:
- When the obligation created in the purchase system is due, the cash disbursement
system authorizes the payment, disburses the funds to the vendor, and records the
transaction by reducing the cash and accounts payable accounts.
Payroll system:
- The payroll system collects labor usage data for each employee, computes the
payroll, and disburses paychecks to the employees.
Fixed asset system:
- This processes transactions pertaining to the acquisition, maintenance, and disposal
of its fixed assets.

The Conversion Cycle

Production system:
- Involves the planning, scheduling, and control of the physical product through the
manufacturing process.
Cost accounting system:
- Monitors the flow of cost information related to production.
The Revenue Cycle
- Involves processing cash sales, credit sales, and the receipt of cash
following a credit sale.
Sales order processing:
- The majority of business sales are made on credit and involve tasks
such as preparing sales orders, granting credit, shipping products (or
rendering of a service) to the customer, billing customers, and
recording the transaction in the accounts (accounts receivable,
inventory, expenses, and sales).
Cash receipts:
- For credit sales, some period of time (days or weeks) passes between
the point of sale and the receipt of cash. Cash receipts processing
includes collecting cash, depositing cash in the bank, and recording
these events in the accounts (accounts receivable and cash).
Accounting Records
MANUAL SYSTEMS
Documents - provides evidence of an economic event and may be
used to initiate transaction processing.
Source documents – used to capture and formalize transaction data
that the transaction cycle needs for processing.
Illustration 2-2: CREATION OF A SOURCE DOCUMENT

Customer’s
Source Document 1
Order
Data 2
Sales Order
Collection 3

Sales System
Product documents – are result of transaction processing rather than
the triggering mechanism for the process.
Illustration 2-3: A PRODUCT DOCUMENT

Source Document 1
r ’s Data 2
sto me
Cu r Collection Sales Order
e 3
Ord

Customer

Bill
-----------------------
Sales System
-
Remittance
Advice
Product
Document
Turnaround documents – are product documents of one system that
become source documents for another system.
Illustration 2-4: A TURNAROUND DOCUMENT

Source Document 1
r ’s Data 2
sto me
Cu r Collection Sales Order
e 3
Ord

Customer

Bill
-----------------------
Sales System
-
Remittance
Advice
Product
Document
1

Check 2
Cash Receipts System

Remittance
Advice
SPECIAL JOURNALS – are used to record specific classes of transactions
that occur in high volume.
Illustration 2-5: SALES ORDER RECORDED IN SALES JOURNAL

Economic Event Capture Event Record Event

Sales Order
Customer’s Sales Journal
Order

REGISTER – often used to denote certain types of special journals.

GENERAL JOURNAL – used to record nonrecurring, infrequent, and dissimilar transactions.

LEDGER – is a book of accounts that reflects the financial effects of the firm’s transactions
after they are posted from the various journals.
1. General Ledger – contains the firm’s account information in the form of highly
summarized control accounts.
2. Subsidiary Ledger – contains the details of the individual accounts that constitute a
particular control account.
Illustration 2-6: SALES JOURNAL
Illustration 2-7: GENERAL JOURNAL
GENERAL LEDGER – summarizes the activity for each of the
organization’s accounts.
Illustration 2:8: FLOW OF INFORMATION FROM THE ECONOMIC EVENT TO THE GENERAL LEDGER

Journal Entry Post

Customer’s General
Sales Order Sales Journal
Order Ledger

Post er
l Ledg
era
Gen
r to
dge
r y Le
s idia
le Sub
n ci
Accounts eco
l y R
Receivable ical
iod
Subsidiary Per
Ledger
Illustration 2-8: GENERAL LEDGER
GENERAL LEDGER – summarizes the activity for each of the
organization’s accounts.
Illustration 2:8: FLOW OF INFORMATION FROM THE ECONOMIC EVENT TO THE GENERAL LEDGER

Journal Entry Post

Customer’s General
Sales Order Sales Journal
Order Ledger

Post er
l Ledg
era
Gen
r to
dge
r y Le
s idia
le Sub
n ci
Accounts eco
l y R
Receivable ical
iod
Subsidiary Per
Ledger
The Audit Trail
Illustration 2-9: RELATIONSHIP BETWEEN THE SUBSIDIARY LEDGER AND THE GENERAL LEDGER
COMPUTER-BASED SYSTEMS
Types of File
Master File - generally contains account data (ex. general ledger and
subsidiary ledger)
Transaction File – is a temporary file of transaction records used to
change or update data in a master file
Reference File – stores data that are used as standards for processing
transactions
Archive File - contains records of past transactions that are retained
for future reference
The Digital Audit Trail
Illustration 2-10: ACCOUNTING RECORDS IN A COMPUTER-BASED SYSTEM
Documentation Techniques
Data Flow Diagrams (DFD)
- Uses symbols to represent the entities, processes, data flows, and
data stores that pertain to a system.
Illustration 2-11: DATA FLOW DIAGRAM SYMBOL SET

