Accounting Information System chapter 2

 Accounting  Accou nting Information Systems, 6th edition  James A. Hall

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Objectives for Chapter 2 y y

y y

Broad

objectives of transaction cycles c ycles

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

y

Documentation techniques

y

Batch

and real-time processing and the impact im pact of  these technologies technologies on transaction processing

A Financial Transaction is... y

y

an economic event that affects the assets and equities equitie s of the firm, firm, is reflected ref lected in its accounts, accounts, and is measured in monetary terms. similar types of transactions transactio ns are grouped together into three three transac transaction tion cycles: cycles: y y y

the expenditure cycle, the conversion conversion cycle, and the revenue cycle.

Relationship between Transaction Cycles Labor Customers    h   s   a    C

  s    d   o   o    G    d   e    h   s    i   n    i    F

Materials Physical Plant

Expenditure Cycle

Conversion Cycle

   h   s   a    C

Revenue Cycle

Subsystems

Subsystems

Subsystems

Purchasing/Accounts Payable Cash Disbursements Payroll Fixed Assets

Production Planning and Control Cost Accounting

Sales Order Processing Cash Receipts

Finished Goods

Cash

Each Cycle has Two Subsystems y

Expenditure Cycle: time lag between the two due to credit relations

 with suppliers: physical component (acquisition of goods) inancial component (cash disbursements to the supplier) f inancial Conversion Cycle : the production system (planning, scheduling, and control of the physical product through the manufacturing process) the cost accounting system (monitors the flow fl ow of cost information related to production) Revenue Cycle: Cycle: time lag between the two due to credit relations with customers : physical component (sales order processing) inancial component (cash receipts) f inancial y y

y

y

y

y

y y

Manual System Accounting Records y

y

y

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 become s a source document for another system

Manual System Accounting Records y

 Journals - a record record of chronological entry  entr y  y

y

y

special journals - specific classes of transactions that occur in high frequency  general journal - nonrecurring, infrequent, and dissimilar transactions

Ledger - a book of financial accounts accounts y

y

general ledger - shows activity for each account account listed li sted on the chart of acc a ccounts ounts subsidiary ledger - shows activity by detail for each account account type typ e

Flow

Customer's Order

of Economic Events Into the General Ledger  Sales Order

Journal Entry

Post

Accounts Receivable Subsidiary Ledger

Sales Journal

Post

 r  y  a   a   i  d   d   i   b s  u  S  r  e   e   l   i  n c  e d g e  o   L  e c  a   l   R   a  r   y  e  a  l  l  e n  c   c   i  o  o d  r  t o  o G   i  r   P e  d g e   L e

General Ledger

Accounting

Records in a Computer-Based System EXPLANATION

OF STEPS IN FIGURE:

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. 1.

 Audit Trail Source Document

Financial

Statements

Journal

General Ledger 

General Ledger 

Journal

Financial

Statements

Source Document

 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 Account-General Ledger 

 Accounts Receivable Subsidiary Ledger  (sum of all customers¶ receivables) receivables)

Sales Journal

Sales Order Shipping Notice

Cash Receipts Journal

Deposit Slip Remittance Advice

Computer-Based Sys Systems tems y

y

y

The audit trail is less observable in computer-based

systems than traditional manual systems. The data entry and computer computer programs are the physical trail. The data are stored stored in magnetic magnetic files. f iles.

Computer Files y

y

y

y

Master File - generally contains account data (e.g., general ledger and subsidiary subsidiary file) fil e) Transaction File - a temporary file containing transactions since the last update erence File - contains relatively constant R ef erence information used in processing (e.g., tax tables, customer addresses addresses)) rchive File - contains past transactions  A rchive transactions for reference purposes

Documentation Techniques y

Documentation in a CB environment is necessary 

y

for many reasons. Five common documentation documentation techniques: y y y y y

Entity Relationship Diagram Data Flow Diagrams Document Flowcharts

System Flowcharts Program Flowcharts

Entity Relationship Diagram (ERD) y

y

is a documentation documentation technique to represent the relationship  between entities  in a system. The R E A model version of  ER D is widely used in AIS. R E A uses 3 types of entities: y y

y

resources (cash, raw materials) events (release of raw materials into the production process) agents (inventory inventory control clerk, vendor, vendor, production produ ction  worker)

Cardinalities y

represents the numerical mapping between entities: y

y

y

one-to-one one-to-many  many -to-many 

Cardinalities Entity

Salesperson

Relationship

1

1 Customer 

Vendor

M

 Assigned

Places

Supply

Entity

1

M

M

Car  Type

Order 

Inventory

Data Flow Diagrams (DFD) y

y y

use symbols to represent the processes, processe s, data sources, data flows, f lows, and entities in a system system represent the logical elements of the system system do not represent the physical system

Data Flow Diagram Symbols Entity Name

Data Store Name

N Process Description

Direction of  data flow 

Documents Flowcharts y

y y

illustrate illustrate the relationship relationship among processes and the documents that that flow f low between between them contain more details than data flow diagrams clearly depict the separation of function f unctionss in a system

Symbol Set for Document Flowcharts Terminal showing source or destination of documents and reports Source document or  report

Calculated batch total

On-page connector 

Manual operation Off-page connector 

File

for storing source documents and reports  Accounting records (journals, registers, logs, ledgers)

