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Chapter 5

Transaction Cycles and

Accounting Applications
 Organizing Accounting Applications
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 An accounting application is an integral part of the

computerized accounting system.
 It describes a type of application software that records
and processes accounting transactions.
 It functions as an AIS.
 Application of computers in Accounting:
 Recording of all business transactions
 Preparation of various ledger accounts
 Processing the payroll information
 Preparation of trial balance
 Preparation of final accounts
 Processing Modes
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 Transactions are processed either by
 Real-time, or Batch system

 Batch processing

o a group of similar transactions that are accumulated over time

and then processed together.

 A time lag exists between the event and the processing.
 Example; All the orders in a batch are processed (usually in a

large volume) at the same time

 At a convenient time/off peak period
 In a similar way
 Usually without the need for human supervision
 Cont’d………
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 It is stored on a transaction file.

 The data is verified by being entered a

second time by a different operator.

 Any discrepancies are corrected.
 The transaction file is transferred to the main

computer.
 This may be physically or electronically

between computers.
 Processing begins at a scheduled time –

maybe overnight when the network is not

busy dealing with on-line users.
 Cont’d………
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 Transaction file may be sorted into same

sequence as master file to speed up the
processing of the data
 The master file is updated
 Any required reports are produced
 Cont’d…………
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Real-time Processing
 Transactions are processed immediately they

occur using an on-line computer system.

 have no time lag between the economic event

and the processing

 Each transaction must be completed in full

before the next transaction is processed

 For example, ATM transactions use real-time

processing because a cash withdrawal must

be applied to the balance before another
withdrawal can be made
 Cont’d……….
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 Transactions will involve changing master

files.
 Example; inserting/modifying/deleting
records
 Bank withdrawals, goods returned, money
sent
 Transactions are processed as soon as they
are received by the computer system, without
delay.
 Data files are updated immediately so that the
transaction can influence any additional
 Cont’d………..
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Choice of processing mode

 Many applications use a combination of
batch and interactive processing. Choosing
between modes depends on:
 Does information obtained from the system
need to be up-to-date at all times?
 The scale of the operation - Batch
systems well suited to very high volumes of
data, when economical to have an off-line
key-to-disk system for data entry.
 Cont’d……….
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 Cost - Real-time system is generally

more expensive because of more
complex backup and recovery
procedures required to manage with
power failures or breakdowns.
 Computer usage - Batch system can
make use of spare computer capacity
overnight or when computer would
otherwise be idle.
 The Revenue Cycle
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S a le s O rd e r
1
C re d it / C u s to m e r
S e rv ic e R EV EN U E C Y CLE
2 (S U B S Y S T E M )
C a s h R e c e ip ts /
C o lle c tio n s
6

S h ip p in g
3

B illin g / A c c o u n ts
R e c e iv a b le
 Cont’d………
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Manual Sales Order Processing

 Begins with a customer insertion an order

 The sales department captures the

essential details on a sales order form.
 The transaction is authorized by obtaining

credit approval by the credit department.

 Sales information is released to:

 Billing
 Warehouse (stock release or picking
ticket)
 Shipping (packing slip and shipping
notice)
 Cont’d………
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 The merchandise is picked from the

Warehouse and sent to Shipping.
 Stock records are adjusted.

 The merchandise, packing slip, and bill of

lading are prepared by Shipping and sent to
the customer.
 Shipping reconciles the merchandise
received from the Warehouse with the sales
information on the packing slip.
 Shipping information is sent to Billing. Billing
compiles and reconciles the relevant facts and
 Cont’d……….
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 Information is transferred to:

 Accounts Receivable (A/R)
 Inventory Control

 Billing, A/R, and Inventory Control

submits summary information to the
General Ledger dept., which then
reconciles this data and posts to the
control accounts in the G/L.
 Cont’d……….
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Manual Cash Receipts Processes

 Customer cheques and remittance advices are

received in the Mail Room.

 Cash Receipts:

 verifies the accuracy & completeness of the

cheques
 updates the cash receipts journal
 prepares a deposit slip
 prepares a journal receipt to send to G/L

 A/R posts from the remittance advices to the

accounts receivable subsidiary ledger.

 Periodically, a summary of the postings is
 Cont’d……….
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 G/L department:
 Reconciles the journal voucher from Cash

Receipts with the summaries from A/R

 Updates the general ledger control accounts

 The Controller reconciles the bank accounts.

 Cont’d……….
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Automating the Revenue Cycle

 Authorizations and data access can be performed

through computer screens.

 There is a decrease in the amount of paper.

 The manual journals and ledgers are changed to

disk or tape transaction and master files.

 Input is still typically from a hard copy document

and goes through one or more computerized

processes.
 Processes store data in electronic files (the tape or

disk) or prepare data in the form of a hardcopy

report.
 Cont’d……….
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 Revenue cycle programs can include:

 Formatted screens for collecting data
 Edit checks on the data entered
 orders for processing and storing the data
 Security procedures (passwords or user IDs)
 Steps for generating and displaying output
 The documents and the files used as input
sources must contain the data necessary to
generate the output reports.
 Cont’d………..
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Reengineering Sales Order Processing

Using Real-Time Technology
 Manual procedures and physical documents

are replaced by interactive computer

terminals.
 Real time input and output occurs, with some

master files still being updated using

batches.
 Real-time - entry of customer order,
printout of stock release, packing slip & bill
of lading; update of credit file, inventory
 The Expenditure Cycle
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P u rc h a se R e q u isitio n P u rc h a sin g
1 2

