Chapter 2

Transaction cycle

1. Expenditure
2. Conversion
3. Revenue

Expenditure cycle
- Business activities begin with the acquisition of materials, property, and labor in exchange for cash—
the expenditure cycle, Most expenditure transactions are based on a credit relationship between the
trading parties.

Conversion cycle
- The conversion cycle is composed of two major subsystems: the production system and the cost
accounting system.

- The production system involves the 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. Information this system produces is used for inventory
valuation, budgeting, cost control, performance reporting, and management decisions, such as
makeor-buy decisions.

Revenue cycle
- Firms sell their finished goods to customers through the revenue cycle, which involves processing cash
sales, credit sales, and the receipt of cash following a credit sale. Revenue cycle transactions also have a
physical and a financial component, which are processed separately

Accounting record -- Manual basedsystem

Documents
- A document provides evidence of an economic event and may be used to initiate transaction
processing. Some documents are a result of transaction processing

Types of Documents

1. Source Documents
- Economic events result in some documents being created at the beginning (the source) of the
transaction. These are called source documents. Source documents are used to capture and
formalize transaction data that the transaction cycle needs for processing
2. Product documents
- Product documents are the result of transaction processing rather than the triggering
mechanism for the process
3. Turnaround Documents
- A turnaround document contains important information about a customer’s account to help the
cash receipts system process the payment
Journals
- A journal is a record of a chronological entry. At some point in the transaction process, when all
relevant facts about the transaction are known, the event is recorded in a journal in chronological order.
Documents are the primary source of data for journals

Types of Journals

1. Special Journals
- Special journals are used to record specific classes of transactions that occur in high volume.
Such transactions can be grouped together in a special journal and processed more efficiently
than a general journal permits
2. Register
- The term register is often used to denote certain types of special journals. For example, the
payroll journal is often called the payroll register
3. General Journal
- Firms use the general journal to record nonrecurring, infrequent, and dissimilar transactions
- As a practical matter, most organizations have replaced their general journal with a journal
voucher system
1. Journal Voucher
- A journal voucher is actually a special source document that contains a single journal entry
specifying the general ledger accounts that are affected. Journal vouchers are used to record
summaries of routine transactions, nonroutine transactions, adjusting entries, and closing
entries

Ledger
- A ledger is a book of accounts that reflects the financial effects of the firm’s transactions after they are
posted from the various journals. Whereas journals show the chronological effect of business activity,
ledgers show activity by account type. A ledger indicates the increases, decreases, and current balance
of each account

Types of ledger

1. General Ledger
- The general ledger (GL) summarizes the activity for each of the organization’s accounts. The
general ledger department updates these records from journal vouchers prepared from special
journals and other sources located throughout the organization
2. Subsidiary Ledger
- Subsidiary ledgers are kept in various accounting departments of the firm, including inventory,
accounts payable, payroll, and accounts receivable. This separation provides better control and
support of operations

Audit trails
- The accounting records described previously provide an audit trail for tracing transactions from source
documents to the financial statements. Of the many purposes of the audit trail, most important to
accountants is the year-end audit
Accounting record – Computer based system

Master file
- A master file generally contains account data. The general ledger and subsidiary ledgers are examples
of master files. Data values in master files are updated from transactions

Types of file

1. Transaction file
- A transaction file is a temporary file of transaction records used to change or update data in a
master file. Sales orders, inventory receipts, and cash receipts are examples of transaction files.
2. Reference file
- A reference file stores data that are used as standards for processing transactions. For example,
the payroll program may refer to a tax table to calculate the proper amount of withholding taxes
for payroll transactions. Other reference files include price lists used for preparing customer
invoices, lists of authorized suppliers, employee rosters, and customer credit files for approving
credit sales.
3. Archive file
- An archive file contains records of past transactions that are retained for future reference. These
transactions form an important part of the audit trail. Archive files include journals, priorperiod
payroll information, lists of former employees, records of accounts written off, and prior-period
ledgers.