Description of process or comments

Document flowline

Sales

Department

Credit

Department

Warehouse

Shipping

Department

Customer 

Customer 

Order  Prepare Sales Orders Sales

Order #1 Sales Sales Order #1 ales OrderS#1 Order #1

First Stages in Constructing Document Flowchart Showing Areas of Activity

Sales

Department

Credit

Department

Warehouse

Shipping

Sales

Customer 

Department A

Order #1

Sales

Order2 Customer 

Checks

Order 

Credit

Prepare Sales Orders

Sales

Credit

Records

Picks Goods

Stock 

Records

Order 4 Sales Order3

Signed Sales

Order #1 Customer 

Sales

Order  Sales Order #1 Sales Sales Order #1 ales OrderS#1 Order #1

Order2

Picks Goods

Sales

Order 4 Sales Order3

Signed Sales

 N

Order #1 Sales

Order2

Customer 

Distribute SO and File

Order  Signed Sales Order #1

 N

Sales

Order 4 Sales Order3 Sales Order2

A Customer 

Finished Document Flowchart Showing Areas Areas of Activity

 N

System Flowcharts y

y

y

are used to represent the relati relationship onship between between the key  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 flow f lowcharts charts

Systems Flowchart Symbols Hard copy

Computer process

Direct access storage device

Terminal ermin al input/ input / output device

Process flow Real-time (online) connection Video display device

Magnetic tape

Sales

Department

Computer

Operations Department

Warehou house

Shipping

Customer 

Edit and Credit Check 

Credit File

Customer 

Order  Sales

Orders Terminal

AR File Update Program Inventory

First Stages in Constructing System Flowchart Showing Areas of Activity

Department

Sales

Department

Computer

Operations Department

Warehou house

Customer 

Sales

Edit and Credit Check 

Shipping

Department

A

Order1

Credit File

Sales

Customer 

Order  Picks Goods

Sales

Orders Terminal

Stock 

Records

Order 3 Sales Order2

AR File Sales

Update Program

Order1

Customer 

Picks Goods Sales

Inventory

Order 

Order2

Sales

Order3  N

A Sales

Order 3 Sales Order2 Sales Order1

Finished System Flowchart Showing All Facts Translated into Visual Symbols

Sales

Order1

Customer 

 N

Program Flowcharts illustrate the logic used in programs Program

Flowchart Symbols

Logical process

Terminal start or  end operation Input/output operation

Decision Flow

of logical process

Modern Systems versus Legacy Syst Systems ems y

Modern systems characteristics: y y y y

y

Some firms f irms employ legacy systems for certain aspects of  their data processing. y

y

client-server based and process transactions in real time use relational database tables have high degree of process pro cess integration and data sharing some are mainframe based and use batch processing

 Accountants need to understand legacy systems.

Legacy systems characteristics: y y y y y

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 environ environment ment that discourages information integration

Updating

Master Files: Primary Keys (PK) and Secondary Keys (SK) (PK)

(SK)

(SK)

Sales Order Number

Account Number

Inventory Number

Record Structure for Sales Orders Transaction File Quantity Sold

Unit Price

Invoice Amount

(PK) Account Number

Record Structure for AR Master File

Name

Address

Current Balance

Credit Limit

(PK) Inventory Number

Last Payment Date

Billing Date

Record Structure for Inventory Master File

Description

Quantity on Hand

Reorder Point

EOQ

Vendor Number

Standard Cost

Total Cost

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 preupdate version of the master file. Transaction

Master

Update Program

Backup Program

Recovery Program

Backup Master

Computer-Based Accounting Systems y

T wo broad classes of systems: y

y

batch systems real-time systems

Batch Processing y

y

y

 A batch is a group of similar similar transactions that are accumulated over time and then then processed processed together. together. The transactions must be independent of one another  during the time period p eriod over which the the transactions are accumulated in order for batch processing to be appropriate.  A time lag exists between the event and the processing.

Batch Processing/Se Processing/Sequential quential File Sales Orders

Unedited Transactions

Keying

Errors correct errors and resubmit

catches clerical errors

Edit Run Edited Transactions

rearranges the transaction data by key field so that it is in the same sequence as the master file

Sort Run Transactions Old Master (father) AR Update Run

changes the values in the master file to reflect the transactions that have occurred

AR New Master (son)

Transactions (eventually transferred to an archive file)

Steps in Batch Proces rocessing/Sequential sing/Sequential File y

y

y

y

y

Keystroke - source documents are transcrib transcribed ed by  clerks to magnetic tape for processing later la ter un - identifies Edit R un identif ies clerical clerical errors in the batch and places them into an error file un - places the transaction file Sort R un fil e in the same order order as the master file using a primary key  un - changes the value of appropriate fields Update R un fiel ds in the master file file to to reflect ref lect the transaction Backup Procedure - the original master continues to to exist and a new master file fil e is created

Advantages of Batch Processing y

y

Organizations can increase eff iciency  iciency by grouping

large numbers of transactions transac tions into batches rather than processing each event separately. separately. Batch processing provides control over the transaction transactio n process via control figures. figures.

Real-Time Systems y

y

y

y

process transactions individually  at the moment the economic event occurs have no time lag between the the economic economic event and the processing generally require greater resources than batch processing since they require dedicated processing capacity; however however,, these these cost differentials differential s are decreasing oftentimes have have longer systems development time

Why

Do So Many AIS Use Batch Processing?  AIS processing is characterized by high - volume,  volume, independent transactions, such suc h are recording recording cash receipts checks received received in the mail. mail . The processing processing of such su ch high- volume  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. collection .

y

y

y