PR O C U R EM EN T C Y C LE
(S U B S Y S T E M )
R e c e iv in g /
C a sh D isb u rse m e n ts In sp e c tio n
3
5

A c c o u n ts P a ya b le
4
 Cont’d……….
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Manual Purchases System

 Begins in Inventory Control when inventory

levels drop to reorder levels

 A purchase requisition (PR) is prepared and

copies to sent to Purchasing and Accounts

Payable (A/P)
 Purchasing prepares a purchase order (PO)

for each vendor and sends copies to

Inventory Control, A/P, and Receiving
 Upon receipt, Receiving counts and inspects

the goods.
 A receiving report is prepared and copies

sent to the raw materials storeroom,

Purchasing, Inventory Control, and A/P.
 Cont’d………
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 A/P reconciles these documents, posts to

the purchases journal, and records the
liability in the accounts payable
subsidiary ledger.
 A/P periodically summarizes the entries
in the purchases journal as a journal
voucher which is sent to the General
Ledger (G/L) department.
 A/P also prepares a cash disbursements
voucher and posts it in the voucher
register.
 G/L department:
 Posts from the accounts payable journal
voucher to the general ledger
 Cont’d………
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Manual Cash Disbursements System

 Periodically, A/P searches the open
vouchers payable file for items with
payments due:
 A/P sends the voucher and supporting

documents to Cash Disbursements

 A/P updates the accounts payable
subsidiary ledger
 Cash Disbursements:

 Prepares the cheque

 Records the information in a cheque

register (cash disbursements journal)

 Cont’d……….
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 G/L department receives:

 The journal voucher from cash
disbursements
 A summary of the accounts payable
subsidiary ledger from A/P
 The journal voucher is used to update the
general ledger.
 The accounts payable control account is
reconciled with the subsidiary summary.
 Cont’d………
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Computer-Based Accounting Systems

 CBAS technology can be viewed as a

continuum with two extremes:

 Automation - use technology to
improve efficiency and effectiveness
 Reengineering – use technology to

restructure business processes and firm

organization
 Cont’d……….
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Levels of Automating and Reengineering

Ordering
 Computer generates PR

 Purchases manually generates PO

 Computer generates PO (no PR needed)

 PO not sent until manually reviewed

 Computer-generated PO is automatically
sent without manual review
 Electronic Data Interchange (EDI)

 Computer-to-computer communication
without PO
 Cont’d………
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Expenditure Cycle Database

 Master Files

 Supplier (vendor) master file

 Accounts payable master file
 Merchandise inventory master file
 Transaction and Open Document Files

 Purchase order file

 Open purchase order file
 Supplier’s invoice file
 Open vouchers file
 Cash disbursements file
 Cont’d………
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Computer-Based Purchases
 A Data Processing dept. performs routine
accounting tasks.
 Purchasing - a computer program
identifies inventory requirements
 The following methods are used for
authorizing and ordering inventories:
 ALT 1: the system prepares POs and
sends them to Purchases for review,
signing, and distributing
 ALT2: the system distributes POs
directly to the vendors and internal
users, bypassing Purchases
 Cont’d……….
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 Other tasks performed automatically by

the computer:
 Updates the inventory subsidiary file
from the receiving report
 Calculates batch totals for general
ledger update
 Closes the corresponding records in the
open PO file to the closed PO file
 Validates the voucher records against
valid vendor files
 Cont’d………
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Computer-Based Cash Disbursements

 Tasks performed automatically by the
computer:
 The system scans for vouchers currently
due
 Prints cheques for these vouchers
 Records these cheques in the cheque
register
 Batch totals are prepared for the
general ledger update procedure
 Cont’d………
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Manual Computer-Based
Authorization Authorization Controls
Controls  Authorizations are
 Purchases of automated.
inventory should
 Fixed Programmed
decision rules
be authorized by  Automating inventory in
the Inventory
EDI and JIT
Control  Faulty inventory model can
department not lead to over or under
by purchasing purchasing
agents  Cash disbursements
 A/P authorizes automate cheque printing
 Cont’d……..
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Manual Computer-Based
Segregation of Segregation of
Functions Functions
 Custody of the  Extensive
inventory, by the consolidation by the
Warehouse must be computer of tasks
separate from traditionally
record keeping for segregated
the assets.  Computer

 Custody of the programs

asset, cash, by Cash authorize and
Disbursements process purchase
 Cont’d……….
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Manual Computer-Based
Supervision Supervision
 Supervision is the  Automation leads to
highest importance collapsing of the
in the receiving traditional segregation
department, where of duties.
 Requires greater
the inventory
arrives and is supervision
logged in by a  Supervision takes on
receiving clerk. new aspects as
Need to minimize: technology advances.
 Electronic monitoring
 Failures to

 General Ledger and Reporting
System
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 The general ledger and reporting system

(GLARS) includes the processes in place to
update general ledger accounts and prepare
reports that summarize results of the
organization’s activities.
 The information must be organized to meet
the needs of internal and external users.
 The basic activities in the GLARS are:
 Update the general ledger
 Post adjusting entries
 Prepare financial statements
 Produce managerial reports
 Cont’d……….
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 One of the primary functions of GLARS is to

collect and organize data from:
 Each of the accounting cycle subsystems,

which provide summary entries related to

the routine activities in those cycles.
 The treasurer, who provides entries with

respect to non-routine activities such as

transactions with creditors and investors.
 The budget department, which provides

budget numbers.
 The controller, who provides adjusting
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Questions?

Thank you!