Accounting Information System: B.

) The Conversion Cycle

 Production System – involves the
Chapter 2: Introduction to Transaction Processing
planning, scheduling, and control
An overview of Transaction Processing of the physical product through
 Application process financial transactions the manufacturing process.
includes sales of goods or services, the  Cost Accounting System –
purchase of inventory, the discharge of monitors the flow of cost
financial obligations, and receipt of cash information related to production
on account from customers. such as inventory valuation,
 It also includes internal events such as budgeting, cost control,
depreciation of fixed assets, the performance reporting, and
application of labor, etc. management decisions.

 Transaction Cycle C.) The Revenue Cycle

 Sales order processing – majority
of business sales are made on
credit such as preparing sales
orders, granting credit to the
customer, etc.
 Cash Receipts – includes
collecting cash and depositing
cash in the bank.

Accounting Records
 Manual System
 Describes the purpose of each type of
accounting record used in transaction
cycles.
A.) Expenditure Cycle  Traditional records used in manual
 Acquisition of materials, property, and systems (documents, journal, and
labor in exchange for cash ledgers) and then examination their
 Based on the credit relationship between magnetic counterparts in computer-
the trading parties based systems.
 Physical component (the acquisition of I. Documents
the goods) and a financial component  provides evidence of an economic event
(the cash disbursement to the supplier) and may be used to initiate transaction
 Purchases/AP system – this processing.
system recognizes the need to
acquire physical inventory (such A.) Source Documents – are used to capture
as raw materials) and places an and formalize transaction data that the
order with the vendor. To be paid transaction cycle needs to processing.
at a later date.
 Cash disbursements system –
authorizes the payment and
disburses the fund to the vendor.
 Payroll System – collects labor
usage data for each employee.
 Fixed Asset System – pertaining
to the acquisition, maintenance,
and disposal of its fixed assets.
B.) Product Documents – are the result of C.) General Journals – to record
transaction processing rather than the nonrecurring, infrequent, and dissiminilar
triggering mechanism for the process. transactions.
III. Ledgers
 A book of accounts that reflects the
financial effects of the firm’s transaction
after they are posted from various
journal.
 Indicates the increases, decreases, and
current balance of each account.

A.) General Ledger – which contain the firm’s

account information in the form of highly
summarized control accounts.
B.) Subsidiary Ledger – contain the details of
C.) Turnaround Documents – product the individual accounts that constitute a
documents of one system that become particular control account.
source documents for another system.

Audit Trail
 From tracing transactions from source
documents to the financial statements.
 The review of selected accounts and
transactions to determine their validity,
accuracy, and completeness.
II. Journals
 When all relevant facts about the Computer-Based Systems
transaction are known, the event is  Types of Files
recorded in a journal in chronological A.) Master File – contains account data. Data
order. values are updated from transactions.
A.) Special Journals – used to record specific B.) Transaction File – temporary file of
classes of transactions that occur in high transaction records used to change or
volume. update data in a master file.
C.) Reference File – that are used as
standards for processing transactions. It is
also called as credit file.
D.) Archive File – contains records of past
transaction that are retained for future
reference.

Digital Audit Trail

B.) Register – often used to denote certain
1. Compare the accounts receivable balance
types of special journals.
in the balance sheet with the master file
AR control account balance.
 2. Reconcile the AR control figure with the  a documentation technique used to
AR subsidiary account total. represent the relationship between
3. Select a sample of update entries made entities.
to accounts in the AR subsidiary ledger  Entities are physical resources, events,
and trace these to transactions in the etc. about which the organization wishes
sales journal. to capture data.
4. From these journal entries, identify  Represents the nature of the relationship
specific source documents that can be between two entities such as one-to-one,
pulled from their files and verified. If one-to-many, or many-to-many
necessary, the auditor can confirm the (cardinality).
accuracy and propriety of these source  Data Model – the blueprint for what
documents by contacting the customers ultimately will become the physical
in question. database.

Documentation Techniques

Data Flow Diagrams and Entity Relationships

Diagrams

1. Data Flow Diagram

 Uses symbols to represent the entities,
processes, data flows, and data stores
 Relationship between ER Diagrams and
that pertain to a system.
Data Flow Diagrams
 Systems analysts use DFDs extensively
 Each data store in the DFD represents a
represent the logical elements of the
corresponding data entity in the ER
systems.
diagram.
 DFDs show that logical tasks are being
done, but not how they are done or who System Flowcharts
(or what) is performing them.
 the graphical representation of the
physical relationship among key elements
of a system.
A.) Flowcharting Manual Activities
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 be 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.
2. Entity Relationships Diagrams
  Program Flowchart
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 if the
program has reached the end-of-file
(EOF) condition for the transaction file.
3. Processing involves a series of tests to
identify certain clerical and logical errors.
4. Error-free records are sent to the edited
transaction file.
5. Records containing errors are sent to the
edited transaction file.
 Batch Processing 6. The program loops back to Step 1, and
 It is a group of similar transactions (such the process is repeated until the EOF
as sales orders) that are accumulated condition is reached.
over time and then processed together.