Symbol Description

Input source or output

Entity destination of data
Name

N A process that is triggered or

supported by data
Process
Description

A store of data such as transaction file, a

Data Store Name master file, or a reference file

Direction of data flow

Illustration 2-12: DATA FLOW DIAGRAM OF SALES ORDER PROCESSING SYSTEM
Entity Relationship (ER) Diagram
- Is a documentation technique used to represent the relationship between entities.
Entities – are physical resources (automobiles, cash, or inventory), events (ordering
inventory, receiving cash, shipping goods), and agents (salesperson, customer, or
vendor) about which the organization wishes to capture data.
Illustration 2-12: ENTITY RELATIONSHIP DIAGRAM SYMBOLS

1 Assigned 1
Company
Salesperson
Car

1 Places M
Customer Sales Order

M Supply M
Vendor Inventory
Illustration 2-13: DATA MODEL

1 Assigned 1
Company
Salesperson
Car

1 Places M

Customer Sales Order

Data Model
- Is the blueprint for what ultimately will become the physical database.
Relationship between ER Diagrams and Data Flow Diagrams
DFDs and ER diagrams are different aspects of the same system, but they are related
and can be reconciled. A DFD model of system processes, and the ER diagram models
the data used in or affected by the system. The two diagrams are related through
data; each data store in the DFD represents a corresponding data entity in the ER
diagram.
SYSTEMS FLOWCHARTS
- Is the graphical representation of the physical relationships among key
elements of a system.

Rules to be observed:
1. The flowchart should be labeled to clearly identify the system that it
represents.
2. The correct symbols should be used to represent the various entities in the
system.
3. All symbols on the flowchart should be labeled.
4. Lines should have arrowheads to clearly show the process flow and sequence
of events.
5. If complex processes need additional explanation for clarity, a text description
should be included on the flowchart or in an attached document referenced
by the flowchart.
Illustration 2-14: SYMBOL SET FOR REPRESENTING MANUAL PROCEDURES

Terminal showing source or

destination of documents and Calculated batch total
reports

Source document or report

On-page connector

Manual operation

Off-page connector

File for storing source

documents and reports
Description of process or
comments
Accounting records
(journals, ledgers, logs,
registers) Document flowline
Flowcharting Manual Activities:
Assuming an auditor needs to flowchart a sales order system to
evaluate its internal controls and procedures. The auditor will begin
by interviewing individuals involved in the sales order process to
determine what they do. This information will be captured in a set of
written facts similar to those below.
1. A clerk in the sales department receives a hard-copy customer
order by mail and manually prepares four hard copies of a sales
order.
2. The clerk sends Copy 1 of the sales order to the credit department
for approval. The other three copies and the original customer
order are filed temporarily, pending credit approval.
3. The credit department clerk validates the customer’s order against
hard-copy credit records kept in the credit department. The clerk
signs Copy 1 to signify approval and returns it to the sales clerk.
4. When the sales clerk receives credit approval, he/she files Copy 1
and the customer order in the department. The clerk sends Copy
2 to the warehouse and Copies 3 and 4 to the shipping
department.
5. The warehouse clerk picks the products from the shelves, records
the transfer in the hard-copy stock records, and sends the
products and Copy 2 to the shipping department.
6. The shipping department receives Copy 2 and the goods from the
warehouse, attaches Copy 2 as a packing slip, and ships the goods
to the customer. Finally, the clerk files Copies 3 and 4 in the
shipping department.
Illustration 2-15A: FLOWCHART SHOWING STATED FACT 1 TRANSLATED INTO VISUAL SYMBOLS
Illustration 2-15B: FLOWCHART SHOWING STATED FACTS 1, 2, AND 3 TRANSLATED INTO VISUAL SYMBOLS
Illustration 2-15C: FLOWCHART SHOWING ALL STATED FACTS TRANSLATED INTO VISUAL SYMBOLS
Batch Processing
- permits the efficient management of a large volume of transactions.
Batch – is a group of similar transactions (such as sales orders) that are
accumulated over time and then processed together.
Advantages of Batch Processing:
1. Organizations improve operational efficiency by grouping together
large numbers of transactions into batches and processing them as
a unit of work rather than processing each event separately.
2. Batch processing provides control over the transaction process.
Illustration 2-16: SYMBOL SET FOR REPRESENTING COMPUTER PROCESSES