Digital Audit trail

- (walang nakalagay kung ano sya, nakalgay lang pano gawin/gamitin)

Documentation techniques

Data flows
- The data flow diagram (DFD) uses symbols to represent the entities, processes, data flows, and data
stores that pertain to a system.
- Entities in a DFD are external objects at the boundary of the system being modeled. They represent
sources of and destinations for data. Entities may be other interacting systems or functions, or they may
be external to the organization

Entity relation diagram

- An 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

System flowcharts
- A system flowchart is the graphical representation of the physical relationships among key elements of
a system. These elements may include organizational departments, manual activities, computer
programs, hard-copy accounting records (documents, journals, ledgers, and files), and digital records
(reference files, transaction files, archive files, and master files)
Steps in flowchart

1. LAY OUT THE PHYSICAL AREAS OF ACTIVITY

- Remember that a flowchart reflects the physical system, which is represented as vertical
columns of events and actions separated by lines of demarcation. Generally, each of these areas
of activity is a separate column with a heading. From the written system facts, we see that there
are four distinct areas of activity: sales department, credit department, warehouse, and shipping
department. The first step in preparing the flowchart is to lay out these areas of activity and
label each of them.
2. TRANSCRIBE THE WRITTEN FACTS INTO VISUAL FORMAT.
- At this point we are ready to start visually representing the system facts

Batch Processing
- Batch processing permits the efficient management of a large volume of transactions. A batch is a
group of similar transactions (such as sales orders) that are accumulated over time and then processed
together

2 general advantages

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. The accuracy of the process is
established by periodically reconciling the batch against the control figure

Record Layout diagram

- Record layout diagrams are used to reveal the internal structure of the records that constitute a file or
database table. The layout diagram usually shows the name, data type, and length of each attribute (or
field) in the record.

Computer based accounting

- Computer-based accounting systems fall into two broad classes

1. Batch system
- assemble transactions into groups for processing. Under this approach, there is always a time lag
between the point at which an economic event occurs and the point at which it is reflected in
the firm’s accounts
2. real time system
- process transactions individually at the moment the event occurs. Because records are not
grouped into batches, there are no time lags between occurrence and recording

Resources
- Generally, batch systems demand fewer organizational resources (such as programming costs,
computer time, and user training) than real-time systems
Operational efficiency
- Real-time processing in systems that handle large volumes of transactions each day can create
operational inefficiencies. A single transaction may affect several different accounts. Some of these
accounts, however, may not need to be updated in real time

Data coding schemes

- Within the context of transaction processing, data coding involves creating simple numeric or
alphabetic codes to represent complex economic phenomena that facilitate efficient data processing.

NUMERIC AND ALPHABETIC CODING SCHEMES

1. sequential codes
- sequential codes represent items in some sequential order (ascending or descending). A
common application of numeric sequential codes is the prenumbering of source documents

advantages
- Sequential coding supports the reconciliation of a batch of transactions, such as sales orders, at
the end of processing. If the transaction processing system detects any gaps in the sequence of
transaction numbers, it alerts management to the possibility of a missing or misplaced
transaction.

Disadvantages
- Sequential codes carry no information content beyond their order in the sequence. For instance,
a sequential code assigned to a raw material inventory item tells us nothing about the attributes
of the item (type, size, material, warehouse location, and so on). Also, sequential coding
schemes are difficult to change.

2. block codes
- block code is a variation on sequential coding that partly remedies the disadvantages just
described. This approach can be used to represent whole classes of items by restricting each
class to a specific range within the coding scheme. A common application of block coding is the
construction of a chart of accounts

advantages
- Block coding allows for the insertion of new codes within a block without having to reorganize
the entire coding structure,

Disadvantages
- As with the sequential codes, the information content of the block code is not readily apparent.

3. Group codes
- group codes are used to represent complex items or events involving two or more pieces of
related data. The code consists of zones or fields that possess specific meaning

advantages
- They facilitate the representation of large amounts of diverse data. 2. They allow complex data
structures to be represented in a hierarchical form that is logical and more easily remembered
by humans. 3. They permit detailed analysis and reporting both within an item class and across
different classes of items.

Disadvatages
- the primary disadvantage of group coding results from its success as a classification tool.
Because group codes can effectively present diverse information, they tend to be overused.
Unrelated data may be linked simply because it can be done

4. alphabetic codes
- are used for many of the same purposes as numeric codes. Alphabetic characters may be
assigned sequentially (in alphabetic order) or may be used in block and group coding techniques.

Advantages
- The capacity to represent large numbers of items is increased dramatically through the use of
pure alphabetic codes or alphabetic characters embedded within numeric codes (alphanumeric
codes).

Disadvantages
- The primary drawbacks with alphabetic coding are (1) as with numeric codes, there is difficulty
rationalizing the meaning of codes that have been sequentially assigned, and (2) users tend to
have difficulty sorting records that are coded alphabetically

5. Mnemonic Codes
- are alphabetic characters in the form of acronyms and other combinations that convey meaning

advantages
- The mnemonic coding scheme does not require the user to memorize meaning; the code itself
conveys a high degree of information about the item that is being represented.

Disadvantages

- mnemonic codes are useful for representing classes of items, they have limited ability to
represent items within a class.