*Two 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. Provides control over the transaction process.

B.) Flowcharting Computer Process

  Updating Master Files from Transactions
 Involves changing the value of one or
more of its variable fields to reflect the
effects of a transaction.

 Record Layout Diagrams

 Used to reveal the interna; structure of
the records that constitute as file or
database table.  Data Backup Procedures
 The master file being updated is copied
Computer-Based Accounting Systems to create a backup version of the original
file.
 First, a special recovery program uses the
backup file to create a pre-update version
of the master file.
 Second, the file update process is
repeated using the previous batch of
transactions to restore the master to its
current condition.

Alternative Data Processing Approaches

 Legacy Systems vs Modern System

Legacy Systems

 They are mainframe-based applications.

 They tend to be batch oriented.
 Early legacy systems use flat files for data
storage, but hierarchical and network
databases are often associated with later-
era systems.  Batch Processing using Real-Time Data
Collection
Modern Systems
 To maintain the integrity of accounting
 Tend to be client-server (network)-based data, once a record has been accessed for
and process transaction in real time. processing, it is locked by the system and
 made unavailable to other users until its  By using codes to represent each item in
processing is complete. the inventory and supply.

1. Concisely represent large amounts of

complex information that would
otherwise be unmanageable.
2. Provide a means of accountability over
the completeness of the transactions
processed.
3. Identify unique transactions and accounts
within a file.
4. Support the audit function by providing
an effective audit trail.

Numeric and Alphabetic Coding Schemes

 Sequential Codes
 Represent an items in some sequential
 Real-Time Processing
order (ascending or descending).
 Real-time systems process the entire
 This number becomes the transaction
transaction as it occurs.
number that allows the system to track
 Such as system has many potential
each transaction processed and to
benefits, including improved productivity,
identify any lost or out-of-sequence
reduced inventory, increased inventory
documents.
turnover, decreased lags in customer
billing and enhanced customer Advantages
satisfaction.
a. Supports the reconciliation of a batch of
transactions, such as sales orders, at the
end of processing.
b. It alerts management to the possibility of
a missing or misplaced transaction.
c. Management can eventually determine
the cause and effect of the error.

Disadvantages

a. It carries no information content beyond

their order in the sequence.
b. It is difficult to change.
Data Coding Schemes
 Involves creating simple numeric or  Block codes
alphabetic codes to represents complex  A variation on sequential coding that
economic phenomenon that facilitate partly remedies the disadvantages just
efficient data processing. described.
 This approach can be used to represent
A system without codes whole classes of items by restricting cash
class to a specific range within the coding
 Firm process large volumes of
scheme.
transactions that are similar in their basic
 Chart of accounts
attributes.

A System with Codes

Advantages a. The capacity to represent large numbers
of items is increased dramatically through
a. Allows for the insertion of new codes the use of pure alphabetic codes or
within a block without having to alphabetic characters embedded within
recognize the entire coding structure. numeric codes.
Disadvantages b. By using alphabetic codes in the same
three-digit coding space, we see a
a. It is not directly apparent. geometric increase in the potential for
data representation.

Disadvantages

a. As with numeric codes, there is difficulty

rationalizing the meaning of codes that
have been sequentially assigned.
b. Users tend to have difficulty sorting
records that are codded alphabetically.

 Mnemonic Codes
 Alphabetic characters in the form
acronym and other combination that
convey meaning.
 Group Codes
 Used to represent complex items or Advantages
events involving two or more pieces of
a. It does not require the user to memorize
related data.
meaning. The code itself conveys a high
 Consists of zones or fields that possess
degree of information about the item
specific meaning.
that is being represented.
Advantages
Disadvantages
a. They facilitate the representation of large
a. They have limited ability to represent
amounts of diverse data.
items within a class.
b. They allow complex data structures to be
represented in a hierarchical form that is [These accounts would be represented better by
logical and more easily remembered by sequential, block, or group coding techniques.]
humans.
c. They permit detailed analysis and
reporting both within an item class and
across different classes of items.

Disadvantages

a. It can lead to unnecessarily complex

group codes that cannot be easily
interpreted.

 Alphabetic Codes
 used for many of the same purposes as
numeric codes.

Advantages