Hard copy (source Terminal input/output

documents and output) device

Computer process
(program run) Process flow

Real-time (online)
Direct access storage connection
device (disk pack)

Magnetic tape (sequential Video display device

storage device)
Flowcharting Computer Processes:
1. A clerk in the sales department receives a customer order by mail
and enters the information into a computer terminal that is
networked to a centralized computer program in the computer
operations department. The original customer order is filed in the
sales department.
2. A computer program edits the transactions, checks the customer’s
credit by referencing a credit history file, and produces a transaction
file of sales orders.
3. The sales order transaction file is then processed by an update
program that posts the transactions to corresponding records in AR
and inventory files.
4. Finally, the update program produces three hard copies of the sales
order. Copy 1 is sent to the warehouse, and Copies 2 and 3 are sent
to the shipping department.
5. On receipt of Copy 1, the warehouse clerk picks the products from
the shelves. Using Copy 1 and the warehouse personnel computer
(PC), the clerk records the inventory transfer in the digital stock
records that are kept on the PC. Next, the clerk sends the physical
inventory and Copy 1 to the shipping department.
6. The shipping department receives Copy 1 and the goods from the
warehouse. The clerk reconciles the goods with Copies 1, 2, and 3
and attaches Copy 1 as a packing slip. Next, the clerk ships the
goods (with Copy 1 attached) to the customer. Finally, the clerk
records the shipment in the hardcopy shipping log and files Copies
2 and 3 in the shipping department.
Illustration 2-17: FLOWCHART SHOWING THE TRANSLATION OF FACTS 1,2, AND 3 INTO VISUAL SYMBOLS
Illustration 2-17A: FLOWCHART SHOWING ALL FACTS TRANSLATED INTO VISUAL SYMBOLS
PROGRAM FLOWCHARTS
- Every program represented in a system flowchart should have a supporting
program flowchart that describes its logic

Steps:
1. The program retrieves a single record from the unedited transaction file
and stores it in memory.
2. The first logical test is to see the program has reached the end-of-file
(EOF) condition for the transaction files. Most file structures use a special
record or market to indicate an EOF condition. When EOF is reached, the
edit program will terminate and the next program in the system (in this
case, the update program) will be executed. As long as there is a record in
the unedited transaction file, the result of the EOF test will be “no” and
process control is passed to the next logical step in the edit program.
3. Processing involves a series of test to identify certain clerical
and logical errors. Each test, represented by a decision
symbol, evaluates the presence or absence of a condition. For
example, an edit test could be to detect the presence of
alphabetic data in a field that should contain only numeric
data.
4. Error-free records are sent to the edited transaction file.
5. Records containing errors are sent to the error file.
6. The program loops back to Step 1, and the process is repeated
until the EOF condition is reached.
Illustration 2-18: PROGRAM FLOWCHART SYMBOLS

Terminal start or end

Logical process
operation

Input/output operation
(read and write records)

Decision
Flow of logical process
Illustration 2-19: PROGRAM FLOWCHART FOR EDIT PROGRAM
Illustration 2-20: SYSTEM FLOWCHART
Record Layout Diagrams
- are used to reveal the internal structure of the records that
constitute a file or database table.
Illustration 2-21: RECORD LAYOUT DIAGRAM FOR CUSTOMER FILE

Customer File
Key

Customer Customer Street

City State Zip Code Credit Limit
Number Name Address

Differences between Batch and Real-time Systems

Batch Systems - assemble transactions into groups for processing.
Real-time Systems – process transactions individually at the moment
the event occurs.
Computer-Based Accounting Systems
Illustration 2-22: CHARACTERISTIC DIFFERENCES BETWEEN BATCH AND REAL-TIME PROCESSING

Data Processing Methods

Distinguishing Feature Batch Real-Time
Information time frame Lag exists between time when Processing takes place when the
the economic event occurs and economic event occurs.
when it is recorded.
Resources Generally, fewer resources (ex. More resources are required
Hardware, programming, than for batch processing.
training) are required.
Operational efficiency Certain records are processed All records pertaining to the
after the event to avoid event are processed
operational delays. immediately.
Illustration 2-23: RECORD STRUCTURE FOR SALES, INVENTORY, AND ACCOUNTS RECEIVABLE
FILE
Illustration 2-24: BACKUP AND RECOVERY PROCEDURES FOR DATABASE FILES

Backup Backup
Transaction Master Program Master

Update
Program
Recovery
Program
Illustration 2-25: BATCH PROCESSING WITH REAL-TIME DATA COLLECTION
Illustration 2-26: REAL-TIME PROCESSING OF SALES ORDERS
End of LESSON 2